Archive for year: 2018

In the world of haute couture, a famous designer once quipped – “In a world full of trends, I want to remain a classic”.

At Investors Mutual we would rephrase it as: “In a world full of trends, we want to remain a true-to-label value investor”.

The past 18 months has been a challenging and at times a frustrating environment for value investors. At IML we pride ourselves on our strict adherence to the IML investment mantra which has defined our approach to investing for the past 20 years – through all market cycles. That is to buy and own companies with a competitive advantage, with recurring earnings, run by capable management, that can grow, at a reasonable price.

This can be neatly described as an investment style of Value with a strong focus on Quality. However, over the past 18 months this proven approach has significantly lagged the styles of Growth and Momentum based investing.

A quick recap of the different styles

Value investors 

Seek companies whose share prices are trading below their intrinsic value as determined by bottom-up, fundamental analysis. This may include buying companies that are trading below their tangible book value, their net asset value, that have a long history of earnings and dividends and that trade at reasonable valuations.

Growth investors 

Seek companies that exhibit above average earnings growth and often are happy to buy when the share price looks expensive or trading well ahead of reasonable fundamentals. Growth investing is an act of faith, often buying earnings which have not yet materialised or where a company is expected to continue grow at a quick pace well into the future. Traditionally these companies trade on very high PE ratios as their earnings are expected to continue to accelerate for many years into the future.

Momentum strategies

Disregards much of the fundamental analysis that Value and Growth investors utilise. Momentum investors seek to capitalise on a continuation of short term existing trends. To put it simply this style – often used by quant investors and hedge funds – buys because the share price is trending higher or sells because it is trending lower. This style includes investing in whatever current market fads or concepts are capturing investors’ imagination. This style is self-fulfilling for a time as the more people believe the hype, the more the share price incites others to jump in.

So where are we today and why has it been a challenging 18 months for a Value investor?

As can be seen from figure 1: Momentum and Growth have outperformed Value and the ASX300 by a significant margin over the last 12 months. The scale of the out performance of the last 12-18 months has been so significant that it is now impacting the 3- to 5-year comparisons.

Figure 1: Annualised returns of ASX investment styles

There are a number of dynamics at play in the current market

We are now nine years into the current market phase which has been driven by a record breaking US market and by continued record low interest rates in many parts of the world – including Australia. Since Donald Trump was elected 18 months ago the US market has risen strongly and until recently volatility was at all-time lows. This renewed and unflinching sense of confidence in the sharemarket has made it difficult for Value investors such as IML to keep pace with the sharemarket, while the environment has favoured both Growth and Momentum strategies.

The majority of companies we visit continue to indicate that conditions remain very competitive in many industries and it remains a challenging environment to grow profits. As an experienced Value manager, it makes little sense in this environment to take on additional risk and pay excessive multiples for stocks which are attractive because they are growing faster than the average company.

However, over this same period many Growth and Momentum managers have shown a willingness to pay high multiples for companies such as; Treasury Wines, Bluescope Steel, Qantas, A2 Milk, NextDC, Cochlear, Macquarie Bank, Resmed and Aristocrat. While many of these are decent companies we challenge the thesis of buying these companies on such high valuations simply because of their short-term earnings outlook. It seems to us that some of the buying is being fuelled by hopes that current macro conditions will last forever.

As an example, a major theme has been the stellar performance of companies rising on exposure to the ‘daigou’ market into China, share prices continue to be based on the expectation that they can sell ever larger amounts of their products into China without any hitches.

We continue to ask ourselves when looking at many of these companies: is too much faith being baked into the future earnings projections of these companies? It seems to us that many companies are priced to perfection and any small slip or earnings downgrade will lead to a very rapid derating in many of these companies.

As demand for these Growth companies continue, we are now seeing Momentum strategies joining in and bidding these stocks up to vastly excessive valuations. The past 12 months has resulted in a very narrow universe of growth and momentum type stocks driving the market higher, whilst good quality industrial companies with modest yet sustainable earnings have lagged.

As Value managers, it is not our style to participate in this exuberance, we have a clear valuation framework around every company in our universe and one which we have always stuck to successfully since our inception.

Resources v Industrials – another growth v value conundrum

This brings us to the topic of the significant outperformance of Resources over Industrials since February 2016, which is also a major factor contributing to IML’s portfolios recent underperformance. Resource stocks by virtue of their nature fit the designation of chasing growth. IML always takes a cautious view on Resources given their high volatility and unpredictable earnings. Resource companies’ earnings and dividends remain beholden to the movement in underlying commodity prices, which remains totally unpredictable – as clearly seen in the last few years in the wild swings we have seen in the prices of commodities such as oil and iron ore.

