It’s been a good 12 months-plus for Australian Edge.

This publication made its debut on Sept. 26, 2011, with an issue that introduced the original Australian Edge Portfolio, what we call our “Eight Income Wonders from Down Under.”

This group has generated an average total return in US dollar terms of 35.39 percent from Sept. 26, 2011, through the close of trade in Sydney on Oct. 12, 2012.

The S&P/Australian Securities Exchange 200 Index is up 28.18 percent during this time frame. The S&P 500 Index, meanwhile, posted a total return of 25.78 percent, and the MSCI World Index grew by 21.35 percent.

The S&P/ASX 200 actually started from its 12-month low point of 3,863.900 on Sept. 26, 2011. The index hit a closing high of 4435.907 on May 2, 2012. From that level it sank to 3,985.025 on Jun. 4 but rallied during the summer and closed Friday in Sydney at 4486.580, just off its 12-month high established Oct. 9 at 4505.349.

The Australian dollar appreciated 4.06 percent versus the US dollar from Sept. 26, 2011, through Oct. 12, 2012. The currency closed at USD0.9833 the day AE launched and rested at USD1.0233 at the close on Oct. 12, 2012. The aussie hit a low of USD0.9527 just a week after AE made its debut. Its high since Sept. 26, 2011, is USD1.0809, established Feb. 7, 2012.

Exactly five years ago, on Oct. 12, 20007, the S&P/ASX 200 Index hit its all-time weekly closing high of 6748.900. That’s a 50 percent rally from current levels and a reminder of the damage wrought by the 20007-09 Great Financial Crisis and the Great Recession that grew out of it.

The S&P/ASX 200 lost 53.39 percent from peak to Mar. 6, 2009, trough of 3145.500. The Australian dollar, meanwhile, bottomed on Oct. 24, 2008, at USD0.6225. The country’s main equity index, although it has posted a price-only 42.64 percent rally from the March 2009 low, remains well below its all-time high.

The aussie, however, has surged to a new level of strength against the US dollar, finding what appears to be a long-term station around and above parity.

This reflects a host of factors, including the differential between the Reserve Bank of Australia’s (RBA) developed-world high benchmark rate and the US Federal Reserve’s official 0.25 percent fed funds rate as well as its unconventional approach to monetary policy.

It also reflects the fact that Australia has the second-lowest government debt-to-gross domestic product ratio in the world. The government Down Under has its fiscal house in order, in stark contrast to the dramatic condition prevailing in the US, what with all this talk of cliff-diving.

The aussie has traditionally followed commodity prices, particularly those for iron ore, Australia’s top export. In recent years, however, Australian dollar-denominated assets have taken on appearances of a haven for institutions and sovereign investors looking to diversify holdings away from troubled developed-world currencies such as the buck, the British pound, the euro and the Japanese yen.

We discuss an actionable way for US-based investors to mimic this approach in one of this month’s Sector Spotlights.

Appetite for Australian corporate and government bonds has pushed the aussie higher than many pundits expect it should be based on past experience and has stoked commentary on the level of its overvaluation.

To be honest, a pullback at this point would be a welcome development. It would bring many of our favorite Conservative Holdings back to within buying range, first of all. But second, and most important, it would be a temporary situation within a larger context of global growth shifting to the Asia-Pacific region.

And within this bigger picture we’ve focused on high-quality, dividend-paying stocks backed by solid businesses that are positioned to grow over the long term.

Portfolio Update

The 21 stocks that now comprise the AE Portfolio–not including this month’s addition to the Conservative Holdings, Aberdeen Asia-Pacific Income Fund (NYSE: FAX)–have posted an average total return of 17.9 percent in calendar 2012, versus 14.7 percent for the S&P/ASX 200 Index, 16.6 percent for the S&P 500 Index and 13.7 percent for MSCI World Index.

We’re happy with the returns so far this year, which add to the gains we made in the last three months of 2011 following Australian Edge’s late September launch.

We’re focused as ever on balance and diversification. That’s not only among individual stocks but between sectors as well.

Conservative Holdings should continue to do well so long as investors are concerned about safety. But we’re also not giving up on Aggressive Holdings that remain healthy inside, despite their volatility.

Here’s how we expect to extend those gains.

In Focus

Copper consumption in that most critical growth engine China will contract in 2012 for the first time since 2008. Demand is weakening, and inventories are climbing. Consumption will drop about 8.5 percent to 5.6 million metric tons in 2012.

The three-month rolling forward contract on the London Metal Exchange slid 21.9 percent from a peak of USD9840 in mid-July, weeks into what most Australian companies define as fiscal 2012, to close at USD7685 on Jun. 29, 2012. It traded as low as USD6735 in early October 2011.

During calendar 2012 copper’s been as high as USD8740, on Feb. 9, and as low as USD7295, on Jun. 8.

Copper rose 6.8 percent in the third quarter as central banks in the US, China, Japan and Europe expanded stimulus to try to revive economic growth. Producers’ share prices, however, have priced in lackluster fiscal 2012 results driven by the big slide before that.

But this avails agile investors the opportunity to find long-term value amid a tumultuous time for global markets and economies: The widely respected metals and mining research firm Simon Hunt Strategic Services, which compiles analysis for users and fabricators, also forecast usage by copper’s biggest consumer to grow by 5.6 percent to 5.9 million metric tons in 2013.

