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Transcription of Finance News Network with MLC IncomeBuilder Head of Australian Shares Research, Peter Sumner
John Treadgold: Hello I’m John Treadgold for The Finance News Network and joining me from MLC IncomeBuilder is its Head of Australian Shares Research, Peter Sumner. Peter welcome to FNN.
Peter Sumner: It’s a pleasure to be here.
John Treadgold: What are the main concerns investors face when looking to grow a tax efficient income stream?
Peter Sumner: Well there’re a couple of things. Have they actually saved enough in the beginning, what sort of level of income that they’re looking to achieve in the long term? And also whether they’re prepared to be exposed to some short term volatility, in order to grow that capital over the long term.
John Treadgold: MLC IncomeBuilder strives to grow its income stream. Can you explain how you do this?
Peter Sumner: We engage with active managers. The managers are investing in shares over the long term and they focus on a couple of things. They focus on the sustainable earnings of those companies that they’re invested into. They’re also focussing on the risks that they’re actually taking in order to generate those returns. And the other aspect which the managers focus on is the after-tax outcomes. So they focus on dividends that are franked and also trying to minimise the capital gains, which are realised in the portfolio over the long term. And all those things are designed to produce long term tax effective returns and long term tax effective income for investors.
John Treadgold: The fund targets growing high quality companies. Can you give us some examples and let us know what makes them appeal to you?
Peter Sumner: In the recent past we’ve seen the banks in particular, have been a source of good income and good capital growth. So Westpac Banking Corp (ASX:WBC), ANZ Banking Group (ASX:ANZ), Commonwealth Bank of Australia (ASX:CBA), National Australia Bank Limited (ASX:NAB) and these companies have been in dominant positions. They’ve got good pricing power; they’ve been able to generate good franked dividends which are distributed. And so that’s actually a very attractive feature that our active managers seek on a regular basis.
Other companies which the portfolio has invested into are companies like Telstra Corporation Limited (ASX:TLS). And again, we’ve seen that the management changed at Telstra, they’ve got a clear plan, they haven’t overinvested in capital and they’re also paying out sustainable dividends. And in both cases, both banks and Telstra, they’re also paying tax. So that allows us to make sure that we’re actually receiving franked dividends over the long term. And again, that’s a great benefit to our retirees and people who are accumulating over the long term.
John Treadgold: A number of companies have maintained or increased dividends over the most recent reporting season. Which company stood out for you?
Peter Sumner: I think there’s a couple and this is a long term strategy. We must remember it’s not just a one year strategy. So for example, Suncorp Group Limited (ASX:SUN) in the last couple of years has grown its dividend from about 55 cents per share, to 75 cents per share. It’s also paid some special dividends along the way. And that’s a function of lower bad loans, better management, better capital management and the company taking costs out. So these things don’t just happen in a year, they’ve been happening for a couple of years.
The other company which is of interest to us has been BHP Billiton Limited (ASX:BHP). And typically, these are heavy high capital expenditure companies; BHP has been disciplined around that. It’s a very low cost producer of iron ore, it has a progressive dividend policy and it’s been able to grow its earnings from around about 112 cents a share to about 121 cents a share. And both Suncorp and BHP are paying fully franked dividends, again which is very attractive for the strategy.
John Treadgold: How has the MLC IncomeBuilder performed over the second quarter and the past 12 months?
Peter Sumner: Over the quarter which is very short term, the portfolio has delivered about a 0.6 per cent positive return. Relative to the broad market the ASX 200, the market was down around about 0.6 per cent. Over the last year, we’ve seen the IncomeBuilder portfolio return around about 8.6 per cent, while the broader market has returned around about 5.0/5.6 per cent. So we’ve beaten the market, but the really important thing is that we’ve actually grown our distributions. And those distributions are generated from dividends.
So our distribution’s actually increased from the fund by around about 3.5 per cent. And that’s consistent with where we’ve seen profits growing and the profits that are flowing through to the dividends, and obviously out to our investors. And we also run with quite a high level of franking in those distributions. So again, whether you’re an accumulator or a retiree, you’re getting that tax benefit as well.
John Treadgold: And what kind of income stream has the fund delivered in the 19 years since it began?
Peter Sumner: Well over the 19 years, things have been a little bit different to the recent past, but around about eight per cent has been the distribution growth. So that’s a pretty solid growth and that’s using the same consistent process, which we’re now currently using and has been the one which has been applied over those 19 years.
John Treadgold: Peter Sumner, thank you for your update from MLC IncomeBuilder.
Peter Sumner: Thanks very much.
Ends
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