FNArena Editor Rudi Filapek-Vandyck was recently interviewed by LiveWire Markets’ James Marlay about what to expect from the August reporting season in Australia.

The video of the interview, including a transcript, was published under the heading ‘Rudi: It’s the healthiest bull market we’ve seen in years’ (link at bottom of this story).

Below is an edited version of that transcript, correcting spoken grammar and misheard expressions for more to-the-point and easier reading.

James Marlay:

Rudi, last time we spoke in February, you said we were entering a new bull market and value is back. Since that time, the All Ords has rallied about 11% which is a good return. My opening question to you is: do you think the bull market is healthy and where will the leadership come from if we're to continue to see a bull market from here?

Rudi Filapek-Vandyck:

As per always, there's a context to things. Conclusion number one is financial markets never ask where you came from. They ask where you're going.

Despite all the bad news that we had last year of the covid pandemic, profit forecasts falling off the cliff, dividends being cut, capital raisings being necessary, et cetera, the truth of the matter is we've had an incredibly quick recovery in economies, we don't have to go too much into detail, but this has fueled an incredibly quick recovery in profits and in dividends for corporate Australia.

It also has created a completely new dynamic for corporate Australia. While we [here at FNArena] look at reporting season and corporate results, it's incredibly visible in how those corporate results compare towards market expectations, and that there's a completely new dynamic in corporate Australia.

Probably the easiest way to illustrate this is: August and late 2019 was probably the worst time for corporate Australia in all the years that I've been in Australia, which is more than two decades.

And according to some analysts that have data that go back to the 1980s, those 2019 data were worse than the 1980s.

That's even before the pandemic appeared. What we saw back then was companies not being able to meet even relatively low expectations. We all forget this, but the banks started cutting their dividends back then, as did energy companies and some other cyclicals.

Then the pandemic came along and, of course, everything falls off a cliff. But that experience now and the subsequent recovery, and the fact that companies have used that experience to strengthen their balance sheet, to streamline the operations, et cetera, has now created a completely different dynamic.

Now what we're seeing is that profit growth is surprising to the upside. You won't see it if you just look at the share price or the index, but forecasts in Australia are now rising for 11 months uninterrupted. That almost never happens.

This has created a completely new dynamic. Dividends in Australia are recovering at a speed which is probably never witnessed, Australia is the number one in the world now in terms of recovery in dividends.

We're seeing all of that with the early indications. The banks have already announced they're going to conduct share buybacks. Those dividends are not quite back to where they were, but they are on their way.

We already had Rio Tinto ((RIO)) paying out probably as much cash as they ever have done in the history of the company, including a bonus dividend, with a promise of more to come in the second half.

I think one of the words we can use here is a Super Cycle in Dividends, which is right here happening in Australia at this point in time.

If you combine all of that, it should be no surprise that people like myself have now been talking about a new bull market that's started. That is if you assume that the old one stopped in late '19 or early '20, otherwise it's just a continuation of, but today’s phase is a much more profitable, much more enjoyable, much stronger upturn to be part of as an investor.

Because the older bull market was pretty much crawling through the mud and you really had to be careful in which stocks you had in your portfolio. That is still the case now, but I'm sure we'll get there with some of your other questions.

James Marlay:

Before we get into the nitty gritty, we will talk about dividends and earnings in a bit more detail. I just want to briefly touch on the backdrop which is the bond market.

When we spoke in February, we were seeing a peak, a rise in bond yields and effectively it's rolled off since then.

I guess I'd be interested in your take on that. Does this mean the value trade that we saw ignited by inflation expectations is now over?

Rudi Filapek-Vandyck:

Again, context, very important, but just before I forget to mention this later in the interview, I do believe that the value trade needs the bond market to ignite it and to support it.

And that gives you already the answer of why the value trade has basically deflated from about late March.

No doubt about it, the bond market has pretty much surprised just about everyone and that includes myself. Did I expect the bond market would go to 2% and just continue going up? No, definitely not.

But I also did not expect it would go back this close to 1% again. We can all have lively discussions about what's happened in the bond market. I actually think there's probably a lot of sense to it.

One of the reasons, I believe, is the relativity between bonds in Europe and bonds elsewhere.

I think this also touches upon a new concept for investors, for most investors are trained to judge and to calculate a valuation for assets on their own, while in the modern-day environment, we have to make assessments on a relative basis.

In the share market, this shows up, for example, between Commonwealth Bank ((CBA)) and the other banks, or between Afterpay ((APT)) and the competition.

In the bond market, the same relative comparison applies. It's about having to make a relative call between low yields in the US, still positive, and low yields in Europe, which are turning even lower.

I think that's one of the reasons why the bond market has gone where it has gone, and it has had a massive impact on equities.

I've never been a believer in that we are entering a new era of the value trade. I do believe we'll go through periods when the value trade is everything that happens in the share market, and then it disappears again.

We've seen so far that every time the value trade becomes popular, it lasts about 4-5 months and then it, sort of, peters out. So far, that's basically the maximum the value trade has been able to achieve.

James Marlay:

Rudi, I'm going to dive into your reporting season themes. You've touched on a couple of them already.

Two of the ones that you've touched on are surging corporate profits and dividends. I'm going to start with one that we haven't touched on so far, which is rising costs, and pressures.

Could you talk me through why that's something that you think is interesting to watch? And maybe call out where you think it is most likely to pop up?

Rudi Filapek-Vandyck:

This bull market is very, very strong. Has been very, very strong, but it doesn't make people comfortable. You see this on many metrics, and in the data that we collect at FNArena.

People always worry that the share market has gone too far. But what we see with the data that we watch -for example the difference between share prices and price targets, the difference between buy, hold, and sell ratings in the market- is this market is very reluctant in pricing in the maximum.

There are a lot of question marks around this market, so we've now had the V-shaped recovery; very strong, but we're very hesitant because we don't know what's coming beyond 2021.

And you see that on many, many levels. One of the reasons, I believe, is because we have transitory inflation. Central bankers talk about it all the time, there's a whole discussion about it in the background happening.

What is transitory inflation? Is that the one that sticks around, or is that the one that goes up once and then stays there? Central bankers say it's the second; it means we're not going to see 2% inflation increases year upon year in the years ahead.

Central bankers see it as transitory, and for that reason bond yields can stay low. They don't have to act and the share market, all else being equal, should do quite well.

However, if you have a rise in prices which are essentially input prices, like commodities and rent and other elements; companies are consumers of those commodities and they are paying rent, et cetera.

One of the reasons I believe why the share market in a broad sense has been very reluctant in continuing to price in and continuing to forecast that those strong recoveries will simply continue, is because the sales level might go up, but corporate margins might come under pressure.

Inflation has to go somewhere.

Traditionally, one of the most profitable investments in the share market is when a company enjoys rising margins - because profit and growth accelerate.

But the opposite happens when margins come under pressure. The obvious questions the share market is asking are directed at industrial companies. The likes of Amcor ((AMC)), Ansell ((ANN)), Orora ((ORA)), you name it, they all have to buy in commodities and then make a product out of it.

But investors should not automatically assume that the producers of commodities are immune. We will see price pressure equally for the likes of Fortescue Metals ((FMG)), BHP Group ((BHP)), Incitec Pivot ((IPL)), Orica ((ORI)), you name it.

Ultimately, it's universal. Where you will see it less happening is in typical IT companies, services companies, software companies. They don't have to buy in oil, for example.

This is one of the question marks that hangs over this reporting season, and investors will be watching this very, very closely. It's not that companies can't buy in product at a higher price; they have to be able to pass it on.

Again, this takes us to quality companies, that are market leaders in their sector, and that have an ability to pass on price increases. If they have none of those three characteristics, they might end up in trouble at some point, and investors will be on the lookout for this.

James Marlay:

You've touched on the strength of earnings. I guess just in terms of the dividends, you've touched on the headline dividend payers, banks, the miners, which are spinning out a lot of cash at the moment.

Are there any areas where you think people might not be fully anticipating the dividends that are about to come out? Are there any under the radar dividend opportunities?

Rudi Filapek-Vandyck:

Most companies are increasing their dividends.

Some companies are selling assets, and have already, sort of, indicated they're going to pass on at least half of it or more to shareholders.

You have to think about the likes of Telstra ((TLS)), Insurance Australia Group ((IAG)), Iress ((IRE)), Commonwealth Bank, BHP too, probably.

We have Ampol ((ALD)), formerly known as Caltex Australia. We even have some REITs that are selling assets. Waypoint REIT ((WPR)), for example.

The term super cycle dividends is not easily applied here, but it will apply. It's almost a once in a lifetime experience that we have in 2021.

Of course, this is not going to be repeating in every subsequent year. But this can potentially still get a repeat in February next year.

This started in February. It's going to continue now in August and there will be a lot of cash coming into investors’ coffers.

James Marlay:

This is your opportunity to draw on the database that FNArena puts together, which tracks the beats and misses of corporate earnings and I know you've just done a bit of an update on those companies that reported between February and where we are now.

I guess the question is: are expectations likely to be exceeded on average this reporting season? What's your assessment of the temperature? Do you think investors are likely to be surprised?

Rudi Filapek-Vandyck:

What we've seen over the past 6-9 months or so is that the numbers are absolutely ‘blown out of the park’-numbers.

We usually don't see in Australia the same numbers as we see in the United States, where business leaders are very well trained to make sure they beat market expectations. This second quarter, for example, the number of companies in the United States that have beat expectations is close to 90%.

We never see those numbers in Australia, absolutely never. I've been doing this for 20 years. Australia is lucky if ‘beats’ reach 40% or so.

What we've seen is that, usually, on average, we have about 33%, 34%, 35%, maybe 37% of companies beating expectations in reporting season.

In the last reporting season, which we just closed off on, the percentage was 55%. Now, that gives you an idea about how much that number is above average.

What can we expect for August? We now are in the 11th month of rising forecasts and the question thus becomes: will we see a reversal from February?

The February reporting season was fantastic, but expectations were much lower. Today expectations are quite high.

We are all expecting a big announcement from BHP. We will not be happy if Telstra doesn't do something special.

One indication that maybe has gone unnoticed this time around is that usually when we have a reporting season, what comes first is the "confession season".

I remember in 2019 and 2018, confession season; that was something you would be a little bit afraid of. You would almost hope you were not in the market the month before reporting season, because share price could tank by -30% or more.

I think the best indication today is: have you noticed any confession season? I haven't. February didn't have one either.

So, I think the fact that the confession season has pretty much gone quiet, maybe that in itself is a very strong indicator of what we should expect from August.

Maybe this August season is too early yet to see a reversal in the strong uptrend. It doesn't mean we can't see it happening in six months' time, but maybe now it's too early yet.

