Rudi’s View: Equities Portfolio For 2021

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In this week’s Weekly Insights:

-Equities Portfolio For 2021
-World’s Worst Salesman?
-Rudi Talks
-Research Reports To Download

Equities Portfolio For 2021

By Rudi Filapek-Vandyck, Editor FNArena

Plenty of academic research suggests what matters most for investment strategies in the long run are asset allocation and portfolio composition.

Yet, it’s probably a fair statement to make most commentary and analysis in finance focuses on the direction of markets and individual stocks in the short to medium term.

Which is why my personal interest was piqued when I came across a recent strategy update by Wilsons, including an explanation and insights into the composition of Wilsons’ Australian Equity Focus List, which can serve as a model portfolio for investors looking for guidance for the year ahead, and beyond.

First up, Wilsons’ investment strategy is built around the observation that Quality and Growth, as identified through, respectively, return on capital and growth in earnings per share, outperforms the broader Australian share market over the medium/long-term.

This not only immediately explains my personal affinity, it also informs investors whose strategy is solely and religiously based on seeking out heavily undervalued assets; this is not for you.

Although, it has to be pointed out, nothing is ever as black and white and Wilsons’ approach does include (a few) typical ‘Value’ opportunities.

Structure Through Baskets Of Shares

Constructing an investment portfolio ideally starts with creating lists or groups of stocks that share similar base characteristics, after which decisions about which stocks to include in order to properly structure, weigh and diversify become a lot easier.

Wilsons has dropped the more traditional labels such as Blue Chips, Defensives and Cyclicals and opted for more refined qualifications that, dare I say it, seem better attuned to the general 2020 share market context.

Instead, the five baskets of equities identified are “Defensive Growth”, “Cyclical Value”, “Secular Growth”, “Cyclical Quality Growth” and “Asset Valuation Plays”.

While at first glance, it appears the concepts of “defensive”, “growth” and “value” are all represented, which can easily fool the inexperienced investor into the wrong impression and interpretation, all is not what it looks like on second consideration.

For example, the most important part of “Defensive Growth” is not the ‘defensive’ part. These are Growth stocks a la Amcor ((AMC)), Collins Foods ((CKF)) and Aurizon Holdings ((AZJ)) that are considered less volatile than your typical high tech, high PE multiple peers elsewhere.

Note: Wilsons even considers a gold producer like Northern Star Resources ((NST)) part of this basket.

The underlying bias towards Growth is shown through the addition of two more baskets with growth stocks of different qualifications; Cyclical Quality Growth and Secular Growth.

The Cyclical Quality Growth contains names such as CommBank ((CBA)), James Hardie ((JHX)), Macquarie Group ((MQG)) and Aristocrat Leisure ((ALL)).

With Secular Growth, Wilsons is referring to the likes of Appen ((APX)), a2 Milk ((A2M)), CSL ((CSL)), ResMed ((RMD)), and Goodman Group ((GMG)).

On the other hand, “Cyclical Value” does involve companies whose share price seems “cheaply” priced, but whose fortunes & outlook are likely to improve materially if/when the economic recovery continues next year.

This is where Wilsons' approach shows its sophistication because other major banks outside of CBA are part of this particular basket, alongside oil and gas producers, retailers such as Super Retail Group ((SUL)), and cyclical industrial companies such as Reliance Worldwide ((RWC)) and Seven Group Holdings ((SVW)).

The final basket, Asset Value Plays, is the one that most closely resembles your typical ‘value’ strategy; companies whose assets are worth more than is currently reflected in the share price.

On Wilsons’ own admission, such stocks need a positive catalyst, and it is not always obvious where that catalyst comes from, or when, indicating stocks can remain ‘undervalued’ for a prolonged period of time in the absence of the right catalyst.

I’d imagine some would consider Boral ((BLD)) and Telstra ((TLS)) part of this basket, or even AMP ((AMP)) and IOOF Holdings ((IFL)), and Link Administration ((LNK)) prior to private equity showing interest (a typical external catalyst).

Wilsons likes News Corp ((NWS)) and has it in portfolio alongside Costa Group ((CGC)).

All-Weather Overlap

Readers familiar with my research, which forms the basis of the FNArena/Vested Equities All-Weather Model Portfolio (see further below), would have noticed there is significant overlap, even though my own set of baskets is the result from a different view and starting point.

To recap, my four baskets of stocks are:

-All-Weather Performers
-Emerging New Business Models & Prime Growth Stories
-Dividend Champions
-Cyclicals, Low Quality & Companies Technologically Challenged and/or Disrupted

The overlap pops up naturally with the likes of CSL, ResMed and Amcor part of my first basket, and with Goodman Group, Macquarie, Aristocrat Leisure, Appen and a2 Milk all included in the second.

Wilsons doesn’t do traditional yield stocks, and instead relies on the Defensive Growth basket to secure above average yield/income for the portfolio.

I’m very happy with the performance I derived from Waypoint REIT ((WPR)), while I equally use reliable industrial companies a la Amcor, Orora ((ORA)) and Iress (IRE)) to boost the average yield for the portfolio.

The All-Weather Portfolio avoids basket number four, also to stay true to its name and purpose.

One potential addition I have been thinking about is seeking out the highest quality companies among cyclicals, as these contribute to my overall observation that, in the long run, quality businesses significantly outperform their lower quality peers, on average.

