Rudi’s View: Lessons & Observations From ASX All-Weathers

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In this week's Weekly Insights:

-Lessons & Observations From ASX All-Weathers
-Conviction Calls & Best Buys
-June Index Rebalancing

By Rudi Filapek-Vandyck, Editor

Lessons & Observations From ASX All-Weathers

The Global Financial Crisis of late 2007-March 2009 changed my life as an investor.

Those who have remained with us since no doubt still remember how FNArena rose above the parapet, declaring what was to unfold next was not your garden variety share market correction.

Sell the banks was not a popular opinion back then, but it proved extremely prescient, as was sell China (oil and gas and the miners) later in the same year of 2008.

For more reflections on what happened back then: https://fnarena.com/index.php/2018/10/03/rudis-view-ten-years-on-the-world-is-still-turning/

But what really (and truly) enlightened my understanding of how financial markets operate was the change in focus in my own research and market observations that started during those dour times.

It all began by asking that all-crucial question: why is it certain companies seem better suited to weather the darkest of times for your average stockmarket investor, while so many other share prices fall by -40%, -50%, -80%, and more?

This new journey eventually led to the concept of All-Weather Performers on the ASX; a small selection of companies that are, simply put, of a much higher level of corporate quality than your standard ASX listing, and thus exceptionally well-equipped to create shareholder value and benefits over an elongated period of time, irrespective of the ups and downs in the economy, interest rates, and bond yields along the way.

To your average value investor, and that's the large majority in Australia, be they retail or institutional, my quest looked incredibly silly. We all know successful investing starts with buying low and selling high, right? As if I could possibly identify something that hadn't already been considered and dismissed by the historic greats in the industry!

Yet, here we are, 1.5 decades later and the All-Weather Model Portfolio, which is based upon my specific research, has generated in excess of 10% per annum before fees since inception in early 2015. Over the past three years, total return pre-fees has been 13.84% on average, for the past twelve months up until March 31st that percentage is 19.17%.

Admittedly, the Model Portfolio doesn't run multiple billions of dollars, which might have played to its benefit at certain times, but in the same vein, the strategy is very much Buy-and-Hold, which underpins the validity of the research and the specific companies selected.

Not About The Share Price

Let's be frank about this: it only takes one brief look at price charts for the likes of Aristocrat Leisure ((ALL)), Car Group ((CAR)) and REA Group ((REA)) to know owning these stocks has been extremely beneficial over the decade past.

And while the contribution from the likes of CSL ((CSL)) and ResMed ((RMD)) on balance has been non-existent post 2020, theirs was a completely different story in the years prior.

The noticeable loss of upward momentum for healthcare stocks generally, in underlying trend terms, has triggered the obvious questions from subscribers and investors alike whether such companies should remain in my selection and whether others with better recent performances should not be included instead?

To me, this simply highlights how much investor perceptions, and views, are being influenced by recent share price moves. Prior to 2021, virtually nobody dared to question the proven quality and track record of CSL. Three years of a less stellar trend on price charts later and general appreciation has deflated substantially.

This is an important observation for what makes an All-Weather Performer is not what happens to a company's share price, it's about what management achieves operationally. Difficult to understand it may be, but both do not by definition always run parallel to each other.

Divergences do occur, and they happen quite regularly because sentiment is all-important in the short term, and market influences are many.

Some companies have strong growth in the here and now. Others grow strongly over a number of years. But to be labeled an All-Weather Performer, it requires that extra level of 'special'; a moat, a defensible number one market position, a customer base that is sticky and growing naturally, the ability to find new growth time and again.

Needless to say, the list of true All-Weathers in Australia is a rather limited selection, and it hasn't changed much or often since I embarked on my research. Equally important; the concept of finding All-Weathers is easily discredited in case of too many disappointments or errors, so it's vital not to include any accidental performer less they undermine the quality of the core selection.

However, we are living through tumultuous times, with technologies and innovations disrupting moats and status quos. This not only increases the risks for All-Weathers, it also creates a whole new battery of high-quality, strong growing, emerging new market leaders.

Technology & Innovation

My research equally tries to identify which ones among those strong performers carry that extra level of corporate quality; the ability to perform better over a prolonged period of time, potentially creating a longer-term platform that, one day, might even lead to be included into the small selection of true blue All-Weathers.

My curated lists thus also include 'Emerging New Business Models' and 'Prime Growth Stories', where I grab the chance to highlight companies such as Audinate Group ((AD8)), Hub24 ((HUB)), NextDC ((NXT)), and Pro Medicus ((PME)).

There is no guarantee that by the middle of the 2030s any of these names will still be part of one of my selections, but for the years ahead growth is slated to be strong, as it has been for a number of years already.

Let's get this straight: the positive outcome of my research post the GFC is partially derived from my quest to identify the highest quality performers on the ASX, with the other part coming from the fact I also identified the current new era of technological transformation and incorporated this in my research.

