Welcome to the September 2024 Investment Update for the Switzer Dividend Growth Fund (SWTZ or the Fund).

The Fund’s portfolio delivered a return of 1.76% during the month, compared with the benchmark S&P/ASX 100 Accumulation Index (ASX 100) return of 2.84%. The rise in the ASX 100 was mainly driven by the Metals and Mining sector. However, these gains were partially offset by a fall in the Health Care and Energy sectors.

The Fund’s underweight position in the Resource sector, in addition to its zero holdings in Macquarie Group (MQG) and South32 (S32) detracted from overall performance. Despite lacking any new developments, MQG continued to rally, pushing its valuation on par with its 2021 record high. The Resource sector, which accounts for about 20% of the market, experienced a substantial rally following China’s announcement of fiscal stimulus measures. Over the last few years, China has been stuck in a “balance sheet recession” as there has been limited demand for loans despite the significant falls in interest rates. However, during the month, the Chinese Politburo pledged to ensure necessary fiscal spending and mentioned “stopping property prices falling further”. In response to these developments, the Fund increased its positions in the Iron Ore sector.

Conversely during the month, the Fund benefited from its investments in Seek (SEK) and Brambles (BXB). SEK’s rally reflected improved investor confidence on its prospects following its recent disappointing earnings guidance. BXB’s continued strong performance reflected growing confidence in its ability to generate substantially more free cash flow than in the past, thanks to its successful business model transformation. The Fund also benefited from its zero holding in Commonwealth Bank of Australia (CBA) and Woodside Energy Group (WDS). CBA fell due to flows rotating from very expensive banks to resource stocks. WDS fell largely due to the weakness in the oil price.

Global interest rate cuts are gaining momentum, with the US joining countries like Canada, New Zealand and parts of Europe in reducing benchmark rates. In Australia, the Reserve Bank of Australia (RBA) held its cash rate at 4.35%, signalling rate cuts may be months away. Falling CPI inflation, driven by temporary effects like lower fuel and electricity prices, eased to 2.7% in August. Despite soft GDP growth and economic uncertainty, the RBA is cautious about cutting rates until inflation is sustainably within its target range.

Looking ahead, the market presents a mixed picture 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.

In its first six-months under the revised investment strategy, the Fund has underperformed on a total return basis as a result of the strong market return. However, it has exceeded the principal income objective and delivered investors an income return well in excess of the benchmark.