In January 2016 commodity prices reached decade lows (yet still above longer-term averages), beset by global oversupply, tepid economic growth and significant concern for China’s financial markets. However, the Chinese Government responded with significant amounts of stimulus which helped many commodity prices to rapidly recover and in turn to a significant rally for Resource companies.

IML has always preferred to invest clients’ monies in a diversified portfolio of good quality Industrial companies. This method of investing in quality Industrial companies allows the prudent investor such as IML to model out the earnings streams of these companies into the future with some degree of certainty. Such a diversified portfolio of good quality Industrial companies will also provide investors with a predictable income stream in the form of dividends over time.

While at times a difficult market for value investors, we remain confident in our long-term approach and point to figure 2 below highlighting the long-term performance of the Industrials and Resources sectors. It is worth highlighting that the Resources sector returns are negative on a total return basis over 10 years.

Figure 2: ASX Industrials v Resources

What are we buying and why?

We have been buying the following companies on current share price weakness, companies which we believe have very resilient earnings, and strong management teams, yet whose share prices are all being impacted by factors which, in our view, are temporary in nature. We believe these investments will serve IMLs portfolios and their investors well in the longer term.

Amcor – a resilient global packaging company which is currently under pressure due to higher input prices and uncertainty around their emerging markets businesses. Amcor generates strong cash flows and has been relatively inactive on M&A for a while now as target businesses have been excessively priced. If reasonable acquisitions don’t eventuate, the focus will return to capital management which has been a key facet of Amcor’s strategy for capital deployment in the past.

Brambles – a global pallet pooling business, currently trading on 16.5x PE, with benefits still to come from productivity increases in its US pallet business. Brambles’ share price is currently trading lower because of fears that increases in lumber and transport costs will impact margins.

Pact Group – a rigid plastic packaging company which has diversified their business into contract manufacturing and materials handling. Concerns around organic growth from recent results have weighed on the share price, however we think Pact has a very strong management team, and is a durable business which can grow earnings over time via continued cost-outs and bolt-on acquisitions.

Caltex – a leading fuel distributor in Australia with a hard-to-replicate infrastructure network across the country. The share price has been weak of late due to slower near-term earnings growth as refining margins have declined and the company transitions from a franchise model to company operated.

Transurban – a toll road operator with a quality portfolio of roads spanning Sydney, Melbourne, Brisbane and the US, currently offering investors a 5.1% dividend yield with strong growth. Transurban’s share price is currently weighed down by uncertainty surrounding the WestConnex sale process.

Conclusion

The last 18 months has been a difficult market to perform in for value investors such as IML. Companies caught up in the latest theme, fad or concept are being rewarded despite, at times, questionable fundamentals and often a distinct lack of sustainable earnings.

We continue to remain disciplined in continuing to focus on the fundamentals of all the companies we invest in and we seek to not over pay for companies that are often over promising and on companies where the outcome
is often far from certain. With many companies’ valuations stretched, we continue to believe that portfolios underpinned by value and quality stocks remain the best place to be.

Referencing figure 3 below, IML’s proven and successful investment approach has guided investors through volatile and challenging times, notably the tech wreck of 2001-02, the GFC in 2008 and the Eurozone debt crisis of 2011. We remain prudently positioned for any possible correction.

While the information contained in this article has been prepared with all reasonable care, Investors Mutual Limited (AFSL 229988) accepts no responsibility or liability for any errors, omissions or misstatements however caused. This information is not personal advice. This advice is general in nature and has been prepared without taking account of your objectives, financial situation or needs. The fact that shares in a particular company may have been mentioned
should not be interpreted as a recommendation to buy, sell or hold that stock. Investors Mutual Limited does not guarantee the performance of any Fund, repayment of capital or any particular rate of return. Performance returns are
calculated using the exit price, net of management fees and assuming the reinvestment of distributions. No allowance is made for tax. Past performance is not indicative of future performance. Returns can be volatile, reflecting rises and falls in the value of the underlying investments. Investors should seek independent advice as to the suitability of the Fund to their investment needs.

Investors Mutual Limited is the issuer of the Investors Mutual Australian Share Fund. Applications can only be made by reference to the current Product Disclosure Statement or through IDPS products that include these Funds. The Product Disclosure Statement can be obtained by contacting Investors Mutual or at http://www.iml.com.au/how-to-invest/pds-and-forms. Potential investors should consider the Product Disclosure Statement before deciding whether to
invest, or continue to invest in the Fund.

We are in the business of educating our clients on the importance of retirement planning. But research has shown that a one-size-fits-all approach to communication isn’t the most effective tactic. And while it’s impossible to customise messages person by person, it turns out that it’s quite easy to customise them by one big factor: gender. It’s widely accepted that there are differing preferences in communication styles and learning techniques between most men and most women. The question is: How can you adjust your message in a way that’s enlightening, not alienating for your female participants?