When the world transitions, so do economies and individual companies. For investors this means: embrace the change. Don't cling on to the past. Tomorrow's new future should be your oyster.

Eventually, even some of yesterday's star performers might find themselves on the wrong side of societal changes. This outcome has been on my mind constantly, and it has previously led to the removal of Ramsay Health Care ((RHC)) from the core selection, but also the removal of Bapcor ((BAP)) from the list of 'Potential All-Weathers'.

More recently, I decided more changes needed to be made. I have thus created a new list; 'Trusty Defensives'. I no longer believe Amcor ((AMC)) or Brambles ((BXB)) deserve to be labeled All-Weathers, but they can definitely still serve a function as a defensive holding in a long-term, diversified portfolio.

Others, including Ansell ((ANN)) and Orora ((ORA)), have been removed altogether.

One lesson I have come to appreciate over the past decade or so is that, when it comes to sustainability and reliability of growth, company size matters. Smaller-cap companies are less robust in general terms because their operations are smaller.

The one obvious exception to this rule remains bull bar manufacturer ARB Corp ((ARB)) whose market capitalisation of only $3.25bn truly stands out against CSL's $135bn or Macquarie Group's ((MQG)) $74bn, or even in comparison to TechOne's ((TNE)) $5bn market cap, but maybe this simply shows how truly exceptional this decade-plus-long achiever is?

Gold & Dividends

All investing is ruled by narratives, rightly or wrongly, and I believe a portfolio portion should be reserved for gold. I also believe every portfolio deserves to have a section dedicated to income. In the share market, investing for income usually translates to buying weaker, lower-quality, more vulnerable stocks.

This is because the available yield is equally determined by the PE multiple a stock is trading on, and robust, strong, quality growers tend not to trade on low PE multiples. This section of my lists I find the hardest, it's also the selection that undergoes the most changes over time.

This is also a specific part of the portfolio that allows for specific, well-timed opportunities. In early 2021, Telstra ((TLS)) shares were trading a smidgen above $3 with the promise of asset sales and better industry conditions ahead. The inclusion of Telstra has been a profitable decision, but ownership of the shares remains under review.

Even though dividends seem poised for further increases in the years ahead, we shall not hesitate when we spot a better opportunity that offers more corporate quality and the promise of better and steadier growth.

Last year, we also jumped on Dicker Data ((DDR)) and HomeCo Daily Needs REIT ((HDN)). The latter's performance remains leveraged to future interest rate cuts and a fall in bond yields. Dicker Data's attractive yield, on the other hand, has shrunk as the share price has rallied post September.

Dicker Data has now been added to the list of 'Emerging New Business Models' because the operational momentum from megatrends including AI and cybersecurity is tangible and real, as also experienced by Goodman Group ((GMG)) and NextDC, and this should support Dicker Data's outlook for the years ahead.

Active Portfolio Management

When it comes to managing the All-Weather Model Portfolio, I remain of the view that limiting losses, if possible, remains an important feature of active management. The first nine years have only witnessed negative returns in 2022 when by June 30th the portfolio remained -2.59% in the red and by December 31st the losses had accumulated to -7.51%.

It was the global reset in bond yields that determined the direction of equities that year, in particular the higher-valued quality and growth stocks. The All-Weather Portfolio significantly increased its allocation to cash and gold that year and by doing so limited the losses that occurred.

While that decision also meant part of the subsequent upside was never included, the hard cold fact remains that a higher starting point implies better returns medium term. This too has contributed to the positive averages reported above.

Possibly the most important experiences and conclusions drawn from the past nine years include:

-a low PE does not equal great opportunity, while a high PE does not by default scupper further upside

-quality never trades cheaply and is equally never understood by your typical value-seeker

-using one universal valuation metric across all companies listed is, simply put, not very smart

-valuation is not a static concept; what looks 'expensive' right now can still be a bargain further out

-great companies have a tendency to surprise to the upside

-impatience is every investor's worst enemy

-know what you own, and why you own it

-investing is about growth, all the rest is second fiddle, at best

-positive share market momentum is good for the soul, but don't allow it to poison your head

-be an investor or a trader, make up your mind, don't confuse yourself

Probably the biggest challenge as an investor is to overcome one's inner resistence when attempting to get on board of some of the greatest and the best the ASX has to offer.

It takes lots of conviction, belief and experience, and that first big leap of faith, to buy into a stock that is trading at a significant premium to the majority of stocks listed on the exchange.

In my personal case, lots of reading, researching and market observations, plus a generally positive outcome from the Portfolio, certainly helped.

I also remain an avid user of the tools FNArena offers me and subscribers, and I try to use them in the most intelligent way possible by, for example, omitting the laggards when it comes to putting a price target on Goodman Group and the likes.

One harsh lesson I had to learn the disappointing way is it is much easier to be on board, and to stay on board, than to get on board.

