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Rudi’s View: CYBG, Link Admin & Treasury Wine

Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

Rudi's View | Jul 12 2018

In this week's Weekly Insights (this is Part Two):

-The Triumph Of Quality
-Share Market Sweet Spot
-Conviction Calls
-Rudi On TV
-Rudi On Tour

Share Market Sweet Spot

By Rudi Filapek-Vandyck, Editor FNArena

One of the persistent misconceptions among Australian investors is that better investment returns await those who venture into small caps, but no such conclusions have ever been drawn from thorough data analysis.

It wasn't that long ago that I compared the performance of various fund managers specialising in large and small caps, and that (admittedly rough) comparison generated similar results as putting raw share prices together.

In contrast to, say, the USA, there is no consistent outperformance of small caps over large caps in Australia. The share market does have its periods when one is very much favoured over the other. And unless you have been living under a rock lately, we are currently in a period when large caps are the laggards, and many investors have redirected their attention to small cap stocks in response.

But are smaller cap stocks the best location for achieving superior returns? What about the higher risk profile?

Turns out, the sweet spot in the Australian share market is situated between positions 51-100 of the ASX200. Throughout the years of reading copious volumes of market research and data analysis, I have come across this conclusion a number of times. Analysts at Citi (if my memory serves me correctly) highlighted this not so long ago, and last week it was the turn of Colonial First State, which is also responsible for the chart below.

We can clearly see how large caps (ASX50) performed considerably better than small caps (Small Ords) over seven and ten year horizons, but the three and five year performances are in favour of small caps, in particular the past three years. But no matter what time horizon we choose, the outperforming market segment is always the ASX Mid Cap 50, which translates into numbers 51-100 of the ASX200 index.

This should come as no surprise. Strong performers including BlueScope Steel ((BSL)), a2 Milk ((A2M)), Seek ((SEK)), Challenger ((CGF)), WiseTech Global ((WTC)), Orora ((ORA)), and Reliance Worldwide ((RWC)); they are all part of this group, as are a number of stocks that haven't performed so well lately, including Harvey Norman ((HVN)), Link Administration ((LNK)), and Fletcher Building ((FBU)).

Investors who'd like to study the apparent sweet spot in the Australian share market in more detail can send an email to and we'll send you a list of the current numbers 40-120 of the ASX200. One should always treat such research in a dynamic fashion as market cap and index weight rankings move and evolve on a constant basis.

Stocks like REA Group ((REA)) and James Hardie ((JHX)) were still included only a few years ago, but ongoing success has now pushed them into the top 50. Similarly, Mineral Resources ((MIN)), Altium ((ALU)) and Corporate Travel ((CTD)) are currently not in the sweet spot basket, but it'll only take one more excellent year and they can be.

There will be losers too, of course. This is why a dynamic approach seems best. And as per always, none of the above suggests that every single stock in this particular segment will prove an excellent investment, no matter what horizon.

Conviction Calls

As mentioned in the first part of this Weekly Insights, CLSA analysts are convinced that whoever buys Ramsay Health Care ((RHC)) shares in the lower $50s shall be richly rewarded over time. Less than three weeks ago, the analysts published a sizeable update on the private hospitals operator and the title of that report pretty much gives it away, despite the rhetorical question mark at the end: Darkest before the dawn?

CLSA keeps a Buy rating for the stock with a price target of $72.35. While the target is not the highest in the market, it does suggest plenty of upside, implied, for investors with stamina and patience.

CLSA is also very keen on Treasury Wine ((TWE)) -note: different analyst- with proprietary research involving 45 wine wholesalers across 14 cities in China supporting the ongoing positive view, contrary to media reports about import and inventory problems in the country.

In light of the weakening share price, and a lot of negative press labeled as "noise", CLSA happily sticks to its Buy rating, in combination with a $21 price target and, equally showing off the analyst's conviction, above market consensus forecasts.


The same passion-with-conviction is becoming apparent at Morgan Stanley with regards to Link Administration. While acknowledging risk remains for the operations in Australia, Morgan Stanley analysts are super-enthusiastic about the outlook for the acquired Link Asset Services (LAS) in the UK. The forecast is for 10% per annum ebitda growth over FY19-21 on a combination of rising revenues and higher margins. This will take care of any small headwinds in Australia, forecast the analysts.

