Rudi's View | Jul 06 2016
This story features CSL LIMITED, and other companies. For more info SHARE ANALYSIS: CSL
In this week's Weekly Analysis:
– Investor Lessons From An Eventful Year
– Rudi On Tour
– Nothing Ever Changes, Or Does It?
Investor Lessons From An Eventful Year
By Rudi Filapek-Vandyck, Editor FNArena
"To a man with a hammer, everything looks like a nail"
One of the smarter things I did at the start of the new calendar year was to reset all share prices in the portfolio to closing prices on December 31st.
This allows me to monitor and analyse each stock on its own merits and dynamics in the new year, without confusing myself or clouding my view because of a lower or higher purchase price.
One of the most common mistakes made by investors, on my observation, is to seek shelter and comfort in the fact they bought their favourite shares at much lower prices than where they trade today.
If you happen to be the one who once upon a time bought CSL ((CSL)) shares below $30 or Carsales ((CAR)) below $5.00, to name but two examples, and you did hold on to your shares, despite several periods of uncertainty and turbulence in between, you should congratulate yourself and be proud of your achievement.
You truly deserve a big pat on your shoulder, as well as the strong gains accumulated since. But don't let it cloud your assessment. If one day the outlook for either of such holdings deteriorates significantly, don't hide behind the fact you have been an investment genius thus far. What comes next can easily take away all the rewards from being patient, loyal and trusting.
The post-GFC years have provided plenty of examples of investors ignoring the downtrend for way too long. From BHP Billiton and Rio Tinto, to Santos and Origin Energy, to Monadelphous and MMA Offshore, and many, many others.
Let's be honest in this: what good is it to buy BHP Billiton shares at $9 back in 2000 and then boast about it, even when you allowed your capital gains to almost completely disappear between 2011 and earlier this year?
Another mistake all too often made by less experienced investors is to never sell unless the share price recovers above the original purchase price. I have one friend who's an absolute investment tragic, because she cannot bring herself to selling at a loss. Last time we met she confessed she's still owning Slater & Gordon shares.
To avoid making these mistakes, I judge equities on their performance over the past six months, regardless of whether I have been smart enough to buy them at a cheaper price. Yes, it means I actually have to make an effort to establish how my individual stocks are performing in their own right, but at least I am comfortable with what I own, and I am in this with my eyes wide open and a long term focus.
One additional benefit is that as a regular market commentator I am able to fall back on impartial assessment of a particular stock, separate from the bias that comes with knowing one bought at much lower price and remains happy to hold. I don't know what the average purchase price is for my CSL shares. What I do know is the shares are up more than 6% since January 1st, ex-dividends, and the broader market barely scraped through into positive territory.
If CSL shares run up too high, like they did earlier when they surged to $117, I might sell a few shares. When they fall too deeply, like they did recently when they briefly sank below $107, I might buy a few extra shares. My prior step-in price levels never feature when making such decisions. And they shouldn't.
Regrets? Only A Few
We all make mistakes, of course, but when it comes to investing we should aim not to pay dearly and under no circumstances should we stop analysing and drawing lessons from errors made.
One important lesson I learned is that we often try to be too smart, adjusting too frequently and thinking we only make smart decisions when we buy or sell. Certainly, the past twelve months have taught me the value of sitting tight, not acting when emotions run high, and trusting my prior judgment.
The reference to CSL shares above is one good example. There have been occasions when I sold some too early, because I was trying to be too smart. Don't. Ignoring market volatility is a true virtue. Or at least it can be if you own the stocks I own and you adhere to a strategy that is not based on constantly moving in and out whenever the market direction takes a swing either way.
One other less-than-favourable decision I made was to wear this year's extreme volatility in some of last year's market darlings, like Bellamy's ((BAL)) and Blackmores ((BKL)). I thought that throughout the volatility, their performance would still end up positively. It hasn't for the first six months of the year. Bellamy's shares are down nearly 25%, Blackmores losses are now in excess of 38%. I joined the register at higher prices in both cases.
One other smart plan I devised was to spread my industry/theme exposure over several stocks. In this case, the portfolio also includes A2 Milk ((A2M)), whose shares are up 3%+ in 2016. Sure, it hasn't exactly compensated for the losses so far incurred by Bellamy's and Blackmores, but the combined result is still significantly better than had I put all the money in Blackmores shares alone.
My broader macro-view remains very much focused on all the things that can and probably will go wrong, meaning regular outbursts of volatility and unexpected hits from operational headwinds should in my view now be considered par for the course. For this reason my mind is also set on reducing risk. How do I reduce risk when owning Blackmores? I cut total exposure in three and include Bellamy's and A2 Milk.
Yes, it doesn't help if the sector as a whole takes a blow, but that wouldn't be different if I only owned Blackmores, would it?
