FYI | Mar 30 2012
By Peter Switzer, Switzer Super Report
At a time when luminaries, such as the Future Fund’s ex-chairman David Murray and ex-Treasury boss Ken Henry, have warned Aussie investors and super funds about holding too many shares, the question is, is this a good sign that we should be buying?
To buy or not to buy?
Don’t get me wrong, but I reckon Ken was one of the brightest Treasury Secretaries and you would be a mental lightweight to ignore the ex-Commonwealth Bank chief executive, Murray. He, in 2008 before Lehman Brothers collapsed, argued convincingly at a dinner party that fixed income was the smartest strategy at the time. He was proven right.
He also revealed on my SWITZER program that the Future Fund, which has to bankroll public servants’ super payments, had only a 30% exposure to stocks.
When Ken and David’s comments were reported in the press, a number of super fund managers questioned their comments pointing to how attractive stocks were, especially with the benefit of franking credits.
Dividend stocks
Regular readers know how I like dividend paying stocks as it means, with the franking credits, you can get a yield of about 7%. Then if your stocks put on some capital gain, life is all good.
Of course, if you have plenty of capital and you can sleep at nights with it going up and down with the cycle of a stock market, then the dividends become your friends. However, a lot of trustees can’t stand capital depletion as they don’t know how long it takes to comeback and during rough times, dividends can be cut.
Murray says Australia needs alternatives, such as a deep corporate bond market, and this would mean a lot of investors who are happy with 4-5% over the inflation rate could get that by risking their investments with brand names such as Telstra, Wesfarmers, Woolworths and the like.
Bonds sending signals
Over the past couple of weeks, I have travelled with some smart guys from a prominent funds management business and even their bond’s guy thinks the big bond rally over the past 20 years or so, and with their current low yields, points to the relative appeal of shares.
The equities guy wouldn’t say the index would necessarily make exchange-traded fund (ETF) players smile, and he would prefer investors to back his judgement, which history has shown has been better than the index.
Our S&P/ASX200 index is captured by Rio Tinto and BHP and the four banks and if you throw in Telstra, that’s a lot of the driving force behind the index.
The banks could go higher on the recent positivity in the United States towards financials, but a US slowdown is now being tipped for the second-half of the year. Against that, if our Reserve Bank of Australia cuts rates this year, then maybe our banks will benefit.
The finance guys like stock picking and so do I, and that’s why we get some of the best for this newsletter. That said, I am still punting on a solid end to the calendar year and I’m just hoping that we see a solid finish before June 30 but that could be a bigger challenge with Iran, oil prices, Spain and the EU’s recession all bound to throw some curve balls over the next few months.
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
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