The Right Lessons To Learn

rudi-views
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 | Sep 12 2019

Dear time-poor reader: The All-Weather Portfolio is generating more income while better protected against share market shenanigans. Here's how we did it.

In this week's Weekly Insights:

-A Joke For The Times
-The Right Lessons To Learn
-Yield At Uncorrelated Protection

-Rudi Talks
-Rudi On Tour

Special note: there will be a Part Two comprising of broker Conviction Calls and remaining insights from the August reporting season, which will be published on Friday on the website.

A Joke For The Times

It is the year 2525, and man is still alive, but he's had to battle raging bush fires and rising sea water levels among many other impacts from climate change.

The world is now divided over three competing populist dictatorships that battle each other for what is left in fresh water and other crucial resources.

And the UK is considering organising its next referendum to decide whether it wants to leave the EU, or not.

(I recently told this joke while co-MC-ing the Conference Dinner with Julia Lee at the AIA National Investment Conference on the Gold Coast).

The Right Lessons To Learn

By Rudi Filapek-Vandyck, Editor FNArena

Probably the best way to describe the performance of the FNArena/Vested Equities All-Weather Model Portfolio into the new financial year is by making the following observation: the All-Weather Portfolio has rallied to a fresh all-time record high, while key local share market indices might need half a week of unrestrained upside to get there.

The difference in performance has been achieved on the back of yet another heavily polarised August reporting season in which yet again sharp differences were laid bare in operational performances between companies often operating inside the same sector.

This has now happened so often in recent years, investors should probably start asking the question as to whether we are experiencing a "new normal" for corporate Australia, and for investors trying to balance risks and potential rewards.

Quality, The New Diversifier

Citi analysts, in a post-August sector update on REITs in Australia, formulated it succinctly when they observed: "Earnings growth and upside surprise [are] becoming more concentrated".

This is not just something that characterises listed property stocks in Australia today. This observation equally applies to other sectors, like retail and miners. A clear case can be made that the Australian share market in its entirety is now sharply divided between Haves and Have Nots, with significant consequences for anyone looking to invest long term.

The most significant observation, on my assessment, is that a relatively low valuation increasingly corresponds with higher operational risks. Certainly, this has probably always been the case, but in the past your typical bottom dwellers and value investors seemed to get away with "buying cheaply" more often than not, as the share market always shoots first and share prices tend to overshoot to the downside.

Not anymore. The August reporting season had barely finished or share prices for Incitec Pivot ((IPL)) and CYBG ((CYB)) had yet to endure another profit warning from company management. The first one was pretty much anticipated as fertiliser prices remain lower-for-longer, but it still surprised to the downside. The latter warning came completely out-of-the-blue.

Which is why CYBG's share price shellacking was so much worse than how the market responded to Incitec Pivot's disappointment. Equally important: since Incitec Pivot is a highly cyclical business, contrarian investors have already started speculating whether this latest disappointment marks the bottom for this cycle?

To be fair, August included some spectacular sell-offs for High Performance Achievers including a2 Milk ((A2M)), IDP Education ((IEL)) and Nearmap ((NEA)), but in most cases this happened on the back of a mere "technicality" such as management deciding to invest more to secure more growth further out, or the initial underperformance of a recent acquisition. It would be an incredibly brave call to now conclude these companies have turned ex-growth.

Fast growers can end up in dire straits, there's no denying the obvious, and August showed that once companies get mired into serious struggles it's best to adopt a cautious and conservative approach. See Blackmores ((BKL)) and Bellamy's ((BAL)), for instance, but also 3P Learning ((3PL)), Ardent Leisure ((ALG)), Arq Group ((ARQ)), The Citadel Group ((CGL)), Bega Cheese ((BGA)) and a whole battery of other examples.

The underlying observation remains intact though: most profit warnings and serious disappointments stem from challenged companies and from business models under pressure. Most often these are the share prices that lag the upward momentum that has allowed the Australian share market to rise more than 20% year-to-date.

High Quality Continues To Prove Its Value

For years now I have been advocating investors should distinguish "High Quality" from the rest in the Australian share market. Those who have been following my market observations and analyses would have noticed there were no profit warnings from High Quality structural growth companies such as CSL ((CSL)), REA Group ((REA)) or ResMed ((RMD)); an observation that extends beyond the recent August reporting season.

In addition, I also believe investment strategies are best served by distinguishing the emerging disruptors from the increasingly disrupted. A substantial part of the polarisation in equities that started taking shape around 2014 can be explained by looking at the investment landscape from such perspective.

Here I believe the August reporting season has provided investors with an important piece of insight: many of the companies that fall either under the umbrella of "High Quality" or of "emerging structural growth" on the back of technological disruption are able to continue to grow their sales and profits, even during times of global deceleration, macro uncertainty and widespread corporate duress.


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