Genuine disappointments, my portfolio only has a few. One hundred percent flawless execution is something for the Land of Dreams and Wishes. I remain of the view the outlook for IPH Ltd ((IPH)) and iSentia ((ISD)) continues to look very promising, but the share market has little appetite for either of them so far in 2016.
I make a habit of never reminiscing for too long about the potential gains I missed out on. You cannot kiss all the beautiful girls is one of my all-time favourite expressions when it comes to investing in the share market. Do I hate myself for not buying BHP Billiton shares at $14 or Monadelphous shares below $5.50? Nah. Not even for a millisecond.
Instead I praise myself the portfolio owns CSL, Ramsay Health Care ((RHC)), Carsales, et cetera. Overall volatility has been incredibly low compared to what the share market has gone through since May 2015. I happily collect dividends. Make small adjustments, most of the time. And watch total return growing at a rate that is well above the market's. At night, I sleep like a baby.
Isn't this how investing should be?
Big Trends & Small Themes
We can all theorise and debate the share market until the cows come home, but at the end of the day beating the market (if that's your goal) and achieving a satisfactory return (should be everyone's goal) has been a lot easier if one got the big trends right in years past. Back in 2008, resources stocks made up 38% of the ASX200. Since then the trend has essentially been sideways and downwards for the China commodities theme. Until February this year.
The current trend that has caught many an expert's attention is the noticeable underperformance for the Large Cap stocks, as a group, in Australia. For the financial year until June 2016, owning the Top20 has translated into a loss in double digit percentages compared to a narrow gain for the index overall (including dividends) and a double digit positive return for small cap stocks. That is a very big difference by anyone's account.
Note this underperformance occurred despite the inclusion of Brambles ((BXB)), CSL, Scentre Group ((SCG)), Transurban ((TCL)) and Westfield ((WFD)), which all delivered double-digit percentage positive returns.
The logical conclusion is thus the performance from many large cap ("Blue Chip") stock has been far worse than the group performance suggests. This has certainly been the case for ANZ Bank, BHP Billiton, National Australia Bank, QBE Insurance, Woolworths and Woodside Petroleum which all are still trading more than 20% below share price levels of June last year, despite the recovery since mid-February.
The underperformance for Australia's big end of the market has been so pronounced over the year past, and it is now visible in all kinds of tables, statistics and comparisons that many an investor's attention will be drawn to it, no doubt with the contrarian inclination that after such a shellacking, there might be an opportunity opening up?
Before we try to answer that question, let's zoom in on the reasons behind the performance gap first. The world has become a low growth environment, certainly in comparison with pre-GFC eras, and Australia is only an exception at face value as exports of commodities and the construction of mega LNG facilities have kept GDP numbers artificially high. Look at actual capex numbers and consumer spending and a more benign picture stands out.
Large cap companies very much represent the Australian economy outside iron ore, coal and LNG construction, while those companies directly involved in those industries have suffered from post-peak downturn and over-supply. The absence of price inflation, in itself a sign of plenty of capacity and little pricing power, also makes it more difficult for large companies in established industries to lift prices, in particular when competition is rife.
If mature markets no longer grow substantially, and price inflation is not an option, diversification and acquisitions might bring relief, but it's a tough ask for any company with multi-billion annual sales to make a genuine difference. And costs can only be reduced so far.
Add increasing government and regulatory scrutiny, more competition and the fact shareholders expect at least the same dividends as in the previous year and it should not be too difficult to see why, for example, the banks have failed to keep up with Eclipx Group ((ECX)) or Silverchef ((SIV)), or why Telstra is seriously lagging TPG Group ((TPM)) and Vocus Communications ((VOC)), or why both Wesfarmers and Woolworths are unable to keep up with Webjet ((WEB)) and Baby Bunting ((BBN)).
Here, for everyone to see, is a big gap in barriers and disadvantages against more opportunities and easier accessible growth. Investors like to flock to large cap stocks when things get hairy and history suggests there's less volatility and more consistency to be had when owning large cap Blue Chips in Australia.
However, in the absence of a decisive change in the trends seen in recent years, it is difficult to argue the past two years have simply been an aberration and the Top20 is ready to regain its prominent position for performance and for relative safety.
For good measure: the large cap underperformance is not something unique to the past twelve months. It's just that the underperformance in FY16 has been so severe that only now it is catching everyone's attention. What all this does mean is one should cherish the exceptions -CSL, Brambles, Amcor ((AMC)), et al- while also seriously considering the option of including more small caps exposure.
The examples of Bellamy's and Blackmores, and of IPH and iSentia, prove there's no such thing as guaranteed success when dealing with smaller cap stocks, but most funds managers who will now be advertising they beat the index in FY16 have been Underweight large caps and Overweight smaller caps, no doubt about it.