I'm not expecting that we are going to have a results season that generates 55% in beats again. But I'm thinking it might still be higher than average.

The lack of confession season indicates we might still be in for a very positive experience in August, overall.

James Marlay:

Very interesting observation. Now Rudi, this is your time to shine. You are the manager of the All-Weather Portfolio.

You don't need to go through each of them, but I thought I'd ask you to bring along a couple of stocks that you're going to be watching closely in reporting season.

And maybe pick a few that you think could surprise on the upside and a couple that might surprise on the downside.

Rudi Filapek-Vandyck:

On the downside; there’s always the left field one, isn't there?

There's one thing I want to throw in first, to illustrate the magnitude of what's happening this year. If you look at the six months announcement from Rio Tinto, they paid out more in six months than they did last year, and the year before, over 12 months.

Actually, you can combine those two years together and Rio Tinto will still pay out more dividends this year.

The yield on the Rio Tinto dividend is more than 5% over six months. BHP is going to pay out something like three and a half, four percent, over six months. You're going to get that from the banks after 12 months. These companies are paying that out over six months.

This provides us with an idea of the magnitude of what's coming towards Australian investors. Of course, it's not sustainable. One of the reasons why it's happening now is because nobody believes it's sustainable. That's why the share price is where it is.

Coming back to the reporting season itself, as people would know, I'm not the kind of guy who looks for beaten down stocks that are forgotten by everyone and that I can buy and hold for six months in the hope that someone else comes along and gives me a big price for it.

I happen to concentrate on what I believe are high quality companies. There are some fast growers in there. I recently noticed quite a number of the stocks I own are near or at an all-time high, which shows you they've obviously done well.

Those companies in particular have my attention. The likes of a ResMed ((RMD)) and REA Group ((REA)), because I need to remain confident those companies can continue performing.

There is also Pro Medicus ((PME)), which I still believe is one of the prime growth stories on the Australian Stock Exchange. I recently sold it because the share price was very close to $60 and I thought you probably can't justify that. That's just too high.

With pain in my heart, I sold my shares. I remain on the lookout for a company like Pro Medicus, and if I would have one wish for this year, I would say, well, hopefully Pro Medicus comes out and people get a big scare and they sell off the share price, and then I can become a shareholder again.

There are companies at the smaller end that have my attention that could potentially become something like a Pro Medicus in the years to come. One of those, I believe, is Audinate Group ((AD8)).

I also owned that one. I've done really, really well out of it. But out of portfolio management, I no longer own that stock, but I will still be watching it.

Audinate Group is a stock that could potentially do very, very well in years to come, but it is a small-cap stock, it's not profitable yet, and bond yields will have a big impact, if bond yields move higher at some stage.

This is probably equally important. We spoke earlier about bonds. What we saw in November last year was a very strong switch between value and growth, and growth stocks were sold off quite heavily while value was bought heavily.

I think for the second half, the chances are we might witness a similar repeat of that experience, for the simple reason that the whole value trade has deflated so much, and bond yields are so important for that trade.

Investors should be mindful of the fact that it's not all about corporate results and dividends. Post August, the bond market can have a big say again, and then stocks like a Pro Medicus, or an Audinate, or an REA, who've all benefited from bond yields going the opposite direction, they might get punished very harshly if the bond market decides to push up yields again. There are quite a few people that expect this to happen.

Paying attention to companies in reporting season; it's not just about the individual cases. You have to do it from a portfolio perspective. And in 2021, there's no better advice than to have a diversified portfolio so that if bond yields move, it doesn’t mean your whole portfolio gets squashed, because you're on the wrong side of the trade.

Other than that, I actually own only few stocks that are a bit of a market laggard.

If I had to nominate two of them, I would nominate Amcor and I would nominate NextDC ((NXT)).

I think it's up to NextDC again to prove the doubters wrong, and there are a lot of doubters out there.

Amcor, it's a bit of a strange animal. It gets thrown in with the growth companies when bond yields move and that's a bit strange, of course.

I remain a big Amcor fan. I believe it's defensive growth at very high quality and dependability and predictability is something you do want to have in your portfolio. Especially when the tough times arrive, plus it's a nice dividend. No franking, though.

James Marlay:

Final point, Rudi. I did happen to go and have a look at the CSL ((CSL)) share price before our call, because I know it's a bellwether stock and something that you've followed for a long time.

It quietly crept its way from the $250 level up towards $300. Give us a quick view on CSL.

Rudi Filapek-Vandyck:

Well, luckily you mention CSL, I didn't want to because people think I always talk about CSL.

Essentially, the share price is moving sideways. It's at $293 or $292, or whatever. It has been above $300.

CSL is one of Australia’s high-quality companies, but its business has been impacted by covid, and by bad policies in the US.

That is still the case and the market will want to see some indications: when is that going to be resolved?

I see CSL as in a sideways pattern, but I still own it. It's still one of my largest holdings and I'm not too unhappy about things.

The share price would have been clobbered if something similar would have happened to one of the lesser quality companies. I think sometimes people just have to be patient and I think in this case, one shouldn't expect miracles.

It's very telling as well, that when analysts have to nominate their potential risks and surprises for the upcoming season, that CSL is mentioned on both sides.

A few other companies are like that. Lendlease is. I think Lendlease is no longer quality, by the way. Seek ((SEK)) is mentioned in the same manner.

We'll have to see what reporting season brings, but it's funny that people will mention those companies with conviction, like, "Oh, they're going to disappoint" and other people go, "No, no, I can see potential for an upside surprise" and that's interesting.

In general terms, when people nominate potential disappointers for the reporting season, they usually are proven wrong because companies that do have to announce bad news, they often can mix it with positive news.

Like, "We throw in an extra dividend" or, "We're going to restructure. We're going to lay off people."

In the past, we had perennial disappointers. QBE Insurance ((QBE)), for example, and Telstra which always disappointed.

I actually think both now are probably going to surprise to the upside, and that too gives us an indication that the dynamics in Australia really are different from the past.

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To view the video on LiveWire Markets:

https://www.livewiremarkets.com/wires/rudi-it-s-the-healthiest-bull-market-we-ve-seen-in-years

To view the video on YouTube:

https://youtu.be/wwuh8YvfVks

(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.)  

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FNArena is proud about its track record and past achievements: Ten Years On

In this week's Weekly Insights:

-Early Days, But Plenty Of Signs
-Not To Be Forgotten: The Bond Market
-Conviction Calls
-FNArena Talks
-All-Weather Model Portfolio

By Rudi Filapek-Vandyck, Editor FNArena

Early Days, But Plenty Of Signs

The August reporting season in Australia is still very young. The FNArena Corporate Results Monitor only contains 19 updates on Monday, August 9th (see further below), but already the main themes of the season are there for all to see:

-A humongous dividend from Rio Tinto, including a bonus payout
-A special dividend from Suncorp (plus share buyback)
-The promise of a share buyback from News Corp
-Asset sales are in full swing, as is M&A
-Industrial bricks and mortar assets continue enjoying revaluations
-Just under half (9 out of 19) of companies performed better-than-expected
-Covid-losers are achieving the strongest bounce-backs (unsurprisingly), but covid-winners are not by default turning into losers
-Those who miss market expectations (only a few to date) are likely to do so because of higher costs
-Covid and lockdowns continue having an impact, as expected
-Overall, companies remain reluctant to provide quantitative guidance
-Analysts remain conservative in their forecast upgrades given lockdowns and other uncertainties

Take a short stroll through the aforementioned Corporate Results Monitor and all of these themes will be found. It's early days still, but it is well possible the rest of August will simply provide investors with more of the same.

FNArena's Corporate Results Monitor will now be updated daily:

https://www.fnarena.com/index.php/reporting_season/

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When it comes to share price action, however, August might be a lot trickier to navigate than usual. Witness: shares in Rio Tinto ((RIO)) are down more than -4% since the announcement of that Grand Dividend; REA Group ((REA)) lost -8% in a heartbeat and ResMed ((RMD)) shares too opened some -3% lower on Friday but have subsequently recovered to a small gain.

And macro factors haven't genuinely commanded a primary role over that brief period.

The share price weakness in Rio Tinto shares is closely correlated with movements and market sentiment concerning the price of iron ore. One would assume most investors are well aware virtually nobody, including the producers themselves, believes this year's elevated prices are sustainable. Hence, those market beating dividends might well include some compensation in the form of share price erosion.

The investment case for Friday's three reporting companies looks equally tricky as all of News Corp ((NWS)), REA Group and ResMed were trading at or near an all-time record high, similar to Rio Tinto. Does it matter? Well, News Corp shares, despite the promise of share buybacks coming under consideration and potentially a better year ahead, has equally seen selling pressure emerge after the market update.

Clearly, there are limits to investor optimism, at least in the short term. Note also: News Corp shares remain well below most broker price targets, so there's no natural safety in a share price that isn't maxed out when the financial result doesn't fully satisfy.

The difficult task ahead for investors is to assess the real importance of these short term moves in share prices, and whether they tell us anything about the way forward. Within this context it is good to keep in mind that companies that manage to beat expectations, and force analysts to lift forecasts and valuations, usually see their share price outperform for up to four months after the market update.

The future profile for those that miss is a lot less straightforward, history suggests, and punishments can be immediately, savagely, or through persistent underperformance over a prolonged period of time.

The best way to handle the information that is updated during results season is thus by forming a view about the longer-term future of the company behind the share price. And here, dare I say it, the fundamentals for ResMed and REA Group continue to look a lot more solid than for most other companies that have reported thus far.

It is no coincidence, both are proud members of my selection of All-Weather Performers on the ASX, and they have been since the inception of my research.

The Strong Are Getting Stronger

Whenever investors ask me: what makes a true All-Weather Stock? My knee-jerk response is usually: a company that consistently invests in its business.

The longer I observe the share market and its multitude in business models, the more I come to this very simple conclusion: from the moment a business starts cutting corners and stops investing in itself, it is gambling on the possibility that nothing unforeseen happens to its customers, its markets, its products and its competitive strengths.

This does not mean nothing untoward can happen. What it does mean is that if something negative occurs, this type of business can handle it, or it knows how to respond relatively quickly. In most other cases, the damage might well be terminal.

Which brings me to one theme that was not mentioned in the list above: recessions and pandemics cause the strong to become stronger. There is, of course, a strong correlation between being a market leader that does all the right things, like investing substantially in the business, and witnessing one's prospects improve on the back of global misery.

The share market may not necessarily always like it, not in the immediate term, but eventually the benefits reaped from those investments will translate into healthy and sustainable rewards for shareholders.

