Rudi’s View: All-Weather Portfolio in FY24; Growth Not Value

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All-Weather Portfolio in FY24; Growth Not Value

By Rudi Filapek-Vandyck, Editor

We all experience the share market through our own portfolio, which might explain why so many voices remain downbeat, if not straightforward negative about the local market and its prospects.

In contrast to general sentiment, the ASX200 just clocked off its second successive double-digit financial year return, coming in at 11.78%. One year ago, FY23 returned 14.80%.

Total return over the past ten years has averaged no more than 8.06%, and that number includes the past two years, so the absence of the sound of champagne corks popping seems a bit odd. But share prices have been more volatile than many can bear during the best of times.

Above all: the bifurcation underneath the headline performance remains extreme, with many more stocks not performing and a select group of popular names generating all the rewards. Investing in the share market is seldom a walk in the park. Whenever it is, the sunny conditions don’t last for long.

Outside of the Winners circles, Australian equities have been overwhelmingly frustrating, deflating, gut-wrenching, and, at times, de-moralising. Unless one’s portfolio owned plenty of supercharged Winners. But even then, the optics remain important and Australia looks bleak against the outsized gains yet again achieved in the US.

The Nasdaq100 index, as its website proudly shows, has returned 55% over twelve months, 177% over five years, and 419.34% over ten years (all data as of 4 July 2024).

We need not look any further as to why general sentiment is far from ebullient among local investors. But as said, total return has been above average for the second year in a row, and the all-important banks have been among the strong outperformers.

The FNArena-Vested Equities All-Weather Model Portfolio does not invest in popular banks or resources companies, but instead attempts to identify local companies of higher quality, with robust growth prospects, underpinned by continuous re-investments and a leading market position.

This focus has served the Portfolio well. Total return pre-fees for FY24 has been 18.28%. Last year, total return slightly underperformed on 12.71%. The year prior, in FY22, the Portfolio kept the damage limited to -2.59% for an average three-year return of 10.43% p.a. against the ASX200 Accumulation index’s 6.27%.

Many Lessons To Be Learnt

What usually happens is I start now highlighting the Big Winners that have contributed to the sizeable Portfolio outperformance, but maybe it’s equally important to acknowledge not all Portfolio constituents have been a Winner over the past three years.

As per always, disappointments do occur and the biggest disappointment for the All-Weather Portfolio has been education services provider IDP Education ((IEL)).

When asked in late 2022 about my favourite stock for the year ahead, I had little hesitation to nominate IDP Education. The company is a global market leader in its field and benefiting from the desire of parents in emerging countries such as China and India to send their offspring to universities in the UK, Canada and Australia.

Competitiveness has increased in the sector, but what really changed sector dynamics is a deliberate push back against student immigration by governments in those destination countries. Instead of reaching for new highs, the share price has more than halved over the past 17 months.

Observation number one: this has not prevented the Portfolio overall to put in a market-beating performance. Other inclusions like CSL ((CSL)) and ResMed ((RMD)) have equally not kept up with the index in recent years, but none of this means the Portfolio cannot still (out)perform.

Harry Hindsight is a wise man, of course, and always knows best after the facts. Admittedly, if I’d known with 100% certainty these share prices were heading for much lower price levels I would not have hesitated to sell and get back on board near ground zero, but investing is seldom that straightforward, just ask the many shareholders in large swathes of micro- and small-caps and in lagging value stocks today.

To my own credit, while I might have held on for too long to a share price that was ultimately only going lower, and lower yet again, I did acknowledge the increasing risks involved and therefore kept overall exposure small. An important part of risk management is making sure one IDP Education disappointment does not destroy the Portfolio performance entirely.

I’ve read and heard too many stories throughout the years past of investors doubling down on share prices that only kept falling further, upgrading one unfortunate slip-up into a major disaster. Doubling down, in my book, is only for traders with high risk appetite.

Running an investment Portfolio of, say, twenty stocks means there are always Winners and Laggards, in the moment. But one can have a broad assessment of where available cash is best allocated. Simply adding more to a share price that has fallen might seem instinctively the most logical decision to make, in practice it seldom is.

It is much better practice to try to assess what the risks are, and be cognisant that risk changes regularly. After shares in Woolworths Group ((WOW)) weakened from $40 to below $31, the Portfolio did purchase more exposure, but the consideration was not to get the average purchase price down, but to jump in at a great entry point on a longer term view.

The experience with IDP Education also shows it’s dangerous to rely on ‘value’ when a company operates under tough market dynamics. In this particular case, new pressure points kept popping up, putting additional pressure on forecasts and on apparent ‘valuation’. With the shares trading near $14, there are no fans left and all former friends have left for greener pastures elsewhere.

IDP Education shares remain the second most shorted on the ASX.

The Portfolio hasn’t sold and will continue to re-assess. What matters right now is not at what price we bought the shares; that is 100% irrelevant. What matters now is whether better times are around the corner, creating the platform for a renewed trend upwards. If this proves the case, the Portfolio might buy more shares. There is no hurry and plenty of other stocks deserve our attention too.

As investors, we are always influenced by daily share price moves, whether we want it or not. The Big Challenge is to keep our focus firmly on the underlying company fundamentals and accept that sometimes shares do not reflect what is happening inside the business, and sometimes our judgment is wrong.