Something to think about, surely?
Macquarie's Large Cap Analysis
The glaring underperformance of large cap stocks in Australia also caught the attention of analysts at Macquarie. They decided a detailed, in-depth analysis was the best response.
On Macquarie's analysis, large cap underperformance is really nothing new. It has been going on since the turn of the century. It didn't stand out as much between 2000-2007 as this was, after all, largely a period of positive returns, for everyone.
And yes, with China booming small cap mining stocks would massively outperform their bigger peers and most of the rest of the market. But there's a big difference in risk profile too and with bank shares generating double-digit returns each year, who'd be complaining?
The trend reversed during the GFC period as investors, understandably, sought refuge in size and in relative solidity though the banks and resources stocks, they all copped it big time. Then followed a period of relative market alignment between large cap stocks and the broader market, also helped by exceptionally low bond yields which started a global scramble for yield in mid-2012.
Things started to change from late 2013 onwards. On Macquarie's observation, earnings growth seems to be recovering outside the large cap space in Australia, while the Top20 is still very much lagging in this regard. This is one of Macquarie's key points to support the analysts prediction the relative underperformance of large caps is not about to end.
There is of course the logical conclusion that after such a horrid year that has been FY16, any underperformance from here onwards won't be as noticeable as what we've witnessed over the past twelve months. Commodity prices seem to have bottomed. Market expectations have turned positive for energy prices and for producers. Things may not get a lot worse for insurers. The banks, however, continue to suffer from regulatory uncertainty, among many international worries, but at least their valuations look cheap. And supermarkets are likely to face more sector stress indeed.
All-Weather Model Portfolio
The great gift provided by the FNArena Vested Equities All-Weather Model Portfolio is that it allows to back up my ongoing market analysis with a real-time, daily operating investment portfolio. For over a decade, I have been writing in-depth market analysis and commentary.
I have traveled between Perth, Adelaide and Melbourne and from Brisbane to Hobart to stand in front of a projection screen, lapel mike pinned on my jacket, to share my findings and views with investors of all kinds.
I wrote and published a book in 2015; 'Change. Investing in a low growth world'. I appear regularly on finance television. But nothing genuinely talks as loud as being able to refer to an actual portfolio that consists of ASX-listed stocks, bought with investors' money, based upon all the things I say when I stand tall on stage.
Today, this Model Portfolio symbolises everything you just read. No resources. A tiny exposure to banks, and then only to Commbank ((CBA)), the toughest and most reliable of them all. Total exposure to the Top20 remains limited to CSL, Transurban ((TCL)), and Commbank.
There are smaller cap exposures for dividends, and smaller stocks included for growth. Above all, this portfolio is built around All-Weather Performers; stocks that can hold their own regardless whether the forecast is for hail, rain, snow or sunshine.
The aim is not to beat the index at all times, because that would force us to become traders and to make a plethora in short term decisions, plus we'd have to own shares we don't want to own longer term. Part of the strategy is to limit risk and volatility; not through fancy derivatives and trading, but through specific stock selection.
Portfolios do not have to mirror the market index because that's not necessarily representative of where risk, returns and growth are heading.
The past year has shown that if one correctly reads the broader trend(s), all these things become a lot easier to achieve. In line with our conservative backbone, the Portfolio has never been fully invested in the share market, carrying plenty of cash most times. Its performance has been significantly better than zero, unlike the broader market.
This is not a time to become complacent, or to crow about past achievements, but to try to stay vigilant instead and keep a close eye on changing market trends. In many ways, the performance of the Portfolio is reflective of the underlying trends that have dominated the Australian share market over the year past; the underperformance of large caps vis-a-vis smaller caps, the only partial recovery of resources after a fierce and bloody downtrend, the underperformance of banks versus most other yield stocks; the ongoing popularity of yield stocks and of solid, reliable industrials, aka All-Weather stocks.
Not all these trends will continue to dominate in the year(s) ahead, but to date I have seen no indication the approach and the philosophy behind the Portfolio need to be amended dramatically to continue achieving our goals.
Note: due to my travel commitments (see also below) there will be no Weekly Insights next week. I shall resume in the week starting on Monday, 18th July.
For more info about the FNArena Vested Equities All-Weather Model Portfolio: [email protected]
Rudi On Tour
I will be presenting:
– To Melbourne chapter of the Australian Shareholders' Association (ASA) on 6 July
– To a Selected Group of FNArena Subscribers, "An Evening With Rudi", in Melbourne, 6 July (sold out)
– To a Selected Group of FNArena Subscribers, "An Evening With Rudi", in Melbourne, 7 July (almost sold out)
– To Gold Coast chapter of Australian Shareholders' Association (ASA) on Tuesday 12th July at Robina Community Centre, commencing at 9:30am
– To Brisbane chapter of Australian Shareholders' Association (ASA) on Wednesday 13th July at the Wesley House, 140 Ann St, Brisbane, commencing at 11:00am
– To a Selected Group of FNArena Subscribers, "An Evening With Rudi", Gold Coast, Wednesday 13 July (tickets still available)
– At the Australian Investors' Association's (AIA) National Conference in August on Queensland's Gold Coast.
