Rudi’s View: Focus On Quality Yield

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 | Nov 08 2019

Dear time-poor investor: what is the best way to invest in equities for regular income?

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

-Market Rotation? It's Complicated
-Conviction Calls
-Focus On Quality Yield
-Fortescue Is No Mystery
-Tickets to Conference on Agricultural and Veterinary Biotechnology
-Rudi Talks
-Rudi On Tour

[The non-highlighted items appeared on Thursday in Part One]

Focus On Quality Yield

By Rudi Filapek-Vandyck, Editor FNArena

It is the subject most share market experts and commentators rather not talk about: buying cheaply priced stocks works best when interest rates are higher, economic growth and cycles are relatively robust and there is no mass-disruption from eroding barriers of entry and technological innovations.

The current environment is different. Interest rates are exceptionally low, and likely to move lower still. Economic growth the world around post-GFC has never been quite the same, and the overall pace remains low by historical standards. And change caused by innovations: where exactly do I start?

The direct result is that corporate throwbacks, missteps and failures are not necessarily temporary in nature, as was mostly the case pre-2012. At the very least, the past number of years have taught investors cheaply priced companies might find it hard to sustainably improve their operations and thus catch up with the prolonged bull market in equities.

It is but one reason as to why 80-92% (small caps - large caps) of actively managed funds in Australia, according to a recent sector update by Morgan Stanley, are unable to keep pace with their benchmark, let alone decisively beat it.

Plenty of examples to choose from. In the healthcare sector, far and away the best performing in Australia, plenty of fund flows preferred Healius ((HLS)) these past years, instead of the much more "expensive" looking Cochlear ((COH)), ResMed ((RMD)) or CSL ((CSL)). Yet it's the "cheaper" one out of these four that has, on balance, hardly performed on a five year horizon.

Amongst REITs, equally one of the better performing segments on the ASX, the likes of Goodman Group ((GMG)) have at times become the focus of short-positioning, but the share price consistently moved upwards, at least until the mini-correction in August this year.

Once upon a time, Goodman Group shares were highly sought after by income hungry retirees, but these days the shares only offer circa 2% forward looking. That can serve as an indication of how "expensive" those shares have become.

There is no doubt in my mind income seeking investors have instead been preferencing REITs such as Vicinity Centres ((VCX)), which still offers circa 6% yield. On the flip side, Vicinity shares have eroded some -23% since their peak in mid-2016 and have largely trended sideways throughout 2019 when most market indices added near 20%.

Amidst an ongoing tough outlook for industrials in Australia, investors might take heed from the observation the increasing number of profit warnings and negative market updates are accompanied by a reduction in the dividend for shareholders. Already I have seen predictions of a lower payout by Vicinity Centres in 2020, and, post this week's profit warning, Medibank Private's ((MPL)) FY20 dividend might be at risk too.


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Probably the most striking examples have come from the banking sector, in particular in Australia prominently represented in investment portfolios. If it isn't because of the dividend appeal, it's otherwise because the sector remains by far the largest on the local stock exchange with all Four Majors plus Macquarie included in the ASX Top10.

In a recent strategy update on global banks, analysts at Citi offered the following warning for investors: Don't Buy Cheapest Banks.


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