Congratulations to all the winners and nominees for this year’s Fund Manager of the Year Awards. For Lonsec and Money Management, these awards are a celebration of the very best of the funds management industry and we will recognise the very best innovations and products and services that improve the investment outcomes of Australians.

As research partner for the awards, we applied the same rigorous approach we take to researching and rating funds to evaluating the nominees and choosing winners in each of the 18 group award categories. It has been an honour to partner with Money Management for these awards and congratulations again to Franklin Templeton for being named Fund Manager of the Year.

Australian Property Securities Fund of the Year 

The nominees for the Australian Property Securities Fund of the Year highlight the variety in the sector by showcasing both A-REIT and ‘real asset’ mandates and differing investment styles. Nominated funds have all been well-rated by Lonsec over an extended period and have been able to deliver consistent risk-adjusted performance over the medium-term.  The nominees are:

  • Cromwell Phoenix Property Securities Fund
  • Martin Currie Real Income Fund – Class A
  • SGH Property Income Fund

Global Property Securities Fund of the Year

The nominees for the Global Property Securities Fund of the Year represent both Australian and off-shore investment firms. These funds, which have been well rated by Lonsec, have navigated a turbulent period for REIT markets well, allowing them to deliver a consistent level of risk-adjusted performance over the medium-term.

  • Ironbark Global Property Securities Fund
  • Quay Global Real Estate Fund – Unhedged
  • UBS CBRE Global Property Securities Fund

Infrastructure Fund of the Year

The nominees for the Infrastructure Fund of the Year are representative of the dynamism in the listed infrastructure space, both by investment style but also the underlying investment structures. The funds have all been well rated by Lonsec over time, with the managers delivering to investors the listed infrastructure premia during a volatile period in markets and meeting their investment objectives.

  • ClearBridge RARE Infrastructure Value Fund — Unhedged
  • CFS FC Global Infrastructure Securities Fund
  • Lazard Global Listed Infrastructure Fund

Unlisted Real Estate Fund of the Year

The nominees for the Unlisted Real Estate Fund of the Year are part of Lonsec’s universe of direct property funds that provide investors with access to a range of commercial and social property sectors. All nominated managers have built strong property capabilities and have demonstrated a commitment to sound capital management over time.

  • Australian Unity Healthcare Property Trust – Wholesale Units
  • Centuria Diversified Property Fund
  • Charter Hall Direct Industrial Fund No.4

Australian Large Cap Equity Fund of the Year

The nominees for the Australian Large Cap Equity Fund of the Year recognise those funds that have been well-rated by Lonsec over an extended period, and those managers that have been able to deliver consistent risk-adjusted performance in line with performance objectives over the medium-term.

  • Allan Gray Australia Equity Fund
  • Dimensional Australian Value Trust
  • DNR Capital Australian Equities High Conviction Portfolio
  • Lazard Select Australian Equity Fund (W Class)
  • Quest Australian Equities Concentrated Portfolio SMA

Australian Small Cap Equity Fund of the Year

The nominees for the Australian Small Cap Equity Fund of the Year recognise those funds that have successfully delivered on investment objectives, demonstrated superior stock selection and have been well-rated by Lonsec over an extended period.

  • First Sentier Wholesale Australian Small Companies Fund
  • OC Dynamic Equity Fund
  • Spheria Australian Smaller Companies Fund

Global Equity Fund of the Year

The nominees for Global Equity Fund of the Year have demonstrated ability to consistently meet their investment objectives, have a track record in applying their investment research and portfolio construction processes, as well as being rated ‘Recommended’ or higher by Lonsec.

  • Arrowstreet Global Equity Fund
  • Barrow Hanley Global Share Fund
  • Lazard Global Equity Franchise Fund
  • PM Capital Global Companies Fund
  • Realindex Global Share Value – Class A

Global Emerging Market Equity Fund of the Year

The nominees for Global Emerging Market Equity Fund of the Year have been sourced from Lonsec’s universe of Global Emerging Markets sector, including funds within the Regional Asia and India sub-sector. The award recognises funds that have been highly rated by Lonsec over the past three years, demonstrated asset allocation and security selection skills, and consistently delivered on its investment objectives.