The All-Weather Model Portfolio has stuck with ResMed shares on the ongoing belief GLP-1s did increase long term risks, but shorter term volatility is mostly related to market sentiment (and traders creating mayhem). CSL is the largest holding as we firmly don’t believe share price action post-2020 is reflective of what the future holds for Australia’s largest and most successful biotech.

Time To Sell The Winners?

The Portfolio is an extension of my personal research into All-Weather Performers, which, apart from the highest quality names on the ASX, also involves identifying those emerging growth companies that enjoy structural benefits with higher quality than the majority of peers.

A quick glance over the selections made in years past quickly reveals most of these stocks have been on the beneficial side of share market momentum. ARB Corp ((ARB)) shares are up 33% since June 2022. Total appreciation for Cochlear ((COH)) shares is 67%. Carsales has done 92%. Pro Medicus ((PME)) is displaying a whopping 239%.

Note: the All-Weather Model Portfolio does not own all stocks in my selections, but this is its main focus.

Ai-related beneficiaries in particular have been in focus throughout the year past. Shares in Goodman Group ((GMG)) have rallied 37% in the past six months. They are up 72% over twelve months, and 95% since mid-2022. For NextDC ((NXT)) the corresponding numbers are 28% to date in 2024, 41% and 66%.

I could go on and on, but the numbers speak for themselves. The contrast with the likes of BHP Group ((BHP)), Aurizon Holdings ((AZJ)), Elders ((ELD)), Lendlease ((LLC)), Metcash ((MTS)) et al is very stark. And these are by far not the worst performers.

The first dilemma that pops up after such a sharp polarised outperformance is whether it is time to sell the Winners and re-allocate into the share market Laggards? Yet again, what seems but logical instinctively may not be so straightforward at all.

For starters, many of today’s outperformers are carried by ongoing strong growth prospects. Think, for example, Goodman Group and NextDC in relationship to an explosion in global demand for data storage and data centres. While market crowding and short-term multiples might suggest the risk is for a sharp pull back in share prices at some point, medium to longer term those share prices should have a lot more upside.

Maybe the best comparison to make is with property prices in the major cities throughout Australia. Ten years ago, properties looked over-priced changing hands for, say, $2m. Ten years earlier, they’d only cost $800,000. Today, you cannot buy a decent house unless you’re willing to fork out $4.5m, and beyond.

Properties are by no means the equivalent of listed equities, but the underlying dilemma is the same: selling at $2m because you made a big gain from your $800k purchase doesn’t seem very smart when judging from today. In similar vein, shares in Pro Medicus looked over-priced at $50 in 2021, and yet again at $85 in 2023. Today they are trading above $130 and yes, there have been plenty of pullbacks along that trajectory.

While the general expectation is that share market momentum should broaden to those parts that as yet have not participated in the market upswing, weaker economic momentum both locally and overseas means the risk for profit warnings and operational disappointment remains high, and that risk applies more to cyclical, lower quality businesses, aka today’s share market Laggards, than it does to the Winners.

What Could Go Wrong?

If central banks are forced to wait for longer before starting to reduce interest rates, as has probably already happened for the RBA locally, this could well prove another delaying factor in the broadening of the share market momentum.

If economies weaken a lot before interest rate cuts are starting to stimulate growth, this would add yet another negative for most of today’s share market laggards.

Equally important: I remain of the view that during times of spectacular new growth avenues, as the world is experiencing in the current decade through GenAi, GLP-1s and multiple other megatrends, quality and sustainable growth companies can certainly fall out of fashion, but they don’t stay in the doldrums for long.

In recent years, we’ve all witnessed the pendulum swinging away in 2021, only to roar back from the moment bond markets stopped rallying. The second half of 2018 and of 2016 were equally times when the pendulum swung from Winners (Growth/Quality) to Laggards (Cyclicals/cheaper Value), but it never lasts for more than a number of months.

Sure, it’s an excruciating process when in the midst of it, but every time has been nothing but a temporary nuisance as far as the macro trend is concerned – and, need we all be reminded, simply an ideal entry point for the next upswing.

So, when I get asked: the share price has run a lot, should I sell? I advise investors to take all of the above into account. Don’t underestimate the psychological barrier that opens up once you’ve sold all your shares in, say, that high quality growth company that is ready to double in size over the years ahead.

If the share price doesn’t fall as much as you expect, and the rally starts without you being back on board, you’re now at risk of blaming yourself for appearing smart for five seconds, and missing out on the next grand opportunity.

I know what I am talking about. This is how and why the All-Weather Portfolio no longer includes Pro Medicus, while it had to wait until September last year to get back on board Hub24 ((HUB)), REA Group ((REA)) and WiseTech Global ((WTC)).

Sometimes the best course of action is simply staying the course, and maybe only make adjustments at the margin.

Unless we identify a significant change in market dynamics, that’s exactly what we intend to do with the All-Weather Portfolio.

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This section appears from now on every Thursday morning in a separate update on the website. See Rudi’s Views for the archive going back to 2006 (not a typo).

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(This story was written on Monday, 8th July, 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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