The best example that comes to mind in this regard is that of Seek ((SEK)), whose market leadership for job advertisements in Australia has come under threat from multiple corners on multiple occasions over the past decade, and every time management at the helm responded with: we need to crank up the level of investment.

On each occasion the share price has come under pressure in the immediate aftermath of yet another "disappointing" market update, but look where it ultimately has taken the share price.

Seek shares set an all-time high in July; they are a little lower now. The former is what counts in a long-term oriented portfolio; the latter is only important in the here and now.

Seek, too, has been on my list of All-Weather Performers since inception.

Other companies that come to mind include Aristocrat Leisure ((ALL)), Breville Group ((BRG)), Cochlear ((COH)), CommBank ((CBA)), IDP Education ((IEL)), and Woolworths ((WOW)), though there is a valid argument to be made I should mention all companies listed as All-Weather, potential All-Weather and All-Weather with question marks in the dedicated section on the website.

Not all report in August, and CommBank is not on my lists, but investors' portfolios would be well-served through exposure to any of these high quality businesses that know the secret sauce for staying on top of the corporate ladder.

Short Term Versus Long Term

Of course, we still want management to harbour a positive culture, to stay aligned with shareholders, to invest in the right places and at a favourable return, and we prefer markets that are non-cyclical with a less volatile structure, but all these characteristics still need to be complemented with substantial investments that are not one-offs and do not simply patch up various weak spots in the corporate armour.

Where things get a little trickier, once again, is that most companies I selected have been enjoying favourable long term trends, such as an ageing population, comfort food and the eternal popularity of automobiles. Some of these trends are ripe for disruption, some of the trends are arguably already under threat.

Here the most obvious victim is probably Ramsay Health Care ((RHC)). Up until 4-5 years ago, this leading operator of private hospitals provided better growth and better financial metrics than CSL ((CSL)), would you believe it? But dynamics for that industry have changed, and quite profoundly so, and this is why the share price has essentially trended side-ways, after the plunge from $80-plus.

Make no mistake, last year's pandemic and lockdowns have plausibly created a runway for growth that may well last two-three years because of the freeze in low priority surgeries, but there are also higher costs to be dealt with and it remains still to be seen how governments respond to the prospect of ever higher costs for general healthcare services.

Ramsay Health Care is still held in the All-Weather Portfolio, but I have to admit the thought has crossed my mind, on multiple occasions, that its name should probably be removed from my list. For now, the prospects for next year and beyond have kept this stock in the portfolio. Management has a major challenge at hand. I am not sure whether they can pull it off, beyond the immediate horizon.

And herein lays the true challenge for investors: at face value, Ramsay Health Care shares look a lot cheaper than the likes of Seek, ResMed and REA Group on very basic measurements such as the one-year forward looking Price-Earnings ratio, though I wouldn't call Ramsay particularly "cheap".

It is possible this gap in relative valuation helps Ramsay shares perform better if the FY21 financials beat forecasts, but I remain more confident in keeping ResMed and REA Group in portfolio and if/when their share prices weaken significantly, I'll be ready to increase portfolio exposure.

This is, ultimately, how you play the share market to your own advantage. Know what you are interested in, and why. Give confidence to the companies that deserve it. Keep a firm eye on the longer term.

Understand that quantifiable quality is rare and extremely valuable, and that 'valuation' is the one and only consideration for unproven, lower quality and cyclical companies (which is: most of them), but merely a short-term item for those exceptional businesses that are also listed on the ASX.

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More on this year's August Reporting Season:

-August Bonanza, But What's Next?

https://www.fnarena.com/index.php/2021/08/05/rudis-view-august-bonanza-but-whats-next/

-August Results: Anticipation & Trepidation:

https://www.fnarena.com/index.php/2021/07/29/rudis-view-august-results-anticipation-trepidation/

Also: this week's Weekly Insights includes a more detailed update on the All-Weather Model Portfolio, see further below.

Not To Be Forgotten: The Bond Market

Results seasons are supposed to direct investors' attention to what really matters on the share market, and that is how business leaders at the helm of ASX listed companies create durable shareholder benefits and rewards, usually through growing the company's revenues, profits, cash flows and dividends.

But results seasons are seldom only about individual companies. Anno 2021 we can count the global pandemic and bond markets as two potential forces that can have a profound impact, either on individual companies or on markets in general. In particular the bond market can cause some serious tribulations, if/when global bond yields start rising once again.

Nobody really knows what has driven bond yields down since mid-March. All explanations I have come across seem partial influences, at best. What we do know is that bond yields are a lot lower than where they seemed to be trending towards up until March, and this has allowed Quality and Growth and Defensive stocks to once again show their most favourable colours.

Investors should, however, not underestimate the potential impact from bond market yields rising, as we all witnessed during the opening weeks of this calendar year. We don't know when or why exactly, but it seems but a fair assumption this will happen again, possibly before year-end.

What this means is that diversification in portfolios remains of paramount importance. Don't stare yourself blind on the strength of profits and dividends and capital returns this season; equally consider what a quick run up in bond yields might do to the share price.

This might be an opportune time to secure profits on the winning side and start looking at adding some laggards that might come to life on the back of bonds selling off (yields rising).

Whatever the strategy: don't make it a one-way bet on the direction of bond yields.

Also, keep in mind: companies that are capable of achieving sustainable strong growth will come out positively on the other end of bond market headwinds, though probably not immediately.

Conviction Calls

Last week's surprise takeover agreement between US fintech Square and local BNPL market leader Afterpay ((APT)) has triggered a genuine "Who Could Be Next?" research drive inside the local stockbroker community.

Whereas Morgan Stanley doesn't think investors should get too excited post-Afterpay, RBC Capital has weighed in with a three-tiered assessment, dividing potential ASX-listed technology targets over three baskets: Highly attractive targets, medium attractive names, and lowly attractive peers.

In the highly attractive basket we find: NextDC ((NXT)), Infomedia ((IFM)), Pushpay Holdings ((PPH)), Altium ((ALU)), and Hansen Technologies ((HSN)). The latter already is providing due diligence to a potential suitor.

Medium attractive targets include: Appen ((APX)), EML Payments ((EML)), Megaport ((MP1)), Macquarie Telecom ((MAQ)), and Fineos Corp ((FCL)).

Not so attractive, apparently, are: Xero ((XRO)), Pro Medicus ((PME)), Nearmap ((NEA)), and Elmo Software ((ELO)). Not all for the same reasons though. The first two are trading on elevated valuations, which acts as a natural deterrent, while for the latter two the future looks a lot less predictable with RBC Capital anticipating ongoing negative cash flows.

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Not a big fan of picking high dividend yielders whose shares look attractive because of operational headwinds and serious question marks that depress the share price, but it is one of the selections that always has investors' interest in Australia.

Morningstar has come up with the following "10 Franked Income Ideas for Australian Investors". Stocks selected are:

-Aurizon Holdings ((AZJ))
-Perpetual ((PPT))
-Link Administration ((LNK))
-GWA Group ((GWA))
-Westpac Banking ((WBC))
-APA Group ((APA))
-Telstra ((TLS))
-Magellan Financial Group ((MFG))
-Dexus ((DXS))
-Medibank Private ((MPL))

Morningstar seems confident there are no dividend traps included in that list.

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Morningstar also updated its selection of Best Stock Ideas, involving a switch out of Spark Infrastructure ((SKI)) and into Aurizon Holdings.

The 15 Best Stock Ideas are:

-a2 Milk ((A2M))
-AGL Energy ((AGL))
-Aurizon Holdings
-Brambles ((BXB))
-Challenger ((CGF))
-Cimic Group ((CIM))
-G8 Education ((GEM))
-InvoCare ((IVC))
-Lendlease Group ((LLC))
-Link Administration ((LLC))
-Southern Cross Media ((SXL))
-TPG Telecom ((TPG))
-Viva Energy Group ((VEA))
-Whitehaven Coal ((WHC))
-Woodside Petroleum ((WPL))

FNArena Talks - Pre-August Interview

Last week I gave an interview to Livewire Markets, which can be accessed:

-Through LiveWire Markets:

https://www.livewiremarkets.com/wires/rudi-it-s-the-healthiest-bull-market-we-ve-seen-in-years

-Via YouTube: https://youtu.be/wwuh8YvfVks

All-Weather Model Portfolio

June-July update for the one and only Portfolio based on my research into All-Weather Stocks on the ASX:

https://www.fnarena.com/downloadfile.php?p=w&n=8E207C19-082F-ADA0-E271FB7C116BFAB0

(This story was written on Monday 9th August, 2021. 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).

(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: 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 $450 (incl GST) for twelve months or $250 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/

This story contained a mathematical error when mailed out to subscribers late on Monday. That error has been corrected in the version below.

In this week's Weekly Insights:

-Investing In Quality & Growth; A Journey
-Conviction Calls
-All-Weathers, EML Payments, Macquarie, And Risk

Investing In Quality & Growth; A Journey

By Rudi Filapek-Vandyck, Editor FNArena

Investing in Growth companies is something entirely different from trying to find true value among bombed out cyclicals, disrupted business models and misjudged disappointments.

Which is why my investment rule number one says: never ask your typical value investor for an opinion on a Growth stock.

You know the answers already. It's either too expensive. Or it won't last. Or the world has gone super-duper crazy.

But Growth stocks offer a lot more than the next investment fad or mini-market bubble. As one astute fund manager stated recently: find the right one, and you can keep them in your portfolio for the next decade, possibly longer. Along the way, fortunes are being made and lives are changing - literally.

New Zealand-based a2 Milk ((A2M)) achieved a secondary listing on the ASX in March 2015 at a price of 56c. Mid-last year the shares peaked near $20 for a return ex-dividends of no less than circa 3470%. What this means is that $10,000 spent on the first day of trading would have appreciated to $347,000 in a little over five years.

What this also means is that investors could have bought those shares in any meaningful pull back and still have made a huge return on investment. One that literally could prove life-changing.

But those earlier mentioned value investors are correct too. It couldn't last and it didn't. a2 Milk shares are today languishing around $5.50 which translates into a depreciation of approximately -72%. In less than one year. That's one big ouch!

And a2 Milk is far from the only one. Shares in artificial intelligence company Appen ((APX)) peaked below $45 in August last year. They are now changing hands at around $13.50, having recently rallied off a bottom not far above $10.

Credit-but-no-credit provider Afterpay ((APT)) still had the wind firmly in the sails in February with the shares surging well above $150. They are now struggling to hold above $90.

Not All Tech

Observation number one is that the concept of achieving a prolonged period of strong growth is by no means reserved for technology companies only.