  • Fidelity Asia Fund
  • FSSA Asian Growth Fund
  • Lazard Emerging Markets Equity Fund

Multi-Asset Fund of the Year

The nominees for the Multi-Asset Fund of the year recognise those products that have been well rated by Lonsec over an extended period of time, and those Managers that have been able to consistently apply their investment process, meet investment objectives through the cycle, and demonstrate portfolio management skill in asset allocation and security selection

  • Australian Retirement Trust – Super Savings – Growth
  • BlackRock Tactical Growth Fund – Class D
  • CareSuper – Sustainable Balanced
  • ipac Income Generator (Class K)
  • Perpetual Balanced Growth Fund

Passive – Equity Fund of the Year

The Passive Equity Fund of Year award recognises an equity based strategy that has demonstrated a strong track record of success with respect to its underlying index, a superior liquidity profile plus costs that are at least in-line with peers.

  • Betashares Australia 200 ETF
  • iShares Core S&P/ASX 200 ETF
  • SPDR S&P World ex Australia Carbon Control Fund
  • VanEck Australian Equal Weight ETF
  • Vanguard US Total Market Shares Index ETF

Passive – Other Asset Class Fund of the Year

The Passive Other-Asset class Fund of Year award considers all the passive fixed income, commodities, or alternative strategies within the Lonsec universe. It recognises the Fund with a strong track record of success with respect to its underlying index, a superior liquidity profile plus costs that are at least in-line with peers.

  • Betashares Australian Bank Senior Floating Rate Bond ETF
  • Global X Physical Gold ETF
  • iShares Core Composite Bond ETF
  • iShares Global Bond Index Fund
  • VanEck Australian Floating Rate ETF

Australian Fixed Income

The nominees for the Australian fixed income category are well rated by Lonsec over an extended period of time. The award recognises managers who have the ability to deliver consistent returns while providing downside protection during challenging markets which are a testament to their robust research and risk management processes, skills and expertise.

  • Janus Henderson Australian Fixed Interest Fund
  • Macquarie Australian Fixed Interest Fund
  • Pendal Sustainable Australian Fixed Interest Fund
  • Perpetual Active Fixed Interest Fund (Class A Units)
  • Western Asset Australian Bond Fund – Class A
  • Yarra Enhanced Income Fund

Global Fixed Income of the Year

As with the previous Australian Fixed Income award, the nominees for the Global fixed income category are well-rated by Lonsec over an extended period of time. The award recognises managers who have the ability to deliver consistent returns while providing downside protection during challenging markets which is a testament to their robust research and risk management processes, skills, and expertise.

  • Bentham Global Income Fund
  • Brandywine Global Opportunistic Fixed Income Fund – Class A
  • Perpetual Dynamic Fixed Income Fund
  • PIMCO Income Fund – Wholesale Class
  • T. Rowe Price Dynamic Global Bond Fund – I Class

Alternatives Fund of the Year

The nominees for the Alternatives fund of the year recognise those products that have demonstrated a track record of success, offer several competitive advantages against their closest peers and have been rated highly by Lonsec for at least three review cycles. Further, over the long term, each of these Funds has met or exceeded their respective investment objectives, achieved favourable absolute returns in a risk-adjusted manner while providing diversification to investors’ broader portfolios

  • Australian Retirement Trust – Super Savings – Diversified Alternatives
  • CC Sage Capital Absolute Return Fund
  • Hamilton Lane Global Private Assets Fund (AUD)

Responsible Investment Fund of the Year

The nominees for the Responsible Investment Fund of the year recognise those products that have demonstrated a clear integration of ESG into their investment process and deliver a portfolio with a high alignment with the Sustainable Development Goals as well as having at least a recommended rating from Lonsec.