– To Chatswood chapter of Australian Investors' Association (AIA) on September 7, 7pm, Chatswood RSL
– To Perth chapters of Australian Investors' Association (AIA) and Australian Shareholders' Association (ASA) on 7 February 2017
Nothing Ever Changes, Or Does It?
Yes, of course, investing in the share market is never really different and best working strategies today are the same that worked pre-GFC. Seriously. I tell you, seriously.
Now that we had a good laugh about it, let's get straight to business. This is a low growth environment. Has been since 2010 (it was masked at the time because of the V-shaped recovery from the global recession) and it is not likely to change fundamentally in the near term. I wrote a book about this (see below). This means investment strategies must adapt. You'll be turning your portfolio into a wish list for dinosaurs otherwise (and your returns will be a reflection of it).
Those not afraid to contemplate "this time is different" can subscribe to FNArena and read all about it in our bonus eBooklets 'Make Risk Your Friend' (free with a paid 6 or 12 months subscription) plus the freshly published eBook 'Change. Investing in a low growth world' (equally free with subscription, or available through Amazon and other online distributors).
Here's the link to Amazon: http://www.amazon.com/Change-Investing-Low-Growth-World-ebook/dp/B0196NL3KW/ref=sr_1_1?s=digital-text&ie=UTF8&qid=1454908593&sr=1-1&keywords=change.investing+in+a+low+growth+world
See also further below.
Rudi On TV
Due to my travel commitments in the coming tw weeks, there will be no TV appearances.
(This story was written on Monday 4th July 2016. It was published on the day in the form of an email to paying subscribers at FNArena).
(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views are mine and not by association FNArena's – see disclaimer on the website.
In addition, since FNArena runs a Model Portfolio based upon my research on All-Weather Performers it is more than likely that stocks mentioned are included in this Model Portfolio. For all questions about this: [email protected] or via Editor Direct on the website).
BONUS PUBLICATIONS FOR FNARENA SUBSCRIBERS
Paid subscribers to FNArena receive several bonus publications, at no extra cost, including:
– The AUD and the Australian Share Market (which stocks benefit from a weaker AUD, and which ones don't?)
– Make Risk Your Friend. Finding All-Weather Performers, January 2013 (The rationale behind investing in stocks that perform irrespective of the overall investment climate)
– Make Risk Your Friend. Finding All-Weather Performers, December 2014 (The follow-up that accounts for an ever changing world and updated stock selection)
– Change. Investing in a Low Growth World. eBook that sells through Amazon and other channels. Tackles the main issues impacting on investment strategies today and the world of tomorrow. This book should transform your views and your investment strategies. Can you afford not to read it?
Subscriptions cost $380 for twelve months or $210 for six and can be purchased here (depending on your status, a subscription to FNArena might be tax deductible): https://www.fnarena.com/index2.cfm?type=dsp_signup
FNArena has reformatted its monthly price tracker file for All-Weather Performers. Last updated until June 30th. Paying subscribers can request a copy at [email protected]
For more info SHARE ANALYSIS: A2M - A2 MILK COMPANY LIMITED
For more info SHARE ANALYSIS: AMC - AMCOR PLC
For more info SHARE ANALYSIS: BBN - BABY BUNTING GROUP LIMITED
For more info SHARE ANALYSIS: BKL - BLACKMORES LIMITED
For more info SHARE ANALYSIS: BXB - BRAMBLES LIMITED
For more info SHARE ANALYSIS: CAR - CAR GROUP LIMITED
For more info SHARE ANALYSIS: CBA - COMMONWEALTH BANK OF AUSTRALIA
For more info SHARE ANALYSIS: CSL - CSL LIMITED
For more info SHARE ANALYSIS: EHE - ESTIA HEALTH LIMITED
For more info SHARE ANALYSIS: IPH - IPH LIMITED
For more info SHARE ANALYSIS: REG - REGIS HEALTHCARE LIMITED
For more info SHARE ANALYSIS: RHC - RAMSAY HEALTH CARE LIMITED
For more info SHARE ANALYSIS: SCG - SCENTRE GROUP
For more info SHARE ANALYSIS: SIV - SIV CAPITAL LIMITED
For more info SHARE ANALYSIS: TCL - TRANSURBAN GROUP LIMITED
For more info SHARE ANALYSIS: WEB - WEBJET LIMITED