To date, I haven’t added this latter category to the lists I share with paying subscribers via the FNArena website, but if I had, it would have included the likes of CommBank, James Hardie, and JB Hi-Fi ((JBH)).

Let’s Get Crackin’

Once we have an equities portfolio alongside the chosen labels, we can start managing the weights and balances in line with our worries and expectations for the months/year ahead.

For example, Wilsons recently made the decision to reduce the overall defensiveness of its portfolio and to increase exposure to the economic recovery that is considered sustainable and worth believing in.

In direct response to this change in view, the relative portfolio weight was increased for Cyclical Value and for Cyclical Quality Growth and decreased for Defensive Growth and Asset Value Plays.

These adjustments can be made through either selling shares from multiple members in a particular basket, or through the removal of one or two stocks altogether.

In Wilsons case, decisions were made to dump Amcor and Link Administration (post private equity approach), and to add Super Retail and buy some extra shares in CommBank and ANZ Bank.

As at the end of September, Cyclical Quality Growth and Secular Growth are the two largest portfolio components weighing more than 55% combined.

Add 24% of Cyclical Value and it is clear Wilsons’ preference currently lays with the ongoing economic recovery for the year ahead.

Defensive Growth still represents more than 10%, with Asset Value Plays the smallest basket.

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The All-Weather Stocks section on the FNArena website does not contain any suggestions about portfolio weights or preferences; instead it offers six lists from which long-term oriented investors can choose at their own volition.

As said, the FNArena/Vested Equities Model Portfolio is almost exclusively populated with stocks from these six lists. The Portfolio owns most, though not all stocks mentioned on the website. For more info about the performance to date, see below.

World’s Worst Salesman?

I must be the world’s worst salesman. Last week I updated on the performance of the FNArena/Vested Equities All-Weather Model Portfolio and made sure I severely understated the actual performance achievements in the process.

In my defense, we are migrating the Portfolio operation onto a new technology platform, and both Vested Equities’ Stuart McClure and myself still have to get our head around the new environment, as also proven by last week’s update.

To set the record straight: Portfolio performance is running significantly ahead of the market in general.

Over the twelve months to June 30, otherwise known as fiscal 2020 (FY20), the performance was a positive 5% (with the emphasis on positive).

For the six months to June 30, otherwise known as the first half of calendar 2020, the performance was a negative -2.03% – the only negative you will read in this update, and a rather small one (no doubt, everyone agrees with that assessment).

For the first quarter in the new financial year FY21, the three months ending September 30^th, the performance stands at 4.91%.

For the month of October, up until Friday, 23^rd the performance stands at 5.17%.

Note all numbers quoted are ex-fees and costs, but once the current migration is in place (expected soon) FNArena and Vested Equities believe we are running one of the lowest cost, active equity portfolios in the country.

So watch this space. A lot more positive announcements are waiting to be unleashed.

The Model Portfolio picks stocks from my research into All-Weather Stocks, which is available on the website for paying subscribers (6 & 12 months), and then sits on those stocks for a long time.

That’s pretty much the story behind the Portfolio. We are currently weighing up the short-term risks leading into the US presidential election, but don’t anticipate we’ll be making a lot of changes.

Rudi Talks

For those who missed it, I interviewed the infamous (or should that be illustrious?) Harry Dent last week – the man who’s predicting the mother of all crashes is coming, and soon too.

For those who don’t want to watch and listen for the full hour, I wrote a brief intro with summary:

https://www.fnarena.com/index.php/2020/10/23/rudi-interviews-harry-dent/

Research Reports To Download

A few recent research reports that might come in handy:

RaaS on Pure Profile ((PPS)):

https://www.fnarena.com/downloadfile.php?p=w&n=DEF0B8A1-D46D-9B8A-BA9E5A46C19898EC

RaaS on Shekel Brainweigh ((SBW)):

https://www.fnarena.com/downloadfile.php?p=w&n=DF09560E-CD86-33E1-96238C0631C52BB5

Edison Research on EML Payments ((EML)):

https://www.fnarena.com/downloadfile.php?p=w&n=DF1552B8-C885-FE91-5D2025194BFA932E

(This story was written on Monday 26th October, 2020. It was published on the day in the form of an email to paying subscribers, and again on Thursday as a story 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: info@fnarena.com or via the direct messaging system on the website).

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BONUS PUBLICATIONS FOR FNARENA SUBSCRIBERS

Paid subscribers to FNArena (6 and 12 mnths) receive several bonus publications, at no extra cost, including:

– The AUD and the Australian Share Market (which stocks benefit from a weaker AUD, and which ones don't?)
– Make Risk Your Friend. Finding All-Weather Performers, January 2013 (The rationale behind investing in stocks that perform irrespective of the overall investment climate)
– Make Risk Your Friend. Finding All-Weather Performers, December 2014 (The follow-up that accounts for an ever changing world and updated stock selection)
– Change. Investing in a Low Growth World. eBook that sells through Amazon and other channels. Tackles the main issues impacting on investment strategies today and the world of tomorrow.
– Who's Afraid Of The Big Bad Bear? eBook and Book (print) available through Amazon and other channels. Your chance to relive 2016, and become a wiser investor along the way.

Subscriptions cost $440 (incl GST) for twelve months or $245 for six and can be purchased here (depending on your status, a subscription to FNArena might be tax deductible): https://www.fnarena.com/index.php/sign-up/

Click to view our Glossary of Financial Terms