  • Ausbil Active Sustainable Equity Fund
  • Australian Ethical Emerging Companies Fund (Wholesale)
  • Candriam Sustainable Global Equity Fund
  • Impax Sustainable Leaders Fund

Innovation Award of the Year

The Innovation Award recognises a manager that has brought a differentiated product to the Australian market.  Differentiation can take the form of fee leadership, product structural evolution or additive capabilites to standard asset class products.

  • Betashares Capital
  • Generation Life
  • L1 Capital

Emerging Manager of the Year

The nominees for Emerging Manager of the Year have been selected by Lonsec’s team of Sector Managers. To be eligible for this award, nominees must have a track record of five years or less within the Australian intermediated market, and have at least one product that Lonsec has assigned a ‘Recommended’ or higher rating.

  • Aikya Investment Management
  • Fortlake Asset Management
  • Pzena Investment Management
  • Ruffer LLP
  • Skerryvore Asset Management

Fund Manager of the Year

To be eligible for the Fund Manager of the Year Award, Managers must have demonstrated a sound investment culture and good governance over an investment cycle and across a number of asset classes.

  • BlackRock Investment Management (Australia)
  • Franklin Templeton Australia
  • Lazard Asset Management
  • Macquarie Asset Management
  • VanEck

Disclaimer: Lonsec Research Pty Ltd (ABN 11 151 658 561 AFSL 421445) (Lonsec) are acting as a research partner for the Fund Manager of the Year Awards (Awards) issued by Momentum Media Group Pty Ltd on 22 June 2023 The Awards are determined using Lonsec proprietary methodologies, are solely statements of opinion, subjective in nature and must not be used as the sole basis for investment decisions. The Awards do not represent recommendations to purchase, hold or sell any products or make any other investment decisions. Investors must seek independent financial advice before making any investment decision and must consider the appropriateness of the information, having regard to their objectives, financial situation, and needs. Past performance is not an indication of future performance. Awards are current for 12 months from the date awarded and are subject to change at any time. Lonsec does not represent these Awards to be guarantees nor should they be viewed as an assessment of a fund or the funds’ underlying securities’ creditworthiness. Lonsec receives a fee from the financial product issuer(s) for researching the financial product(s), using objective criteria. Lonsec rating(s) outcome is not linked to the fee or the Award. Lonsec and its associates do not receive any other compensation or material benefits from product issuers or third parties in connection with the Award. Lonsec makes no representation, warranty or undertaking in relation to the accuracy or completeness of the Awards. Lonsec assumes no obligation to update the Awards after publication. The Award is for the exclusive use of the client for whom it is presented and should not be used or relied upon by any other person unless with express permission from Lonsec. Except for any liability which cannot be excluded, Lonsec, its directors, officers, employees and agents disclaim all liability for any error or inaccuracy in, misstatement or omission from, this document and any Award or any loss or damage suffered by the reader or any other person as a consequence of relying upon it. ©Lonsec 2023. All rights reserved.

Equity markets ended the financial year on a negative note in June, with the S&P/ASX 200 falling around 9% to finish the quarter down 12%. This drove the ASX 200 index as a whole down 6.5% for FY22. Global equities also fell significantly over the quarter, but Australian investors received some protection on unhedged investments from a 6 cent (8%) depreciation in the Australian Dollar. Rising inflation and subsequent rising interest rates were the main factors causing these negative returns.

Dan Moradi, Portfolio Manager for Listed Products, explains in detail what caused these negative returns and provides an update on the portfolios’ latest performance, positioning and outlook.