The risks of not being prepared

Before I answer that question, I want to reinforce why this topic is so important. Women have longer average lifespans than men, and retire earlier, with much less Superannuation than men, yet tend to underestimate how much they need to save for retirement.

Avoiding labels

At this point, you may be thinking that I’m going to suggest a series of women-branded workshops or educational flyers stamped in pink.

But I’m not.

When Invesco Consulting began the process of creating a workshop for women, we tested numerous options for titles with specific references to women, and one of the first things we heard from women is that they do not want to be singled out by their gender. In fact, any title that included a gender reference — such as “What Women Know About Money” or “The Female Financial Advantage” — consistently scored in the bottom 20% of engagement.

Why? Because women often view these approaches as carrying a subtle suggestion of inferiority, as if the “women’s version” was created for those who don’t qualify for the regular workshop. We found that a better approach is to create educational workshops and materials with the preferences of women in mind, but which doesn’t highlight them as “special” or “different.” In other words, simply work to meet the needs of your women participants — without labeling them.

Three key principles

This is the approach Invesco Consulting took when creating our investor education workshop “Your Prosperity Picture” (notice the lack of women-specific labels in the title). We found that there are three key principles that resonate with many women investors, and we incorporated these in our program:

Principle 1: Provide experience before explanation

Principle 2: Align life goals with financial goals

Principle 3: Be positive

Principle 1: Provide experience before explanation.

According to the Public Administration & Policy – APAC Journal, 3 women tend to be “Relational Learners” while men are usually more “Independent Learners.” We found that beginning a workshop with an interactive activity (instead of just launching into a presentation) can be a great way to tap into that learning preference for many women. But what kind of activity? In a column I wrote — “What will retirement look like?” — I discussed the power of visualisation exercises. Science has shown that if you visualise a particular goal that requires financial resources, such as traveling or pursing a hobby, it helps condition the brain to look for information and resources that might help in achieving that goal. Walking investors through a visualisation exercise that focuses on their goals can be a great way to begin a financial workshop.

Principle 2: Align life goals with financial goals.

One study has shown that women who feel their financial advisors have successfully helped them align their investment goals with their life goals are 41% more likely to be satisfied. In “Your Prosperity Picture” workshops, we do this by walking investors through the process of creating a visual financial plan that illustrates their short-term and long-term goals, and organises them by the amount of financial resources that will be necessary to make those goals happen.

Once investors are talking and thinking about their vision for their retirement, the next logical step is to connect that vision with your retirement plan benefits. You’ve set the stage to talk about practical strategies geared toward making their goals happen.

Principle 3: Be positive.

I started this column with some sobering statistics about women’s retirement age and retirement superannuation balance. I did that to set the stage for you, the Financial Advisor, but I would not include these in an investor workshop. Our research has clearly shown that negative spin doesn’t sit well with most women investors, and trying to scare them into action can backfire. In fact, the principle of being positive is so powerful that it transcends gender. It’s proven to be one of the most important and consistent language trends that Invesco Consulting has seen since we began doing our language research in 2009.

What does this mean for Financial Advisors? Rather than focusing on the possibility of negative outcomes and how to avoid them, focus on achieving what’s possible. Position your retirement plan as a way to help investors reach their goals, rather than taking a gloom-and-doom approach.

Bottom line

In general, women and men have different learning styles and communication preferences, but women don’t want to be singled out. A workshop designed for these needs won’t include “women” in the title, but will follow three key principles: providing experience before explanation, aligning life goals with financial goals, and maintaining a positive message.

Important information
This document has been prepared by Invesco Australia Ltd (Invesco) ABN 48 001 693 232, Australian Financial Services Licence number 239916, who can be contacted on freecall 1800 813 500, by email to info@au.invesco.com, or by writing to GPO Box 231, Melbourne, Victoria, 3001. You can also visit our website at www.invesco.com.au

This document contains general information only and does not take into account your individual objectives, taxation position, financial situation or needs. You should assess whether the information is appropriate for you
and consider obtaining independent taxation, legal, financial or other professional advice before making an investment decision. A Product Disclosure Statement (PDS) for any Invesco fund referred to in this document is available from Invesco. You should read the PDS and consider whether a fund is appropriate for you before making a decision to invest.

Invesco is authorised under its licence to provide financial product advice, deal in financial products and operate registered managed investment schemes. If you invest in an Invesco Fund, Invesco may receive fees in relation
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Investments in the Invesco funds are subject to investment risks including possible delays in repayment and loss of income and principal invested. Neither Invesco nor any other member of the Invesco Ltd Group guarantee the return of capital, distribution of income, or the performance of any of the Funds. Any investments in the Funds do not represent deposits in, or other liabilities of, any other member of the Invesco Ltd Group.

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