Also, Link is well placed to capitalise on the outsourcing trend in the UK, plus expansion into Luxembourg should add yet another leg of growth. Morgan Stanley is therefore convinced the market is overly focused on the current headwinds and risks in Australia, and thus missing the fact that Link is grabbing the opportunity to build a leading European asset servicing franchise, potentially opening up an earnings upgrade cycle.

Morgan Stanley rates the stock Overweight in conjunction with an In-Line sector view and $9 price target.


Now that we've mentioned Link Administration, those responsible for the Balanced Model Portfolio at stockbroker Morgans have been buying Link shares recently, arguing the stock looks oversold and has probably weakened a lot more because of frustration from investors who signed up for the capital raising at $8 per share, with the $300m raised un-deployed thus far.

The fund has trimmed USD earners CSL ((CSL)), Macquarie Group ((MQG)), Corporate Travel ((CTD)) and Orora ((ORA)), likely as a weighting rebalance following recent outperformance. All four remain core holdings for the fund, the managers state. Existing holdings in the major banks have been topped up.

The stockbroker's Growth Model Porfolio has equally been buying Link Administration shares, while accumulating additional bank shares, and trimming the position in Reliance Worldwide (profit taking).

Morgans' Cross Asset Income Model Portfolio has sold half its position in APA Group ((APA)), built a new position in AusNet ((AST)) and is watching Stockland ((SGP)) and Mirvac ((MGR)) for an opportunity to replace Peet Retail Bonds.


Equity investment manager DNR Capital is focusing on a possible reduction in credit in Australia and has decided its portfolio requires less bond proxies and less higher PE stocks. DNR is worried that a period of reduced credit growth will have a negative impact on consumers as well as on the housing sector.

DNR remains underweight consumer stocks and banks, preferring mining and infrastructure spending exposure instead. The investment manager has been building positions in Woolworths ((WOW)), CYBG ((CYB)), and Woodside Petroleum ((WPL)) recently.


Martin Crabb, chief investment officer at Shaw and Partners, has been warning the stockbroker's clientele it might be time to start selling some shares as the share market in general has performed well, on basically nothing but sentiment and thin air, and with no support from earnings estimates (have not risen accordingly).

Crabb uses a rigorous fair value methodology based on consensus price target forecasts for the ASX100. With the share market rising throughout June and July (up until last week), the suggested further upside potential from this model is only a fraction on top of the prospective 4.45% in dividends. Not enough to start accumulating, in a general sense.

Overall conclusion: "Australian earnings risk seems pretty low, but valuations look full. Global earnings risk looks even lower and valuations are much better. Overweight global equities over local."

His warning is further supported by the observation the Australian share market is trading nearly one standard deviation above its long term PE average.

Rudi On TV

This week my appearances on the Sky Business channel are scheduled as follows:

-Tuesday, 11am Skype-link to discuss broker calls
-Thursday, from midday until 2pm
-Friday, 11am, Skype-link to discuss broker calls

Rudi On Tour

-ATAA members presentation Newcastle, 14 July
-AIA National Conference, Gold Coast QLD, June 29-August 1
-ASA Presentation Canberra, 3 August
-Presentation to ASA members and guests Wollongong, on September 11
-Presentation to AIA members and guests Chatswood, on October 10

(This story was written on Monday 9th and Wednesday 11th July 2018. Part One was published on the Monday in the form of an email to paying subscribers at FNArena, and again on Wednesday as a story on the website. Part Two shall be published on the website on Thursday).

(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: or via the direct messaging system on the website).



Paid subscribers to FNArena (6 and 12 mnths) 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.
– Who's Afraid Of The Big Bad Bear? eBook and Book (print) available through Amazon and other channels. Your chance to relive 2016, and become a wiser investor along the way.

Subscriptions cost $420 (incl GST) for twelve months or $235 for six and can be purchased here (depending on your status, a subscription to FNArena might be tax deductible):

(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.

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