The information in this video is prepared by Lonsec Investment Solutions Pty Ltd ABN 95 608 837 583 (LIS, we, us, our), a Corporate Authorised Representative (CAR) No. 1236821 of Lonsec Research Pty Ltd ABN 11 151 658 561, AFSL No. 421445 (Lonsec Research). Any express or implied rating or advice presented in this video is limited to general advice and based solely on consideration of the investment merits of the financial product(s) alone, without taking into account the investment objectives, financial situation and particular needs (“financial circumstances”) of any particular person. Before making an investment decision you must consider your financial circumstances or seek personal financial advice on its appropriateness. Read the Product Disclosure Statement for each financial product before making any decision about whether to acquire a financial product.

Past performance is not a reliable indicator of future performance. No representation, warranty or undertaking is given or made in relation to the accuracy or completeness of the information presented in this video, which is drawn from information not verified by LIS. This video may also contain third party material that is subject to copyright. To the extent that copyright subsists in a third party it remains with the original owner and permission may be required to reuse the material.

The information contained in this video is current as at the date of publication. Financial conclusions, ratings and advice are reasonably held at the time of publication but subject to change without notice. LIS assumes no obligation to update this document following publication. This video is not intended for use by a retail client or a member of the public and should not be used or relied upon by any other person. This video is not to be distributed without the consent of LIS. Except for any liability which cannot be excluded, LIS and Lonsec Research, their directors, officers, employees and agents disclaim all liability for any error or inaccuracy in, misstatement or omission from, this video or any loss or damage suffered by the reader or any other person as a consequence of relying upon it. Copyright © 2022 Lonsec Investment Solutions Pty Ltd.

You may not reproduce, transmit, disseminate, sell or publish this video without our written consent.

Lonsec Research chatted with leading Fixed Income Managers to learn more about the sector, how they are approaching the changing investment landscape and what drew them to this sometimes overlooked, but very important, sector.

In this video, Isrin Khor, Lonsec Sector Manager of Fixed Income is joined by Anthony Kirkham, Head of Melbourne Operations and Investment Management/Portfolio Manager at Western Asset Management, and Sachin Gupta, Managing Director and Head of the Global Desk at PIMCO. The discussion focuses on the key qualitative strengths of PIMCO and Western Asset, particularly on business, people, and the process followed by a market outlook discussion.

IMPORTANT NOTICE: This video is published by Lonsec Research Pty Ltd ABN 11 151 658 561, AFSL No. 421445 (Lonsec). Please read the following before making any investment decision about any financial product mentioned in this video.
Disclosure as at the date of publication: Lonsec receives fees from fund managers or product issuers for researching their financial product(s) using comprehensive and objective criteria. Lonsec receives subscriptions for providing research content to subscribers including fund managers and product issuers. Lonsec receives fees for providing investment consulting advice to clients, which includes model portfolios, approved product lists and other advice. Lonsec’s fees are not linked to the product rating outcome or the inclusion of products in model portfolios, or in approved product lists. Lonsec and its representatives, Authorised Representatives and their respective associates may have positions in the financial product(s) mentioned in this video, which may change during the life of this video, but Lonsec considers such holdings not to be sufficiently material to compromise any recommendation or advice.
Warnings: Past performance is not a reliable indicator of future performance. The information contained in this video is obtained from various sources deemed to be reliable. It is not guaranteed as accurate or complete and should not be relied upon as such. Opinions expressed are subject to change. This video is but one tool to help make investment decisions. The changing character of markets requires constant analysis and may result in changes. Any express or implied rating or advice presented in this video is limited to “General Advice” (as defined in the Corporations Act 2001 (Cth)) and based solely on consideration of the investment merits of the financial product(s) alone, without taking into account the investment objectives, financial situation and particular needs (‘financial circumstances’) of any particular person. It does not constitute a recommendation to purchase, redeem or sell the relevant financial product(s).
Before making an investment decision based on the rating(s) or advice, the reader must consider whether it is personally appropriate in light of his or her financial circumstances, or should seek independent financial advice on its appropriateness. If our advice relates to the acquisition or possible acquisition of particular financial product(s), the reader should obtain and consider the Investment Statement or Product Disclosure Statement for each financial product before making any decision about whether to acquire a financial product. Where Lonsec’s research process relies upon the participation of the fund manager(s) or product issuer(s) and they are no longer an active participant in Lonsec’s research process, Lonsec reserves the right to withdraw the video at any time and discontinue future coverage of the financial product(s).
Disclaimer: This video is for the exclusive use of the person to whom it is provided by Lonsec and must not be used or relied upon by any other person. No representation, warranty or undertaking is given or made in relation to the accuracy or completeness of the information presented in this video, which is drawn from third party information or opinion not verified by Lonsec. Financial conclusions, ratings and advice are reasonably held at the time of completion but subject to change without notice. Lonsec assumes no obligation to update this video following publication. Except for any liability which cannot be excluded, Lonsec, its directors, officers, employees and agents disclaim all liability for any error or inaccuracy in, misstatement or omission from, this video or any loss or damage suffered by the viewer or any other person as a consequence of relying upon it.