Apart from a2 Milk, which is a marketer of dairy products by anyone's definition, the past decades have shown extended periods of uninterrupted Growth can be achieved by a wide variety of sectors and business models; from medical devices to poker machines and online gaming, to online classifieds and paper and packaging products and services, to car accessories, small electrical appliances and cheap pizzas.

And that's simply limiting my selection of successful Growth stories to the ASX where, arguably, the likes of NextDC ((NXT)), Pro Medicus ((PME)) and Xero ((XRO)) are still in a relatively early stage of what could prove to be another decade of strong growth ahead.

But how do we separate the wheat from the chaff -distinguish between truly sustainable Growth companies and temporary pretenders- and, equally important, how can we know when the tide is shifting as has happened in the case of a2 Milk, and Appen, and Kogan ((KGN)), and Blackmores ((BKL)), and Redbubble ((RBL)), and so many others?

It is here that investing in Growth companies reveals itself as being more art than science. Shares in accountancy software provider Xero have sold off twice already in 2021. First they sank from near $160 to $105 and upon releasing FY21 financials in May the share price pulled back from circa $140 to near $111.

I did not sell my shares, having reduced my exposure a little in February, but I did aggressively increase portfolio exposure during the second pullback. I never climbed on board the register of Afterpay, but if I had I most definitely would not have had the same confidence as with Xero.

One problem with emerging success stories is they sometimes capture the imagination of the crowds, and while everyone is getting excited and boasting about their exposure, the public adulation always makes me wary there's too much money flowing in that is too flighty for its own good. Someone shouts Boo! and risks setting off a stampede towards the exit.

Which is why I much more prefer achievers a la ARB Corp ((ARB)), or Breville Group ((BRG)), or Ansell ((ANN)). I hardly ever receive an enquiry about these companies, but have you checked their performances yet?

This is not to deny that Growth stocks in general can be a lot more volatile than the average stock listed on the ASX. Take the aforementioned a2 Milk for example. Whereas the share price had risen by some 3470% over as little as 5-plus years, from 2018 onwards there have been a number of serious pullbacks (-20%, -30%, -40%) that would have made many a shareholder uncomfortable on each occasion.

But also: none of these pullbacks marked the end of the uptrend that remained in place until the middle of last year. If we look back at recent history, we'll find this is quite a common feature for Growth stocks, including for ARB Corp, Breville Group and Ansell.

Such pullbacks are not necessarily always related to a company's performance. Sometimes the market simply gets in a mood to sell everything that trades on above average multiples.

See the first two months of calendar 2021, for instance, or the third quarter of 2018, or the second half of 2016.

While these significant draw-downs always attract a lot of attention from media and market commentators, with the usual explanation given that the shares were simply too expensive, it's good to realise that investors suffering heavy losses is not the sole prerogative of Growth companies.

AMP. QBE Insurance. Telstra. Unibail-Rodamco-Westfield. Not to mention your typical cyclicals such as Woodside Petroleum; they have all caused shareholders serious grief and disappointment, often with losses that are far greater and with very slim prospects of getting back to old share price levels anytime soon, if ever again.

My Personal Lessons

Us humans are not naturally well-equipped to excel in the share market. Whereas your typical value investment style often requires patience, and a lot more than many have available, investing in Growth companies scares people because of the big accidents and the huge draw downs that do occur.

The extra mental barrier comes from the general misconception that Price-Earnings (PE) multiples define whether a given stock is "cheap" (thus: opportunity) or "expensive" (thus: a disaster waiting to happen).

Simply analysing CSL ((CSL)) over the past (nearly) three decades would deliver sufficient counter-evidence of this Grand Misunderstanding, but emotions get in the way, or otherwise our personal biases, the lack of understanding, insufficient in-the-market experience, the fear of suffering losses, or the inability to look beyond the here and now.

It's never a pleasant experience to see the price of your shares falling, let alone dropping like a rock. Unless you are confident and ready to pounce with a big bag of money on the sideline, but I find such ideal scenario is rather seldom a reality.

I don't consider myself your typical Growth stocks investor either. Rather, I aim to seek out those businesses that have that something special; something that makes it worthwhile to stay on board when volatility hits the share price. I don't always get it right, and I definitely don't always respond appropriately or on time.

The portfolio I manage sold out of Appen ((APX)) above $20, which is more than -50% below last year's peak, but also more than 100% above the recent low. I was lucky I sold out of Treasury Wine Estates ((TWE)) before the Chinese import duties hit the share price. I made good money out of Nanosonics ((NAN)) which the All-Weather Portfolio currently does not own. I never anticipated that CSL shares would fall as low as $245 during the post-November pullback.

On average, I find confidence in my understanding and my insights about the companies I select, and this includes their potential weaknesses as much as their competitive prowess, their business moat, the structure of the sector and the embedded corporate quality within.

Every day I learn and I read. Newspapers. Broker research. Company statements. Corporate presentations. Strategy reports. General news. Look as much for negatives as you do for positives.

The most important lesson I can pass on is to not treat investing as a game of being perfect. This is as much about learning, including from mistakes, and finding what suits you best. In the end, if something doesn't suit you, it can never grow into a comfortable fit.

To those with diversified, long-term portfolios, or the desire to build such a portfolio, I can wholeheartedly recommend thou should not dismiss the benefits and beauty of being part of some of Australia's high-quality, pre-eminent success stories. Them being out of favour is usually not a long-winded trend, as also once again proven by the fact CSL shares are grinding their way back towards $290.

See also Conviction Calls further below.

Paying subscribers can stay on top of my research into All-Weather Performers via a dedicated section on the website: https://www.fnarena.com/index.php/analysis-data/all-weather-stocks/

Here's the April update on the All-Weather Model Portfolio: https://www.fnarena.com/downloadfile.php?p=w&n=51C9C4D8-CC0D-24EC-9FE75F69E9D98B9F

Conviction Calls

Mid-year is approaching and JP Morgan is reviewing its assumptions and outlook for sectors listed on the ASX. Its healthcare update, released on Monday morning, nominates ResMed ((RMD)) as Top Pick and Nanosonics ((NAN)) as least preferred.

ResMed is chosen because of share price weakness post quarterly results release, with the new product launch of AirSense11 later in the year providing the logical next positive catalyst for the share price.

Nanosonics has fallen out of favour because it is increasingly becoming clear to JP Morgan that hospitals worldwide are cutting their spending. This shrinking of budgets, the broker worries, might slow growth for Nanosonics, even if its main device is relatively low cost.

Ongoing uncertainty about the company's new device, details unknown at this stage with potential for further delays, only adds to the broker's concerns.

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Market strategists at Macquarie warn investors should be cognisant of the fact global cyclical momentum is in the process of peaking, which loosely translates as the easy gains have been made from this recovery. From here onwards, returns might still be positive, but they will be smaller and possibly harder to achieve.

Which is why Macquarie is starting to advocate investors should return to local healthcare and staples retailing. Slowing momentum usually goes hand-in-hand with reduced risk appetite, meaning a shift towards defensives. Macquarie in particular likes CSL ((CSL)), Cochlear ((COH)), Ramsay Health Care ((RHC)), and Woolworths ((WOW)).

Strategists at Wilsons are equally in favour of adding more defensive names to investment portfolios, while pointing out the Australian share market has been rallying higher for 13 months in a row without a sizeable pullback or correction.

Wilsons likes Amcor ((AMC)), Coles ((COL)) CSL, Northern Star Resources ((NST)), Medibank Private ((MPL)), Ramsay Health Care, and Telstra ((TLS)).

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All-Weathers, EML Payments, Macquarie, And Risk

As communicated a few weeks ago, I am reviewing and revisiting the lists of companies that are mentioned across the various categories that are on display via the All-Weather Stocks section on the FNArena website.

For those who are reading this through the free email that goes out on Thursday; sorry, but this section is for paying subscribers only.

Historically, most of my amendments tend to focus on sub-categories such as Emerging New Business Models and Dividend Champions, which act as a complimentary add-on to the original concept of finding true All-Weather Performers such as TechnologyOne, REA Group, CSL, et cetera.

The fact that my specific choices regarding All-Weather Performers have remained largely unchanged over the past decade or so in essence solidifies the core-concept of my research. All-Weather Performers are rare, which is what makes them so valuable for long-term oriented investment strategies.

One of the changes I did make this month is adding EML Payments ((EML)) to the selection of New Business Models. This company has been one of the prime achievers among local fintech companies with many institutions and professional investors singing its praise, which is usually what happens when the share price keeps rallying towards new record highs, of course.

I was very well aware the recent change in overall strategy, whereby EML Payments is effectively moving into online banking, brings about added risks, but I also realised this could potentially be that success story that keeps on giving for many years into the future.

Almost immediately after I added EML Payments on the website, news broke the Irish central bank had communicated some reservations about the company's subsidiary in the country. The ultimate irony after I waited this long to include the stock. Just goes to show there is always a level of risk that simply cannot be forecast or anticipated.

It goes without saying, I have removed EML Payments from my selected list. Not necessarily because I no longer believe in this company's ability to shape a profitable future, but this is simply not the kind of uncertainty that belongs in my curated selections.

On a slightly related topic; investors are being treated with some of the finest investigative journalism through the Sydney Morning Herald and the Australian Financial Review this month.

The subject of investigation is the flopped IPO that has been Nuix ((NXL)) and the insights provided are best summarised with the scathing assessment of one of the sources quoted:

A pig was put on a dress and then sold to investors as being a princess.

Another insider quoted makes the bold prediction that Nuix will turn into the next AMP.

Macquarie Group ((MQG)) still owns 30% of Nuix's equity and will be held responsible for this debacle, one way or another. Which is doubly annoying because Macquarie has been a proud member of my small selection of Prime Growth Stories on the ASX.

Last year I was annoyed with myself for having sold out of the stock when economies locked up and borders and travel closed down as the share price recovered quicker than anyone can say Shemara Wikramanayake.

This time around, however, if Macquarie were still held in the All-Weather Portfolio, I might actually have decided to wave goodbye.

The stock has not been removed from my list, but I have serious reservations. Consider this the equivalent of a first strike against management and the corporate culture at the Silver Doughnut.

(This story was written on Monday 24th May, 2021. 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).

(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: 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/

In Weekly Insights this week:

-CSL, The Answers
-Research To Download

CSL, The Answers

By Rudi Filapek-Vandyck, Editor FNArena

Since listing in June 1994, the performance of CSL ((CSL)) has been nothing but spectacular, with the stock ultimately growing into the ASX200's largest constituent, beating the far more familiar household names of CommBank and BHP Billiton.

It took the better part of the past 2.5 decades, but Australian investors eventually warmed to Australia's largest and most successful biotech company, even though it never offered a genuine "yield" to get excited about and the valuation never looked "cheap".

