The BetaShares Australian Dividend Harvester Fund has been a popular fund among SMSF and retiree investors, however investors have recently noticed that returns have lagged the market.
Over the past year, the fund’s distribution yield was 11.8 per cent. And over the life of the fund, which was launched in October 2014, the yield has been around 10 or 11 per cent a year.
However, this high yield has been achieved at the cost of a weak total return. Over the past year, the fund has fallen 6.1 per cent (net of fees). Since inception it has lost 1.9 per cent a year.
The fund’s objective is to provide investors with exposure to large capitalisation Australian shares along with regular franked dividend income, paid monthly, that is at least double the income yield of the broad Australian sharemarket on an annual basis. In addition, the fund aims to reduce the volatility of the equity investment returns and defend against losses in declining markets.
The fund does not track an index or a benchmark. Rather it follows a set of “governing portfolio management rules” that allow it to meet its objectives. At no time does the manager have discretion as to what stocks the fund holds or about the level of risk management that should be employed.
The fund will usually hold 14 stocks drawn from the top 50 ASX stocks. If fewer than 14 stocks meet the yield threshold at the time of the rebalance, then one or more ETFs with broad Australian sharemarket exposure will be added to the portfolio.
The stocks are generally selected based on being the highest gross dividend yielding stocks (based on expected dividends including franking credits).
The portfolio is rotated approximately every 60 days to another selection of stocks that will be paying dividends over that period.
Currently, top exposures include Westpac, ANZ, National Australia bank, Macquarie Group, Commonwealth Bank, BHP Billiton, CSL Ltd, Wesfarmers, Telstra and Woolworths. Financial stocks make up 60 per cent of the portfolio.
The fund’s stock holdings are combined with a risk management strategy that aims to manage the fund’s volatility and provide a downside cushion against general market declines. The risk management process utilises ASX SPI 200 futures with the aim of reducing market exposure during periods of higher than average market volatility.
In the period from September 2015 to April 2016, the fund’s stock portfolio outperformed the index, up 10.4 per cent compared with a 5.2 per cent rise in the S&P/ASX 50.
In the period from December 2016 to June 2017, the portfolio underperformed – falling 3.8 per cent compared with a 2.3 per cent rise in the index.
The fund was overweight bank stocks in April and May, at the time when the sector underperformed in the wake of the bank levy announced in the Australian Government Budget.
The underperformance increased when the fund rotated out of banks and the banks rebounded.
In addition, given the fact that the market has been rallying, the risk management strategy caused an additional performance drag.
The fund’s recent performance can be attributed to a number of quite separate factors, where virtually all factors have been working against it. Given the objectives-based nature of the fund, it is usual that funds like the Australian Dividend Harvester experience under and outperformance during market cycles.