Copyright © 2021 Lonsec Research Pty Ltd (ABN 11 151 658 561, AFSL No. 421445) (Lonsec). This video is subject to copyright of Lonsec. Except for the temporary copy held in a computer’s cache and a single permanent copy for your personal reference or other than as permitted under the Copyright Act 1968 (Cth), no part of this video may, in any form or by any means (electronic, mechanical, micro-copying, photocopying, recording or otherwise), be reproduced, stored or transmitted without the prior written permission of Lonsec.

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Important information: Any express or implied rating or advice is limited to general advice, it doesn’t consider any personal needs, goals or objectives.  Before making any decision about financial products, consider whether it is personally appropriate for you in light of your personal circumstances. Obtain and consider the Product Disclosure Statement for each financial product and seek professional personal advice before making any decisions regarding a financial product.

Capital growth and dividends each play an important role in delivering growth in dollar income over time. Capital is what income grows off, along with providing duration to the retirement funding pool well into the future, countering longevity risk.

There are a number of equity income strategies in the market, where objectives largely focus on yield (not dollar income) and largely ignore capital (and total returns). This can often come at the investors expense which we outline further below:

Equities have traditionally been referred to as a ‘growth’ asset class, but are increasingly being considered for their income characteristics. This follows many years of yield compression across traditional income asset classes, to levels that have fallen short of meeting investors’ income requirements. At the same time, investment providers have pushed ahead in developing more tailored solutions for post-retirement investors. This trend has further contributed to the increasing penetration of equity income strategies in many clients’ portfolios.

In this paper, Rudi Minbatiwala, Head of Equity Income, examines how the income concept is managed in more traditional income asset classes. Lessons learned from understanding how these traditional income assets are analysed are applied in considering some important implications when seeking to generate income from equities. The paper argues that when it relates to equities, income needs to be considered as a long-term concept; a total return focus is critical in order to meet the required outcomes of retirement income strategies.

As always there will be many different opinions on what might happen to markets in the coming year, but by and large most will agree it is unlikely to top the volatility and uncertainty of 2020. Amid the stimulus packages, lockdowns, PPE and politics, COVID-19 also brought to an end one long running market cycle and ushered in a new one, offering investors new opportunities with the potential for new risks and returns.

We believe understanding and navigating both will be more important than ever.

One of the main risks that still carries over from the last few years is the concentration of the index in just a few mega-capitalization companies. In fact, when considering the S&P 500, the top 10 companies still account for around 28% of the index, and as of late December 2020 the top 6 were worth more than the bottom 372 companies.

 

 

Why is this a problem?

Well if you’re buying the index you’re buying very expensive companies that have already grown substantially during 2020 such as Apple 86% and Amazon 76%. What’s riskier is Tesla (TLA) is nearly 2% of the index but only joined in late 2020, so index investors didn’t receive most of the benefit of its 700%+ growth, but bear all the downside if the stock were to fall.

Investors usually choose indices for their diversity – perhaps now they need to look again.