Sector Spotlight

Even in the face of short- and medium-term challenges, Asia-Pacific remains the world’s long-term growth engine.

Aberdeen Asia-Pacific Income Fund (NYSE: FAX), a closed-end fund that Roger Conrad introduced to Australian Edge readers in the August 2012 Portfolio Update, is one of only five out of a universe of 106 US closed-end funds with a “Gold” rating from investment research firm Morningstar.

The fund was so cited because it’s the only one of its kind that enables US-based investors to access developing Asia’s debt markets as well as Australia’s. In fact very few funds of any kind provide individuals the opportunity to invest in bonds issued in the difficult-to-reach Asia-Pacific region.

The fund is not just about Australia. It includes significant exposure to bonds of emerging market countries such as the Philippines, Malaysia and Indonesia. Developed and emerging economies in the Asia-Pacific region continue to account for increasing shares of global economic growth. Accumulated debt in the developed world and the steps that must be taken to address same threaten to impair growth in those markets for years to come. Aberdeen Asia-Pacific is a compelling option for income-focused investors who also seek some protection from the impact of a deteriorating US dollar. At the same time you’ll get paid USD0.035 per share per month, an annualized dividend rate of USD0.42 per share. That works out to a yield of 5.3 percent based on the fund’s Oct. 11, 2012, closing price.

That’s why we’re adding it to the AE Portfolio Conservative Holdings.

The short story for this Sector Spotlight is “short-term gain, long-term gain.” You read that right: It’s a win-win situation at current levels for investors who own AE Portfolio Aggressive Holding New Hope Corp Ltd (ASX: NHC, OTC: NHPEF) before it enters its next “ex-dividend” period on Oct. 18, 2012.

When I wrote up New Hope’s fiscal 2012 (ended Jul. 31, 2012) final results for the Roundup section of the Sept. 18, 2012, edition of Down Under Digest, I was struck, first, by the fact that the thermal coal producer had declared yet another special dividend along with its regular final dividend announcement.

Second, and of particular note for investors looking to put money to work right now, New Hope’s shares won’t trade ex-dividend on the Australian Securities Exchange (ASX) until Oct. 18, 2012. That gives investors who haven’t yet established a position in the company to buy now and immediately realize a solid yield.

The special dividend is AUD0.20 per share, the final AUD0.05. Total dividends paid in respect of fiscal 2011, including a special dividend of AUD0.15 per share, were AUD0.2525. Including the AUD0.06 interim dividend in May for fiscal 2012 New Hope will have paid AUD0.31 per share, a 22.8 percent increase over total dividends paid in respect of fiscal 2011.

As of this writing, based on New Hope’s closing price of AUD4.69 in Sydney on Oct. 11 and the AUD0.20 special dividend and the AUD0.05 final dividend to be paid Nov. 6 to shareholders of record as of Oct. 24, new buyers will be up 5.3 percent. That’s the short-term gain.

The long-term gain is predicated on New Hope’s cash and short-term investment reserve totaling approximately AUD1.5 billion. That allows it to do things like top off payments to investors with what are becoming regular “special” dividend declarations coinciding with the announcement of full fiscal-year results; it’s done so each year since fiscal 2005.

News & Notes

We’re No. 12!: The Land Down Under is now the world’s 12th-largest economy in terms of gross domestic product (GDP) adjusted to US dollar terms. Australia ranks No. 51 in the world in terms of population.

Since 2007 Australia has surpassed South Korea, Mexico and now Spain to make its way into the top dozen economies in the world. This is one of the positive threads to pull from the International Monetary Fund’s (IMF) semi-annual World Economic Outlook (WEO).

Unemployment: 5.4 Percent: The Australian Bureau of Statistics (ABS) reported this week that the unemployment rate Down Under ticked up by 0.3 percentage points to 5.4 percent in September, though Australia’s seasonally adjusted labor force participation rate increased 0.2 percentage points to 65.2 percent.

The Dividend Watch List: The Dividend Watch List includes updates on How They Rate companies that announced dividend cuts during the recently concluded earnings reporting season Down Under, lowered earnings guidance in recent weeks as well as those that cut payouts during their most recent reporting period.

The ADR List: Many Australia-based companies that list on the home Australian Securities Exchange (ASX) are also listed on the New York Stock Exchange (NYSE) or over-the-counter markets as “sponsored” or “unsponsored” American Depositary Receipts (ADR).

Here’s a list of those companies, along with an explanation of what these ADRs represent.

How They Rate

How They Rate now includes 110 individual Australian companies–with the addition this month of copper producer PanAust Ltd (ASX: PNA, OTC: PNAJF)–organized according to the following sector/industries:

• Basic Materials
• Consumer Goods
• Consumer Services
• Financials, including A-REITs
• Health Care
• Industrials
• Oil & Gas
• Technology
• Telecommunications
• Utilities
• Funds

We provide updated commentary with every issue, financial data upon release by the company, and dividend dates of interest on a regular basis. The AE Safety Rating is based on financial criteria that impact the ability to sustain and grow dividends, including the amount of cash payable to shareholders relative to funds set aside to grow the business. We also consider the impact of companies’ debt burdens on their ability to fund dividends. And certain sectors and/or industries are more suited to paying dividends over the long term than others; we acknowledge this in the AE Safety Rating System as well. We update buy-under targets as warranted by operational developments and dividend growth.

In Closing

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David Dittman
Co-Editor, Australian Edge