So be careful when you decide it's time to sell. Might be better to at least keep half an allocation going (even if this means enduring more weakness short term). You might be praising your genius decision later on.

Instead of focusing on 'price' and 'cheap' valuation, I firmly believe most investors would do themselves a humongous favour by identifying first which companies are of the rarest kind. That will prove invaluable with identifying true bargain opportunities.

The All-Weather Model Portfolio considers Woolworths Group ((WOW)) a core long-term holding, and recently increased its allocation.

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Paying subscribers have 24/7 access to a dedicated section on the website: https://fnarena.com/index.php/analysis-data/all-weather-stocks/

See also:

–https://fnarena.com/index.php/2024/04/04/rudis-view-in-search-of-the-holy-grail/

–https://fnarena.com/index.php/2024/03/06/rudis-view-investing-is-about-the-future/

–https://fnarena.com/index.php/2024/02/19/rudi-interviewed-ongoing-potential-in-technology-growth/

–https://fnarena.com/index.php/2024/02/05/rudi-interviewed-megatrends-a-go-go/

Conviction Calls & Best Buys

Morningstar has added insurance broker AUB Group ((AUB)) to its selection of Best Buy ideas in Australia.

The network connected to AUB is estimated to write circa 10% of all premiums written by intermediaries in Australia with Morningstar suggesting brokers are likely to increase market share as consumers are incentivised to shop around for better deals.

Remain selected:

-ASX ((ASX))
-Aurizon Holdings ((AZJ))
-Bapcor ((BAP))
-Domino's Pizza Enterprises ((DMP))
-Fineos Corp ((FCL))
-Lendlease Group ((LLC))
-Newmont Corp ((NEM))
-Pexa Group ((PXA))
-ResMed ((RMD))
-Santos ((STO))
-a2 Milk Co ((A2M))
-TPG Telecom ((TPG))
-Ventia Services Group ((VNT))

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Morgan Stanley's Australia Macro+ Focus List was last changed in early November last year.

The ten stocks included:

-Altium ((ALU))
-Aristocrat Leisure ((ALL))
-Car Group ((CAR))
-CSL ((CSL))
-Goodman Group ((GMG))
-Macquarie Group ((MQG))
-QBE Insurance ((QBE))
-Telstra ((TLS))
-Treasury Wine Estates ((TWE))
-Woodside Energy ((WDS))

Portfolio-wise, Morgan Stanley is of the same view as just about everyone else that share prices in Australian banks have undeservedly priced in a very positive outlook for the sector on the prospect for RBA rate cuts.

Morgan Stanley's portfolio preference therefore resides with an Overweight allocation to miners and energy companies (with a preference for the latter) in combination with an Underweight exposure to the banks.

Over in the USA, Morgan Stanley market strategists have identified biotechnology stocks as a major beneficiary of Fed rate cuts.

"Assuming rates trend on a downward trajectory, new innovation delivers, and M&A continues, we see the potential for another cycle of sustained outperformance for the industry."

June Index Rebalancing

A lot can still happen, and probably will, between now and the upcoming index rebalancings by Standard & Poor's in June, but a preliminary preview by analysts at Wilsons is suggesting a number of (potentially) intriguing index changes.

South32 ((S32)) is shaping up as a strong candidate to get booted out from the ASX20, Wilsons believes, with James Hardie ((JHX)) the most likely replacement.

For the ASX50, WiseTech Global ((WTC)) stands ready to make its entrance, but which current member should go?

Wilsons finds there are no strong candidates to exit the Top50, but if one will be replaced to allow for WiseTech's addition, the onus will most likely fall upon Endeavour Group ((EDV)) to lose its inclusion.

Both Nine Entertainment ((NEC)) and Liontown Resources ((LTR)) screen as strong candidates to lose their spot inside the ASX100, alongside AMP Ltd ((AMP)), and Wilsons nominates Viva Energy ((VEA)), Paladin Resources ((PDN)) and Sandfire Resources ((SFR)) as plausible replacements.

The official cut-off of what makes a small cap company in Australia (for institutional investors) is whether a stock sits inside or outside the ASX100, but history doesn't suggest significant impacts from such changes.

More can be expected from future inclusions in the ASX200 with announcements about new inclusions and exclusions to be made on Friday, June the 7th.

Wilsons has identified Domain Holdings Australia ((DHG)) as a strong candidate to be booted out from the ASX200, with Charter Hall Social Infrastructure REIT ((CQE)) and Strike Energy ((STX)) also considered possible removals.

In their place could arrive Judo Bank ((JDO)), Codan ((CDA)) and McMillan Shakespeare ((MMS)).

The next rebalance for the ASX 300 is not until September.

FNArena Subscription

A subscription to FNArena (6 or 12 months) comes with an archive of Special Reports (20 since 2006); examples below.

(This story was written on Monday, 5th April, 2024. It was published on the day in the form of an email to paying subscribers, and again on Wednesday as a story on the website).

(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: contact us via the direct messaging system on the website).

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