In addition, while global stimulus and support packages have helped economies from falling off a cliff, they have also pumped a lot more liquidity (cash) into the system. This, along with low interest rates may well support inflation for the first time in decades which even in small amounts can have a profound effect on stocks. Stocks with high valuations that are dominating the index (technology) are more susceptible to the increase in interest rates that usually accompanies inflation, meaning to get your money back you need to wait years if not decades. This is less the case with other sectors.

Is this likely?

While the potential for inflation is there, so too are signs of a rotation away from the tech stocks to those less highly valued sectors of the economy. From September to mid-December 2020, the S&P500 Value index outperformed Growth by around 8%, driven by more certainty about the real economy restarting on the back of a COVID-19 vaccine. While we can’t predict the future there is precedent here going back to the dotcom bust of 2000, where in the following 5 years Value had a resurgence to the point where it outperformed over the 10 years pre and post the bust.

 

To add to this are current data showing a significant increase in activity in the bellwether ISM New Orders Index which measures manufacturing activity, up 40% since the lows of 2020 and its highest level in over 3 years. The opportunity here lies in those sectors and regions that benefit from this new cycle economy, sectors that have been neglected, and so are cheap, but stand to benefit from the surge of global economic activity as populations slowly become vaccinated. The rewards here could be substantial.

Added benefit of options

Finally, the market is currently experiencing an unusual set of dynamics. Volatility (uncertainty) is higher than the long-term average, but so is the market. Usually the market is lower when volatility is higher.

This represents both heightened uncertainty alongside optimism, which has been fueled by some arguably unsophisticated market participants.

This creates unprecedented opportunity for professional investors, and especially for Talaria’s process of using put options to enter stock positions because:

  • There is a greater contracted rate of return on the put options we sell, which can generate 3-4% p.a. more option premium into the portfolio p.a. all else being equal.
  • The opportunity cost of not being fully invested is materially reduced given low expectations for equity market returns.
  • Heightened volatility allows us to widen our buffers against loss and maintain our risk credentials.

As we like to say, certainty empowers you.

It’s been nearly a year since the world changed as COVID-19 took hold. Of all that has been written
about and said so far, the word ‘uncertain’ seems to be the most enduring.

Uncertainty is not many people’s preferred state, but for retirees in particular, it’s even more
concerning, coming at a time when the juggle and stress of raising kids and building careers should be a
warm but more distant memory.

We spend 40+ years working to build an asset base to support us in retirement and we need that asset
base to deliver three key outcomes:

• Income generation – but not at the expense of capital loss,
• growth – of outcomes, and
• certainty – of outcomes…

…and do all this for an unknown number of years.

So how has the COVID-19 pandemic impacted these three retirement needs?

While stock markets globally have largely recovered since March, the underlying economy and outlook
for businesses hasn’t. This means dividends have been cut or reduced by many companies – impacting
income. Meanwhile, other asset classes such as Fixed Interest, Bonds, and Property are also delivering
substantially less returns.

Ranjit Das, Principal at Rahali Corporation believes this is a significant problem because of the over
reliance on income since the GFC. “Even over 10 years, traditional income sources like Banks, Telstra
have underperformed the ASX200, so non-traditional income sources are essential in client portfolios,”
Ranjit said.

At the same time, there has been a lot of volatility – a direct outcome of uncertainty – across asset
classes and currencies. This means it’s hard to predict when is a good time to either sell assets if
required or buy back into them.

“Retirees are very nervous in nature as they have no means to rebuild lost wealth. Any sharp spikes to
the downside creates a fear that capital will erode, income will reduce and they will ‘run out of money’.
Any sharp upticks don’t provide any joy as retirees are ‘buy and hold’ – much more than younger clients
who may be tempted to buy/sell and rejig allocations,” said Das.