But CSL performed when others couldn't, and it kept on simply doing that, until the global pandemic and calendar year 2020 arrived.

Just when it seemed nothing could ever possibly go wrong for Australia's number one business success story, it somehow did.

While the Australian share market has enjoyed one of the strongest bull markets in living memory, the CSL share price has sagged, clocking up its worst relative performance since the IPO 26 years ago.

Below is an attempt to explain the "why" behind this remarkable turn of events. More than a simple company-specific expose, it might as well be treated as an informative and educational vivisection of the share market in general, and the past twelve months specifically.

Answer #1: No More Buyers Left

Can an investment ever become too popular?

In overseas markets, particularly in the US, teams of quant analysts are regularly sifting through fund manager statements, drawing up rankings for popular ownerships in an attempt to determine which stocks are over-loved and which ones are temporarily under-owned. Such insights might prove pivotal when exploring the next trading opportunity.

The situation of CSL in Australia is somewhat different.

For most of its ASX-listed existence, the stock did not feature prominently on many active funds managers' radar. Too expensive, would be the standard response for a long while, in particular during the years of Commodities Super Cycle and strong outperformance from the Big Four major banks.

And frankly, CSL as the topic of conversation among retail investors was simply non-existent. No yield. A high valuation. A complex science and investment-based business model. Predominantly active in overseas markets.

Who in their right mind would possibly invest in it?

Meanwhile, CSL shares kept on rising through the local rankings. Member of the ASX200. Then followed the ASX100, the ASX50, the ASX20, the Top10, the Top5.

Nothing grabs the attention of investors as much as a steady and persistent outperformance, and the fact CSL grew ever more important for the local index meant the business and its share price were consistently outperforming the broader market, in particular near the top where it counts.

On my observation, things started to change in 2016, maybe 2017. Public conversation shifted from "expensive" to "you pay up for quality" and more and more investors, both professional and retail, joined the fan club.

What helped growing enthusiasm was that CSL shares kept on keeping on. First past $100, then $200, and even $300 was not a bridge too far.

By late 2019, a local survey among investors put CSL up as a must-own stock for the second year in a row. In hindsight, it was then I started to feel a little less comfortable. But, of course, as soon as markets entered 2020 and the global pandemic hit, no such doubts seemed valid with the CSL share price, true to its form and reputation, surging as high as $339.14.

What happens when everyone is on board with a guaranteed good thing? It means there are no logical buyers left when money starts shifting elsewhere. So, when parts of the investment community started to concentrate on greener pastures elsewhere, there was no money on the sideline waiting for the opportunity to get in.

In fact, that money on the sideline last year was very much looking elsewhere because the opportunities to be had were of the once-in-a-lifetime kind, leaving early safe havens and outperformers like CSL hanging high and dry.

To answer today's first question: there most definitely is a danger with having convinced the last of the sceptics, as share prices need a marginal buyer to provide natural support.

That marginal buyer was not around, or had other interests, when the CSL share price pulled back from its all-time high last year.

Answer #2: It's All Relative

Most share market analysis focuses on company specific features (bottom up) or starts with a macro view (top down), but both omit the fact that relativity is equally important in the share market, in particular during times of extraordinary circumstances and a heavily polarised asset spectrum.

Why would an investor buy into 4% yield when 5% is still on offer? Why buy into a stagnant business when plenty of growth is around? Why hold on to a falling share price when so many others are trending upwards?

The rise of CSL's popularity stems to a large degree from the fact most old economy stalwarts on the ASX were starting to be challenged in their growth path, and many local management teams (and boards) did not have a ready-to-be-executed answer or response.

Yes, the past five years have thrown up multiple tech success stories including Afterpay, Altium and Xero (sorry, New Zealand), as well as a2 Milk (sorry again), Lovisa Holdings, and Netwealth but at the top, where most institutions allocate their funds, the Australian landscape gradually turned grey and bleak.

From banks to insurers, to property developers and shopping mall owners, not to mention energy companies, utilities and miners; all revealed their weaknesses when confronted with a low growth, highly disruptive environment and only a few large cap companies in Australia managed to offer sustainable, consistent and reliable growth. CSL was one of those few.

As happens elsewhere: what becomes rare but remains in demand will receive a big reward. Hence the shift in market attitude: CSL is not expensive, it's of rare quality, and that deserves a premium.

Of course, the Big Reward came about one year ago when most stocks in the market got smashed amidst panic, forced selling and the threat of a global pandemic.

While low quality cyclicals, small caps and cash gobbling business models de-rated by -50% and more, shares like CSL found new friends who pushed up the share price onto a new all-time high.

But now that dynamic has changed and those prior castaways are offering potential growth of 50% and more, plus in some instances the return of shareholder dividends.

By now the over-ruling question has become: why holding on to a company that only offers little growth, with no yield, while I can get both in spades elsewhere? Many investors don't spend five seconds thinking about it.

Answer #3: A Parasol Or An Umbrella?

The importance of relative comparisons is firmly backed up by history. In simple terms: when it rains everybody starts looking for an umbrella, but as soon as the sun shines the race is on to secure an umbrella on the beach.

CSL is a big, sturdy, dependable umbrella that keeps us dry during times of heavy weather, but it's not a parasol.

Twelve years ago, when four years of synchronised global economic growth came to naught and disintegrated into the Global Financial Crisis, CSL shares went into the quagmire priced in the mid-$30s. It came out the other end at around the same level.

It was a truly astonishing result considering the broad market sank more than half in value, with banks and resources stocks faring a lot worse.

However, 3.5 years later CSL shares were still battling to stay above $30. Nobody wants a high-quality umbrella when the mindset is: let's go to the beach!

Answer #4: Aussie, Aussie, Aussie!

Sometimes the odds are stacked in your favour, and multiple narratives merge into one giant support for the share price, and sometimes the exact opposite happens.

Once central bankers had found a way to pull the world out of the fraudulent mess created by the US financial industry, global optimism was awakened and this pulled the Australian dollar to parity and beyond against the greenback. AUD/USD at 1.13. Remember those days?

Those were also the days that local exporters and profits derived in foreign currencies had a giant mountain to climb. No surprise, the local healthcare sector remained out of favour while the Aussie dollar enjoyed its moment in the sun. Once AUD/USD had peaked in 2012, the CSL share price started moving upwards.

Today's situation is not as extreme, but important nevertheless. AUD has quickly risen from below 0.60 to near 0.80. The move since the start of 2021 has been from circa 0.70 to, say, 0.77. That's a 10% increase. In three months.

At its lowest point two weeks ago, the CSL share price was down in excess of -13% when measured from the start of the calendar year.

Every analyst who has investigated historical correlations will confirm during times like these, CSL shares and the Aussie are very much intertwined with each other, as direct opposites.

Answer #5: My Name Is Bond, Not 007

Never witnessed anything like it before. Ever. Such was the mood of veteran asset managers and professional investors in late 2019.

Share markets, including here in Australia, had become gripped by extreme polarisation whereby winners kept on winning and laggards never seemed to attract anything but temporary attention from investors.

The result was a valuation gap most had never witnessed in their active careers. Then came the dividend cuts in Australia, followed by the global pandemic, and that relative valuation gap between winners and laggards blew out further to an extent that could not possibly be sustained.

The elastic band between Growth and Value has narrowed considerably, as should be expected, but what really got the momentum switch into acceleration was the advent of ready-to-use vaccines plus rising yields on government bonds the world around.

Before long, the global narrative morphed into "inflation is coming". Investors buy protection through energy, financials and cheaply valued cyclicals.

They reduce exposure to technology and highly priced quality and growth stocks. Again, CSL finds itself on the wrong side of market momentum.

Answer #6: Covid Is Kryptonite

Very few contest the fact CSL is one of the most successful and best managed companies on the local bourse, but just like Superman is weakened by Kryptonite, the covid-19 virus spreading throughout the USA still is preventing donors from visiting plasma collection centres and this is weighing down the global plasma industry, of which CSL remains the most efficient operator.

Because there is a lead time of approximately nine months, today's below-trend industry collection data will weigh upon growth numbers in FY22. While nobody expects the current situation to remain in place forever, the market is waiting for concrete evidence the industry is picking up.

CSL has the advantage of operating the world's second largest virus vaccine business, which is booming and thus offering a natural offset, but investors understandably want to see improvement in the largest and core part of the business.

Pre-covid, CSL was operating the largest and most efficient global network of collection centres while also investing most in additional capacity, grabbing the lion share of annual industry growth, but these advantages don't count for much when supply remains under pressure.

And so we wait. For the Biden administration to successfully roll out vaccines. For life without lockdowns. For industry collection data to signal the worst is in the past, and growth in plasma collection is returning.

Answer #7: Fear Is Stronger Than Fact

Does anyone remember when Amazon was coming to Australian shores? And how did that work out for local retailers such as JB Hi-Fi ((JBH)) and Harvey Norman ((HVN)), or for a direct local competitor such as Kogan.com ((KGN))?

The most insightful answer probably comes from Booktopia ((BKG)) which listed late last year but would never have been able to IPO in the year leading up to Amazon's arrival. Yet, here we are, with Booktopia reporting record growth and with both company management and analysts forecasting ongoing strong growth numbers for the years ahead.

Admittedly, the Booktopia share price hasn't exactly performed strongly post the initial fresh listing excitement, but there are many factors in play, and it remains early days yet to make any sort of firm judgment.

Meanwhile, JB Hi-Fi shares recently set a fresh all-time record high, while Kogan shares did so last year, and Harvey Norman -believe it or not- is finally closing in on the all-time high reached in 2007 (pre-GFC).

A similar fear has gripped parts of the investment community regarding a potential new class of drugs that might impact on sales of immunoglobulin (Ig), which is the bread and butter for the likes of Grifols in Spain, Takeda in Japan, Octapharma in Switzerland, and CSL in Australia.

Without getting lost in healthcare techno-lingo, US-based biotech argenx is currently trialling a FcRn drug for Chronic Inflammatory Demyelinating Polyneuropathy (CIDP), and showing great promise. CIDP is a rare condition with only 40,000 patients being treated annually, but it does account for circa US$3bn of the US$12.8bn of global annual Ig sales. In other words: a highly successful argenx market entrance can potentially put a big dent in the plasma industry's annual sales.

This is probably where the comparison with Amazon meets the reality of every day life inside hospitals and the healthcare industry in general. For starters, argenx is currently the front runner for this new industry but, assuming everything works out well from here onwards, a genuine competitive threat might not be seen until a number of years from today.

A recent industry study by Credit Suisse gives a successful argenx FcRn product launch a 70% chance by 2025 with an estimated peak potential of US$1.2bn in annual sales years later. This remains less than half of the current US$3bn in annual Ig sales that would be affected.

