It’s been 12 months since we published a performance commentary post on our BetaShares Australian Dividend Harvester Fund (managed fund) (ASX Code: HVST). Given the popularity of that post, we’ve decided to do a refresh – we’ll also make sure we do it every year going forward.
This post may also be helpful for the large number of newer investors in the Fund, who may be eager to stay abreast of the Fund’s performance and how it’s been delivering on its objectives to date.
The Harvester Fund’s Objectives
Just to recap the objectives and strategy of the Fund – HVST aims to provide:
- Large cap equity exposure, generally through shares that are part of the S&P/ASX 50
- A regular monthly income stream with the aim of generating at least double the gross income yield (cash income + franking credits) of the Australian share market on an annual basis
- A smoother investment ride with the potential for reduced volatility and cushioning of downside market risk by using a risk management overlay.
With the aim of meeting these objectives the Fund essentially uses a two-pronged strategy.
Firstly, to harvest dividend yield it utilises what’s referred to as a dividend rotation strategy – whereby the Fund holds a basket of high-yielding stocks during the period within which they will be going ex-dividend, and rebalances these holdings approximately every 60 days.
The second part of the strategy is the risk management overlay – the risk management overlay involves monitoring volatility in the broader market and reducing market exposure when volatility rises above the historical average – the theory being that periods of heightened volatility have historically been correlated with market drawdowns.
More information on the Fund’s strategy can be found in our post here.
1. 12 Month Returns
Part of the Fund’s objective is to provide this income in the form of a regular monthly income stream. Through the last 12 months the Fund has been able to deliver a monthly distribution yield of ~1% each month before franking.
Note: income vs price return
Our Chief Economist David Bassanese wrote what I would consider to be a must read piece for all existing and prospective HVST investors on this topic, entitled Reap What You Sow: An Analysis of Income and Price Returns of the Australian Dividend Harvester Fund.
The total return of any equities exposure is equal to capital growth plus any income received – what David notes in his article above is that in a truly efficient market, one would expect the Fund to underperform from a price return perspective by broadly the degree to which it outperforms from a gross income perspective. However, what we can see in the 12 month numbers from the HVST Fund appears to confirm the theory that the market is not truly efficient – which some argue is due to the way that franked dividends are valued. This has meant that the HVST Fund has been able to produce market-beating gross total returns over the last year. As you can see, the true benefit of the HVST Fund comes via its enhanced franking (particularly for low-tax payers and SMSFs) and re-composition of total return towards income.
2. A Smoother Investment Ride
The numbers below show that the level of volatility for HVST over the last 12 months has been 52% lower than that of the S&P/ASX 50.
How has the risk management overlay worked?
By nature of the investment strategy and risk management overlay used in the HVST Fund, it will have periods of outperformance and underperformance – however as you can see from the numbers above the core objective of the risk management strategy is to reduce volatility of returns.
If we use the Brexit scenario as a case in point – in the days leading up to the Brexit and the market fall immediately following*, the S&P/ASX 50 dropped ~5%. However through this period because of the risk management overlay being active, HVST only incurred ~1.5% of the fall.
More recently – last Monday we saw the all ordinaries fall ~2% – HVST while obviously not immune only incurred ~1% of this market decline.
HVST Performance Summary: 12 months to 31 August 2016
- Gross return 1.45% above the S&P/ASX 50
- Over double the income return and double the franking credits of the S&P/ASX 50
- Half the volatility of returns of the S&P/ASX 50
Potential benefits of the HVST Fund:
- Attractive monthly income stream
- A smoother investment ride
- Potential for protection against market pullbacks
- Fully flexible DRP
*9th June – 24th July 2016. Past performance is not an indicator of future performance.