In addition, the recovery of many markets at an index level has been driven by a few – namely
technology and consumer discretionary stocks – that have skewed the index. This means that those
following the index have a greater risk by being less diversified. If you’re starting out or still in the
accumulation phase of investing this might be ok, but not for retirees as they have additional risks
namely:

Sequencing – incurring large losses early in retirement, endangering a comfortable retirement
Longevity – ensuring your investments are there to support you for the full journey; and
Inflation – ensuring the purchasing power of your investments doesn’t erode.

The culmination of COVID-19 uncertainty, loss of business, and government stimulus that is currently at
play is creating all three of these.

There are solutions however that are genuinely uncorrelated sources of income – from shadow banking
to catastrophe insurance to selling equity insurance. However, the first two are very difficult to access as
a private investor, whereas equity insurance is more accessible and easily available.

So what is it?

In a nutshell equity insurance is really a metaphor for selling put options to enter stock positions that
you want to own rather than buying them directly. This then generates a premium which is treated as
income for the investor, regardless of whether the stock is ultimately bought or not. As a result, the
process creates:

• More consistent income;
• A diversified source of return;
• A downside buffer to first loss; and
• Reduces portfolio volatility.

This means that in periods such as now, investors have somewhere else to go for income. Further, as
option premium increases with volatility, an uncertain environment in most cases increases income
from this source.

Helping to create more certainty in an uncertain world.

www.talariacapital.com.au

Many retirees with investments in the sharemarket will have seen the recent momentum-driven obsession and hysteria with companies like Afterpay, whose share price has gone from $20 to $100 in the space of six months, despite the fact that the company has yet to make a profit. Afterpay’s market-cap has now surpassed some of Australia’s most successful global companies, such as Amcor, Brambles, and Orica. So what’s going on, and what are the implications for retirees?

Sharemarkets around the world, including Australia’s, have experienced very strong rallies since their March lows thanks in the main to interest rates being cut to record lows and large quantitative easing from central banks. It can be argued that this flood of cheap money has led many speculative-type growth stocks to trade well above their fundamental value, led by the NASDAQ in the US.

Consumer patterns changed markedly through the COVID-19 virus lockdowns, as consumers stayed at home and as volumes in many areas facilitated by the internet have all boomed such as online shopping, social media, online conferencing, online gambling, and streaming services such as Netflix and Stan here in Australia. This has led to a significant rise in almost any stock that is technology-related.

This phenomenon has driven the divergence between value and growth stocks to expand to levels which have now surpassed the ‘tech boom’ of 1999-2000, as Chart 1 below shows. With this momentum currently in full swing, many investors appear less concerned about the underlying fundamentals or valuations of many companies, and are instead focusing on anything with blue sky potential, particularly in the technology sector.

Chart 1: Average Price/Earnings of ASX200 Firms by Forward P/E Quintile

Source: Goldman Sachs Report 11 August 2020; chart range 30 June 1997 – 30 June 2020

‘Buy now pay later’ (BNPL) service provider Afterpay’s focus on reinvestment means that it is not yet profitable. Despite Afterpay’s first mover advantage and early success, competition in the sector is picking up quickly, which suggests that margins will come under pressure. As Table 1 shows, the sharemarket is assigning Afterpay an extraordinary valuation compared to well-established, profitable companies like Amcor, Brambles, or Orica. Given the global scale and profitability of these businesses, Afterpay’s valuation indicates that investors are taking an enormous leap of faith in Afterpay’s ability to reach sufficient scale and profitability to justify its nearly $30 billion market valuation.

Amcor is a global leader in consumer packaging products with US$12.5 billion in sales and US$1.03 billion underlying profit after tax in FY 2020, trading on around 16.3 times 2021 earnings, which looks reasonable for a global packaging leader which generates strong cashflows by servicing defensive end markets. Brambles is a global leader in pallet pooling solutions which earnt global revenues of US$4.7 billion and made an underlying profit after tax of US$504 million from continuing operations in FY 2020, and is trading on a P/E of around 21.6 times 2021 earnings and 19.4 times FY 2022 earnings.

