Welcome to the January 2025 Investment Update for the Switzer Dividend Growth Fund (SWTZ or the Fund).

The Fund’s portfolio delivered a return of 3.66% during the month, compared with the benchmark S&P/ASX 100 Accumulation Index (ASX 100) return of 4.45%. The rise in the ASX 100 was mainly driven by the Consumer Discretionary and Financials sectors. However, this was partially offset by losses in the Utilities sector.

The Fund’s underperformance relative to the benchmark was partly due to its lack of exposure to major index stocks such as Commonwealth Bank of Australia (CBA), Macquarie Group (MQG) and Wesfarmers (WES) which collectively make up about 18% of the benchmark. These stocks surged despite the absence of stock-specific news, contributing to a quarter of the benchmark’s strong monthly return.

On a positive note, Xero (XRO), Orica (ORI) and Newmont Corporation (NEM) delivered strong returns for the Fund. Both XRO and ORI rebounded after being oversold in the previous month’s market decline, despite no material company updates. NEM, the world’s largest gold miner, rallied alongside rising gold prices. However, over the past two years, NEM’s share price has remained largely flat, even as gold prices surged 50%, driving a 69% increase in its projected earnings per share. At current levels, NEM is trading at a Price to Earnings (PE) multiple of 10x, near its 20-year low. With the company rapidly de-leveraging through its strong free cash flow and asset sales, it is well positioned to return funds to shareholders, either through a share buyback or increased dividends in the coming year.

Another strong performer was QBE Insurance Group (QBE), where the Fund increased its position during the Los Angeles wildfires. Historically, major catastrophic events – such as the 9/11 attacks ($40-50 billion in insured losses) and COVID-19 business interruptions ($40-80 billion) – have driven higher insurance premiums. The LA wildfires, estimated to be the costliest in U.S. history with insured losses of $20-35 billion, could create a similar dynamic. While QBE’s exposure to the fires is minimal due to its reduced market share in the region, it stands to benefit from a potential industry-wide rise in insurance premiums.

Global share markets rallied in January 2025 on the back of a smooth transition from the outgoing US President Biden to Trump, and expectations of pro-growth policies which boosted investor confidence. The annual Australian inflation rate slowed to 2.4 per cent in the December 2024 quarter, increasing expectations of an interest rate cut in the near term.

Looking ahead, the market landscape remains susceptible to volatility, with pockets of extreme overvaluation. By avoiding these areas and focusing on undervalued stocks, the Fund is well-positioned to generate attractive income and sustainable long-term returns. The Fund remains focused on delivering higher income and lower volatility than the ASX 100, with the potential for capital growth.