Not surprisingly, Credit Suisse analysts believe market fears about this new upcoming threat look "too pessimistic". On Credit Suisse's assessment there is no shortage in demand, hence Ig lost to FcRn will simply find a customer elsewhere.

Others have expressed similar views and forecasts, while not necessarily having conducted a similar survey of US neurologists to produce an in-depth industry report in the same fashion as Credit Suisse did. Grifols' share price since January 1st looks quite similar as CSL's.

argenx is not the sole competitor aiming to make an impact, not by the slightest. Takeda, and others, have been cranking up competition in so-called Specialty Products; high margin, strongly growing market segments. Local analysts, in response, have been scaling back their growth projections for CSL in coming years.

The bottom line remains the same, however, and this is that CSL will very much continue growing its business, profits and dividends in the years ahead, occasionally impacted or interrupted by external factors such as currencies, government policies and competition.

Which is why I believe last week's upgrade to Outperform with a twelve months price target of $315 might prove quite the pivotal event for shareholders and investors in the company.

Following their recent industry study, Credit Suisse analysts have positioned their CSL EPS forecast for FY22 -11% below market consensus, but still decided to upgrade the stock.

The difference, say the analysts, between a base case scenario for Ig sales and the bear case scenario is between 10% growth per annum and 7% growth per annum between 2025-2030.

Credit Suisse's updated projections imply CSL will report negative EPS growth in FY22, followed up by a strong, double-digit rebound in FY23. History suggests such an outcome looks but plausible. But as today's expose shows, it ain't the only factor impacting on the share price, not by a long stretch.

Research To Download

Recent research reports by Research as a Service (RaaS) that can be downloaded:

-Stealth Global Holdings ((SGI)):

https://www.fnarena.com/downloadfile.php?p=w&n=D6311338-B76B-59BC-36F8578D08B8D850

-Rent.com.au ((RNT)):

https://www.fnarena.com/downloadfile.php?p=w&n=D6493443-E334-736F-3D4B77ADAA0C0CA2

-Amaero International ((3DA)):

https://www.fnarena.com/downloadfile.php?p=w&n=D65174F7-D468-1E25-5592798BB643BC3E

(This story was written on Monday 29th March, 2021. 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).

(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: 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/

My recent story on TechnologyOne ((TNE)) has generated a number of questions from investors, both about the shares in particular ("would you be buying now?") as well as more generalised questions about portfolio maintenance and management ("when do we sell?"). Below are a number of responses combined, to share with a broader audience.

Response:

The most important lesson I have learned from years of investing in the share market is to not pressure yourself into thinking you must act now.

Speaking from my own experience over the past six years, I have learned that often taking too much action is not the most efficient way to run one's portfolio. There are always ways to manage it better, but often they only become obvious in hindsight.

I also think there is a general context to take into account. It is but prudent to act differently in say, the second half of 2018, or earlier in 2020, and now.

Let it be said: we are in a bull market.

What I tried to explain is that if I am convinced that my companies continue doing well, and thus those share prices should be a lot higher in, say, 3-5 years, how much should I worry about share price volatility in the here and now? That's the balance we all should be looking for.

If you are sitting on cash right now and you want to allocate more of it in the share market, my suggestion is you set up a plan. It starts with how much money you have, which shares you already own, and where you are going to deploy your cash. More than focusing on one or two singular stocks, I highly recommend you take a closer look at the story I wrote a few weeks ago, "Rudi’s View: Equities Portfolio For 2021" (see: Rudi's View on the website).

Longer term, you will be best off with a structured portfolio approach. I'd say start with creating the baskets of stocks that are going to make up your portfolio. Teach yourself to view the share market through the lens of the various baskets. Next thing you do is you start drawing up lists of the stocks you like to own for each basket.

When you're ready, you start paying close attention. Follow the stocks that have your attention. Wait until you feel comfortable enough to start adding. Whether you accumulate in smaller batches, or you pounce is probably dependent on how much opportunity the market gives you.

With the obvious benefit of hindsight, TechnologyOne shares near $7.50 were an absolute steal. They touched $9.50 recently, and are sliding downwards since. The All-Weather Model Portfolio owns shares, but I'd like more given I reduced my stake above $10 earlier in the year and did not buy the same amount back on the way down.

But I can be patient. I'll just wait and see, and if at some point I feel "lucky" enough, I top it up. If the share price falls after that, I still remain confident the five year outlook looks great.

There are no universal rules in this game, not that I have discovered as yet. The general context has a say as well (portfolio rotation, etc). All in all, I would describe my view on All-Weather companies such as CSL, REA, TNE, etc as these stocks are inside a continuous uptrend. Thus I ask myself the question: how much action do I need to take in the short term and how confident do I remain about that uptrending trajectory?

Some subscribers have asked me about how to judge the TechnologyOne share price in light of a lower consensus price target. I always pay attention to the finer details when it comes to consensus price targets. TechnologyOne's consensus target is depressed because Ord Minnett and UBS have much lower valuations.

It's a bull market and bond yields will remain low, even though maybe not as low as earlier in the year. Under such circumstances, I decide to take guidance from the brokers with a higher valuation, and in this particular case this provides me with a range of $9.15 to $9.99. Bell Potter has a price target of $10.

I can sense a few more story ideas for the coming year about how one can be flexible and adaptive with entry points and broker price targets. But this is one way how I currently judge the TNE share price.

I do pay attention to broker targets and the consensus, but I have also come to appreciate that sometimes certain stocks simply trade at a premium, and they will continue to do so. Look at REA Group, for example, or Fisher & Paykel Healthcare. In a general sense, I have become more comfortable with holding stocks, and not selling any, when share prices rise above targets, and rise a lot further.

Obviously, I also try to figure out why it happens. Is the market being irrational or is it anticipating more positive news? It's not always clear what exactly is happening, but it is good to remind ourselves this is a bull market, and many companies are continuing to do well.

A lot relates back to the type of companies I follow, and get to know, as well as the fact that I only allow the best of the best (CSL comes to mind) to have a larger-than-average weighting in my portfolio.

As per always, none of the above is financial advice. I am simply sharing my personal experiences and insights.

(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.)  

P.S. I - All paying members at FNArena are being reminded they can set an email alert for my Rudi's View stories. Go to My Alerts (top bar of the website) and tick the box in front of 'Rudi's View'. You will receive an email alert every time a new Rudi's View story has been published on the website. 

P.S. II - If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

FNArena is proud about its track record and past achievements: Ten Years On

Dear time-conscious investor: Share price volatility does not equal risk, and this week's All-Weather Stock proves exactly that

In this week's Weekly Insights:

-"Be Respectful Of The Past"
-Question Of The Week
-Mayday. Mayday. Website Down

By Rudi Filapek-Vandyck, Editor FNArena

"Be Respectful Of The Past"

As every battle-hardened investor knows: achieving investment return comes with acceptance of risk. In the short term, taking on a lot of risk can be extremely rewarding, but in the long run reducing risk is key for survival.

Too many investors confuse "risk" with "share price volatility". There is almost always a fundamental difference, even though the result might look similar in the short term. Admittedly, we all feel bad when our asset or portfolio takes a deep dive, but that's only a bad event when that deep dive turns into a permanent new development, which it seldom is assuming there was more than just a temporary fad behind the share price rise in the first place.

One way to reduce risk is to stay alert for potential trend reversal cum share price weakness, but investors with a longer term horizon will inevitably discover jumping on and off stocks that display share price strength, then weakness, is sub-optimal and energy-consuming under the best of circumstances, not to mention the accumulation of costs and the loss of opportunity that both eat into the total return.

Option number two is to minimise risk through one's knowledge of the company and why it is in the portfolio. The deeper the knowledge, the greater the conviction and the comfort of holding on even when the share price is temporarily no longer strongly trending  upwards. If we are really comfortable, we might even add more money in order to boost future return.

But how does one know, really? We can all make forecasts and predictions, but that's all they are: an educated stab in the dark, at best. Forecasts do not always resemble actual outcomes, and that's probably putting it mildly.

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Last week, I came across the following statement on Twitter (thanks Motley Fool):

"Successful investing requires being respectful of the past, indifferent to the present, optimistic about the future, and skeptical of salespeople."

To minimise risk, I believe sound company analysis starts with paying respect to the past. Too many investors ignore the past and simply stick with "being optimistic about the future". Works sometimes, and often for a brief moment in time only.

The past does not provide all answers, for obvious reasons: economies change, circumstances change, cycles strengthen and deflate, but there are many valid clues and indications to be had from a company's past, including whether a business can withstand tougher times, pick itself up after unforeseen misfortune, and how successful it can defend its home turf.

As a long-term investor who has the intention to stay on board for a long while, it is almost of paramount importance we suss out the solidity and the sustainability of the business, for on what else are we basing our conviction and comfort to hold on when the share price moves in the wrong direction?

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Let's start with the basic premise, derived from many years of market observations and company research: unless a company or the sector in which it operates is severely disrupted, a business that has successfully navigated through the major challenges of the past is most likely to continue doing exactly that in the future.

This is how a company's past track record can provide a whole lot of confidence about its future.

It is on this basis that I often refer to TechnologyOne ((TNE)) as "by far the highest quality software services provider listed on the ASX", or when put in a less sector-specific context, "one of the highest quality, most reliable performers in the Australian share market".

To back up those statements, let's highlight some of the key achievements and characteristics that elevate this company above the masses listed on the ASX:

-Compound annual growth in earnings per share over the past decade is 14%
-Shareholders have always received a dividend, even during the GFC and the post-2000 tech bubble burst
-Average growth in dividends is 8% per annum, including the occasional special dividend
-Company spends circa 20% of annual revenues on Research & Development
-Is currently debt-free (never had much in the first place)
-Provides mission-critical products to extremely loyal and sticky customers, including universities, local councils, hospitals, governmental departments and financial institutions
-To back up that previous statement: customer churn is less than 1% (meaning 99%-plus of more than 1200 customers remains loyal to the company)

Most importantly, company management continues to guide investors towards annual growth in the mid-teens -say a little below or above that long-term trending 14%- and it keeps delivering on that promise. As has just happened when the company released its FY20 financial performance last week.