Orica is the global leader in explosives and innovative blasting systems to the mining, quarrying and construction industries around the world. Orica is expected to earn global revenues of $5.6 billion in FY 2020 and make an underlying profit after tax of $320 million, and is trading on attractive multiples of around 18.2 times 2021 and 14.5 times 2022 earnings.

Table 1: Afterpay, Amcor, Brambles, Orica – Key Financial Metrics

Company ASX

Ticker

FY21F Revenue

$Abn

FY21 F Earnings

$Am

Market-Cap

$Abn

Afterpay APT 0.9 25.0 $29.7 billion
Amcor AMC 17.3 1,540 $25.9 billion
Brambles BXB 6.8 720 $15.9 billion
Orica ORI 6.0 370 $6.7 billion

Sources: Investors Mutual, Iress, FactSet. Data as at 10 November 2020

No matter how good Afterpay’s prospects are, to have it valued at more than one of the largest packaging companies in the world as well as higher than the largest pallet and explosive companies in the world combined seems to be an optimistic way of valuing the company. We prefer to back the proven fundamentals, management track records and steadily growing profitability of companies like Amcor, Brambles and Orica than to use what looks like excessively optimistic forecasts to try and justify Afterpay’s valuation and share price.

When markets are in an exuberant phase, it requires discipline and patience to avoid what look like excessively priced stocks and sectors. Our discipline back in 1999/2000 rewarded our investors with substantial subsequent outperformance. The conditions we see in sharemarkets today seem to echo the hype of that period. Our focus remains on companies that have recurring and predictable earnings, a strong competitive advantage, that are run by experienced and capable management teams, and that are trading at a reasonable valuation. We continue to believe that retirees will gain most benefit from owning a carefully selected collection of companies with these characteristics. This has proven over multiple market cycles to be more effective in delivery of tax-effective income and capital growth than chasing the latest exciting-sounding sector or fad.

Disclaimer

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. Past performance is not a reliable indicator of future performance.

Examining some underappreciated benefits

Key Takeaways

• In order to fund liabilities, achieve retirement goals, or meet other investment objectives, many investors need the capital appreciation that equities can provide, but are concerned about downside risk.
• Despite the empirical history of low-volatility equity investing, many investors mistakenly equate low downside risk with low returns.
• By providing exposure to the potentially higher returns of the equity market, and at the same time mitigating downside risk, low-volatility investing addresses a significant obstacle to equity allocations.
• Low-volatility equity portfolios are typically constructed using historical data and can lack forward-looking estimates of risk and return, which fundamental research can provide.

Investors obligated to meet certain liabilities and investment objectives face a conundrum. While equities can provide the potential for capital appreciation that these investors need to help them meet their obligations, equities can also introduce volatility and downside risks. This combination is prompting investors to consider adding equities through an allocation to low-volatility (low-vol) equity investing— a strategy whose benefits some investors may not fully appreciate.

For many decades, investor unease with equity risk has not been addressed by investing strategies that have been more focused on following market benchmarks than managing return volatility. More recently, heightened global economic uncertainty—along with very low yields in the fixed income markets—has increased investor attention to capital preservation.

This, in turn, has highlighted the need for equity strategies that offer capital appreciation but also downside protection, to help manage equity risk via portfolio construction versus allocating to asset classes such as low-yielding bonds and/or cash equivalents.

In this paper, we demonstrate how managing portfolios that have lower volatility may enhance investment return potential, not diminish it. Moreover, its emphasis on capital preservation sets low-vol investing apart from other “smart beta” or “strategic beta” strategies that do not target downside protection.

 

 

COVID-19 has created one of the biggest drawdowns in Australian Equity earnings in history, even bigger than during the Global Great Financial Crisis. Income investors are thus understandably concerned about the impact the shutdowns and ongoing social distancing will have on the ability of Australian equities to pay dividends.

In this article we discuss our forecast of the near-term dividend outlook and examine how active managers can help investors navigate this unique moment with the objective of creating a sustainable income stream.

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