Those numbers were marked down due to management taking additional provision for a court case that unexpectedly did not end in the company's favour (an appeal will follow). Underneath this set-back, however, a familiar picture emerges once again:

-Growth in earnings per share ex-provisioning: up 13%
-Growth in cash dividends: up 8%
-Dividend payout ratio is 65%
-Of total annual revenues, 86% is now deemed "recurring"
-Customer churn in FY20 was a measly 0.57%, having peaked for the decade at 1.31% in 2011
-The loss-making entrance into the UK market is now breaking even, with management flagging a strong pipeline ahead
-Return on Equity (RoE) is 44%
-Cash flow came out above reported profit for the year

The company is transforming from a traditional seller of on-premise software licenses to the much more flexible and advantageous Software-as-a-Service (SaaS) model through the cloud. SaaS has turned out a win-win for all parties with customers paying on average -30% less while TechnologyOne can run its business on much lower cost. Management forecasts current operational margin of circa 29% will rise to 35% in the years ahead. Only a few years ago, that margin was 21%.

Part of management's ongoing confidence is those loyal customers are now increasingly taking on board additional products and services from the company.

(Earlier this year, the company found itself under attack from a foreign short-seller whose claims have been proved misguided by last week's results. Investors who panicked and sold should not expect an apology).

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One crucial element that needs to be put in proper context is the average growth of 14% per annum.

Apart from the cold hard fact such a steady pace of growth is extremely hard to replicate and maintain, just ask management at, say, CommBank, BHP Group, Incitec Pivot, Graincorp, Hansen Technologies and the many hundreds of more ASX-listed entities, what many an investor might not realise is that, at 14% growth, this company is doubling its size every five years.

Yes, that's correct. In five years time, this company will double its annual profits for shareholders, just like it has done over the five years past, and the five years prior to that.

Question: when a company doubles in size without compromising on its profitability, what do you think will happen to its share price?

If we look back in history, we find the share price performance has strongly outperformed the growth achieved by the company. No doubt, this is partially because investors have gradually warmed towards the steady-hand performances and rewarded management for its reliability and its commendable track record.

Lower bond yields and a shift towards more technology-driven market momentum would equally have assisted, though TechnologyOne has never enjoyed a strong re-rating similar to the likes of Altium ((ALU)) or Afterpay ((APT)); its growth has been rather steady, not spectacular.

Consider the following: today the share price is trading above $9 having temporary rallied as high as $10 a few months back. Five years ago, it moved from $3 to $4.84. Five years before that the share price was yet to cross the $1 mark. Five years before that, in 2005, the share price was about -50c lower.

While those numbers look mightily impressive, and they should as they are essentially but a reflection of what this company is consistently delivering for shareholders, it is far from the total picture. What is not included in those five year share price intervals is that at times the share market did not want to know about this company. It was either too small, not sexy enough, victim of portfolio rotation, or of rising bond yields, of markets selling off, investors worrying about the future, not relying on the past, or getting freaked out in the present.

At times, and I have seen it so often I lost count, the share price lands on the radar of traders watching charts, and it gets swept up in a blaze of irrational exuberance. Other times, it got spat out and ignored because of one noisy, public conflict with the Brisbane council that ultimately was settled outside court.

Emotions here, money flows over there, with general market sentiment in the middle. It has all impacted on the share price; pushing it up, tearing it down, pushing it back up again. If anything, TechnologyOne is one prime example of why investors make a big mistake when they think all the info they need to know is in the share price, and how it moves.

Instead, they should absorb all of the above, plus some, and consider whether this is the type of All-Weather, steady performer, that would suit their portfolio, and fit in with their investment philosophy and strategy. Because one thing remains certain: that share price might not necessarily move higher tomorrow, or even next week or next month, but if earnings-per-share continue growing by 14% per annum, on average, as is the current underlying trend according to company management, then that share price of today will be a lot higher when the calendar closes on 2025.

I can think of a few scenarios that might lead to a different outcome, but management's confidence and track record certainly suggest the odds remain very much stacked in favour of TechnologyOne doubling in size again over the next five years. Which is why this company remains part of my selection of All-Weather Performers on the Australian share market, alongside other prominent members such as CSL ((CSL)), REA Group ((REA)), Woolworths ((WOW)), et cetera.

One can never be too confident what will happen to the share price at any given time, but each of these High Quality businesses has that one factor in common: over a longer period of time, the risk is very much skewed in favour of the sitting shareholder - crucial for those investors seeking long term return, and survival.

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Paying subscribers (6 and 12 months) have 24/7 access to my research and selection of All-Weather Stocks and sub-sections. For more info about the FNArena/Vested Equities All-Weather Model Portfolio, see further below or send an email to info@fnarena.com

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This is my final Weekly Insights for 2020. I expect it to resume in early February next year. On Friday, Part II will be published as Rudi's View, including one more update on Conviction Calls made by strategists and stockbrokers in Australia. I hope you all enjoyed my writings this year as much as I enjoyed researching and writing them. Best wishes and the kindest regards to you all. No doubt, 2021 will not be as straightforward as it seems today, because it seldom is. But that'll be something to tackle in the new year.

Question Of The Week

I am an old widower with some cash sitting in a bank drawing a miserly interest. I have finally been convinced that I should do something with that money that could potentially get me 5-6%. Is this possible? What does your All-Weather Portfolio return?

Response:

To obtain 5-6% on average from your cash means you must move up (a lot) higher on the risk ladder.

When 10-year government bonds offer you less than below-average inflation, and the RBA cash rate is near zero, a yield/return that is 400 or 500 basis points above these levels almost by definition implies you are taking on a lot more risk. This is definitely something you need to get straight in your perception and intentions.

Things that come to mind are government bonds from Emerging Markets and high yielding corporate bonds (credit). Before you are ready to move into those spaces, I suggest you speak to a few people with knowledge, like maybe your current financial planner, and make sure they give you an accurate picture of the risks involved.

For example, I know from a number of local investors who have ventured into corporate bonds in Australia (there are few specialised firms around) that it can be extremely hard to on-sell your bonds if, at some stage, you no longer want to own them. Most likely, you will take a haircut during the process, and only if there is a buyer out there, which is not guaranteed.

Those specialised firms will not buy these bonds off you. This is something you need to keep in mind.

A more familiar place to get return from is probably the share market. I assume you know the risks. Equities have rallied pretty hard, and overall sentiment is extremely bullish; history suggests the big corrections, or worse, nearly always happen when nobody is expecting it.

But the share market does offer you a range of options. The least risky option, I think, is through combining growth with dividends. If you get it right, you should be able to achieve the 5-6% targeted, and potentially a lot more. FNArena just published a Special Report on Smart Dividend Investing.

Another option is to buy extremely reliable, dependable and sustainable dividend payers. Irrespective of the volatility in share price, this option would provide you with 4-6% yield income per annum. As part of my research into All-Weather Stocks, I have included a small number of such options available on the ASX.

The more adventurous approach is to pick some companies that used to be reliable dividend payers, and that will recover post-2020.

You could potentially reduce your risk through broad-based ETFs, but you can never really remove the risk that comes with investing in equities.

As far as the FNArena/Vested Equities All-Weather Model Portfolio is concerned, the aim is to generate an average annual return of 7-8% after fees and the experience of the past six years has shown this is possible (it has been achieved). Around 3%-3.5% of the return stems from dividends.

I hope the above helps you in making your decision.

As per always, I am simply sharing my observations, experience and insights. Nothing in my response should be seen as financial advice.

Mayday. Mayday. Website Down

It's that dreaded feeling we are all confronted with, at some point. The electronic device is conducting a necessary software update, and then something goes wrong. Why or where exactly, nobody really knows, but we can all see it is no longer working.

FNArena was hit by a Microsoft software update gone wrong last week and the result was a website that remained non-active for much longer than we thought it would, but it did.

While we can never fully protect our service from something similar happening in the future, we are looking into ways we might be able to reduce the time it took to get the website back fully functioning and up and running again.

Meanwhile, we have added five days to all subscriptions and trials to the service. That'll hopefully compensate for the temporary inconvenience of not being able to access our wonderful website. 2020 has been an extremely eventful year, indeed.

(This story was written on Monday 23rd November, 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).

(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: 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/

Dear time-constraint investor: A shift is happening in financial markets as year-end approaches

In this week's Weekly Insights:

-Same But Different, Different But The Same
-Conviction Calls
-Question Of The Week (on All-Weathers)

By Rudi Filapek-Vandyck, Editor

Same But Different, Different But The Same

Earlier this year I wrote a story titled "The Bear Market That Changes The World". In it, I predicted further unprecedented central bank market support measures and interventions, as well as governments joining in on the act through accumulating a heavy load of additional debt.

As we all know today, those forecasts have proven accurate and as the story title suggests, it will be incredibly difficult, if not nigh impossible, to wind back the enormous mountain of debt that has been built to fight off the economic consequences from this year's global pandemic.

And this story is not over yet. Global debt is still rising, and it will continue rising as governments cannot escape the cold reality that businesses that stop operating no longer pay tax, no longer keep people in jobs and they certainly won't be making any investments needed to lift the economic recovery onto a sustainable trajectory.

Last week the Institute of International Finance reported global debt has surged by over US$15trn since 2019, reaching a new all-time record high of US$272trn-plus during the September quarter of 2020, projected to grow further to US$277trn by year-end, equal to 365% of global GDP.

Anyone who still thinks governments will finally come up with a credible path towards reducing this historic mountain of public and private debt is seriously deluding him/herself. When you're this deep down into the rabbit hole, there simply is no way back. The Rubicon has now well and truly been crossed.

How exactly this scenario plays out over the decades ahead, I don't think anyone genuinely knows, but I can confidently make one prediction: we all have to get used to the fact that debt, in its broadest concept possible, is now an integral and crucial part of governments, businesses and households for the times that lay ahead.

And the more time passes by, the more the world is changing. In a sense, that title I chose in March is misleading. This year's pandemic and societal lockdowns have not changed the world per se; they have made sure that running trends, such as accumulating debt and extreme central bank policies, have now become irreversible.

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There are many more ways in which the world is changing, and has been post-GFC, including the inner dynamics of financial markets. Negative real interest rates and government bond yields are forcing investors big and small higher up the risk ladder while the rise of passive investing, predominantly through Exchange Traded Funds, or ETFs, is equally unstoppable.

It's not easy to establish by how much both phenomena have impacted on prices and relative valuations for financial assets, but the impact itself is undeniable. Consider, for example, the market for global government bonds has traditionally been significantly larger than the size of global equities, but that gap between the two asset classes has been shrinking rapidly in recent years.

At the current pace, it is not inconceivable most of us will live through the moment that equities replace the once all-mighty bond market as the world's number one destination for superannuation and other investment funds. Will that shake things up a little? You bet it will!

Even in pre-GFC days, financial markets have always been influenced by the number and types of participants. 2020 has introduced a fresh group of share market enthusiasts: twenty- and thirty-somethings who not only helped create the fastest bear market recovery on record post-March, but who are equally contributing to the rise and rise of so-called "story-stocks".

Think Nio, China's equivalent of Tesla in the US, or, closer to home, Afterpay ((APT)).

It is not possible to determine who or what exactly influenced what and when, or how exactly. Such data are simply not available, let alone the context and insights necessary to obtain an accurate insight, but those expert voices who keep a firm eye on global liquidity might be looking into the right direction.

Investors need not look any further than recent price action in crypto currency Bitcoin which seemed to be bobbing along between US$9000 and US$12000 after having sold off in line with global equities in February and March. Since the beginning of October the price has -quite literally- exploded to the upside, by now having surged past US$18000. At the start of 2020, Bitcoin was languishing below US$8000 and only true believers seemed to still be interested.

Given its popularity among younger generations, Bitcoin's stellar come-back this year can be interpreted as the clearest sign those younger enthusiasts are making their mark. It can also be seen as the ultimate indicator for excess liquidity inside the global financial system.

Viewed from the latter's perspective, this month's stellar rise for Bitcoin bodes well for the Australian share market, and for risk assets in general. As the old adage goes: money first finds its way into financial assets before it is spent in the day-to-day economy, making the recovery happen that has been anticipated and priced-in first.

And Bitcoin, those eagle-eyed experts will assure all of us, has been preceding the next upswing for global equities on more than one occasion since its inception in 2008.

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It may not necessarily be obvious to all and sundry, but general investor sentiment has made a dramatic turn in the past few weeks.

Having kept a finger on the pulse of the Sydney property markets myself, I have witnessed the change in general dynamics whereby, at first, everyone seemed convinced property prices looked vulnerable and destined for weaker prices in 2021, thus only high quality properties were finding willing buyers at reasonable prices.

Post the latest RBA rate cut, and the (unexpected) subsequent follow-through in banks' owner occupier mortgage rates, those hesitant tyre-kickers are now driven by FOMO. Properties that couldn't attract a decent offer only weeks ago, are now flying off the shelves at prices $100k-$200k above reserve, with multiple candidate buyers bidding against each other.

All of a sudden the buzzword in Sydney is: limited stock available.

In similar vein, two-three months ago the big debate among investors seemed to have returned to how "expensive" equity markets looked in light of historical comparisons and the many risks and uncertainties ahead. That too has quickly shifted into a "more risk is good"-type of mindset.

Now, major international asset managers at the likes of Morgan Stanley, Goldman Sachs and others, are toying with the possibility of double-digit percentage gains for equities next year, on top of a firm rally into year-end. Value-stocks are priced too cheaply and most commodities are facing deficits as economic growth is expected to recover strongly after this year's steep falls.

Bitcoin's sharp resurgence is simply the most visible indicator of this sudden switch in general sentiment. The ruling narrative is that todays newfound popularity follows investors realising central bankers and governments have no other viable option than to continue to debase their fiat currencies.

It's the same narrative that can be heard among true blue gold bulls, but thus far this late in 2020 it is not benefiting the price of gold bullion. Rising US bond yields are most likely responsible for the latter. It also means excess liquidity, not that popular narrative, might well be the primary driver for Bitcoin.

Caveat emptor, as per always, but Bitcoin's rally might bode well for equities in the weeks ahead.

****

Fittingly, the latest monthly global fund manager survey by Bank of America has been labeled the most bullish survey of the year with cash levels dropping as money is flowing into equities and with growth forecasts rising fast on the back of positive news flow about vaccine candidates.

Overall, observe market strategists at BofA Securities, cash levels have now returned to below pre-covid level; 4.1% versus 4.2% in January while global growth and profit optimism is at a 20-year high. "Early stage" and "steepening yield curve" have become the two most popular expressions used.

Emerging Markets are back on the agenda. And so are energy producers.

Taking note of the general spike in market optimism, BofA Securities market strategists are keeping their attention focused on signs the last bull has put his money in the market. Markets are approaching the point BofA strategists call "Full Bull" mode. Their advice is investors should start preparing to take money off the table.

Market moves are as much about general sentiment as they are about underlying fundamentals.

****

Apart from the prospect of having at least one vaccine to beat the virus in 2021, growing investor optimism is carried by company updates beating market expectations and rising forecasts for the two years ahead.

But that's not the full story, not by a long shot.

Central banks are still keeping short-term bond yields pinned close to the zero yield level, while also guaranteeing sufficient liquidity to keep the economic recovery alive and on track, while governments continue to provide further stimulus and support. Inflation is low, though bond yields at the higher end (longer-dated) are on the rise.

The matter of inflation or not is guaranteed to remain the subject of lively debate for many years to come. Arguments on both sides of the Grand Disagreement are equally persuasive and valid. But as long as inflation remains modest, and economic growth and corporate profits continue to improve against a background of ongoing stimulus and excess liquidity, it is likely equities might be enjoying the best of all worlds in 2021.

Further fueling bullish forecasts is the realisation many a consumer has been adding additional cash to savings in 2020. What if this money is being spent next year?

While some might still offer the counter-argument that, when measured on simple Price-Earnings (PE) multiples, equity markets have seldom looked as "expensive" as today, the key offsetting argument is that, on a relative comparison between bond yields and dividend yields on share markets, equities do not look over-priced at all.

And that, as they say, is the crucial factor when investing in the share market in 2020 and beyond. You have to accept the world is changing, and keeps on changing, and this also affects how assets like equities are being valued vis-a-vis government bonds and other (yielding) assets.

Conviction Calls

A recent update on strategy sees Macquarie upping the prospect for rising bond yields in the year ahead, in particular if the news flow regarding potential vaccines to fight the global pandemic remains positive.

As a result, Macquarie strategists have implemented further adjustments to their Model Portfolio settings, adding Suncorp ((SUN)), Computershare ((CPU)) and nib Holdings ((NHF) while adding additional exposure to both Westpac ((WBC)) and ANZ Bank ((ANZ)).

Evolution Mining ((EVN)) and GPT ((GPT)) have been removed to fund these changes, while portfolio exposure to Spark Infrastructure ((SKI)), Charter Hall ((CHC)) and James Hardie ((JHX)) has been reduced.

All changes made can be explained by forecasts for higher bond yields next year.

****

Strategists at Wilsons have by now directed their Focus List towards a 60% orientation to next year's economic recovery story through list inclusions Worley ((WOR)), Santos ((STO)), Aristocrat Leisure ((ALL)), National Australia Bank ((NAB)), CommBank ((CBA)), ANZ Bank, and Aurizon Holdings ((AZJ)).

****

Model portfolio managers at stockbroker Morgans have decided in favour of a larger exposure to the beaten-down energy sector with both Santos and Woodside Petroleum ((WPL)) having been added to the Balanced Model Portfolio, while equity holdings in Rio Tinto ((RIO)) and Sonic Healthcare ((SHL)) have shrunk.

The Growth Model Portfolio sold some shares in NextDC ((NXT)), while accumulating some in a2 Milk ((A2M)) while Santos was added and exposure to Rio Tinto reduced.

Question Of The Week

FNArena receives regularly questions about the lists FNArena subscribers have access to as part of my research into All-Weather Stocks on the ASX. There appears to be some confusion about the selection of All-Weathers and related sub-selections. Below is my response to such questions last week.

I have identified exactly 20 All-Weather Stocks listed on the ASX. That selection doesn't change often, but what I do, sometimes, is shifting stocks from "Potential All-Weather" to "All-Weather" or to "All-Weather with a question mark".

That latter selection is simply me making investors aware there are some issues that might temporarily impede on this company's performance, but I am keeping it as an All-Weather. The latter is important as it indicates that whatever is creating the question mark might be temporary, or we yet have to find out whether it might be more permanent.

In the case of Ramsay Health Care, the private hospital sector has become increasingly caught out by governments not wanting to spend money, and this is squeezing the sector in many countries, including in Australia, the UK and France; all countries in which this company operates.

In Australia, Ramsay is facing the additional challenge of private health policies shrinking in total numbers, as younger people refuse to pay for older people’s costly care, creating a dog fight between health care providers and private health insurers about who will get the dirty end of the proverbial stick.

We have yet to find out whether this year’s pandemic will fundamentally change industry dynamics, as a lot will come down to government priorities post-2020.

I shouldn’t be telling you anything new about Ramsay Health Care; the above is exactly what has been reflected in the share price that hasn’t gone anywhere but sideways over the past four years. I think the outlook looks uncertain, but positive for the next, say, two years.

However, if by that time industry dynamics haven’t changed, I might remove this company from the list of All-Weather Stocks, with or without a question mark. For now, however, I am focused on the trajectory that should be ‘up’ for the foreseeable future.

There are cases where the question mark disappears and I move stocks back to All-Weather (without a question mark). One such example is Coles, together with Woolworths. Both have been listed as All-Weathers with a question mark for a while, but are now firmly back on the list of All-Weathers (no question mark).

That question mark related to Kaufland, the German discounter, who was preparing for a major expansion in Australia. This, I believed, would prove a major challenge to all grocery operators in Australia. As it turned out, Kaufland abandoned its intention and won’t be back anytime soon.

The Kaufland decision, in my view, marks a major turning point in the outlook and good fortunes of both Coles and Woolworths. Both are therefore back as an All-Weather Stock, no question mark. Instead, I have moved Wesfarmers, now without Coles, to the list of “All-Weathers with question mark”.

At the end of the day, whether any of this matters or not is completely up to the investors who pay attention to my research and my lists. And this includes myself. The FNArena-Vested Equities All-Weather Model Portfolio owns all of Ramsay Health Care, Coles and Woolworths, but not Wesfarmers.

To a large degree, this is due to personal insights and preferences. I am sure investors who own Wesfarmers shares are pretty happy about it. What counts is that no portfolio can own all the stocks listed on my selected lists. It’s about making educated and well-thought of choices.

My research into All-Weather Stocks has identified that some businesses are far more resilient than others, and this shows up during tough times and over longer periods of time. That’s the essence of my research. The selections I share through my writings and on the website are merely there as a broad guide for investors looking to build a better, more resilient portfolio. It’s there so that everyone can pick and choose at their own volition and in line with their own goals and strategy.

This is also why I don’t provide Buy recommendations, entry or exit levels, or recommended portfolio weightings. The aim is not to provide financial advice (which I am not allowed to), but to assist investors with understanding shares, the market, and the importance of portfolio construction.

The same base principles also apply to the sub-selections I included, like “Prime Growth Stories”, “Emerging New Business Models” and “Dividend Champions”. These selections are all an attempt to identify those businesses that have that little bit of “special” attached to them, which should show up, again, during tougher times and over a longer period of time.

At the risk of blowing my own trumpet, I do think share price performances for the selected stocks have, in general terms, vindicated the view that embedded business quality counts, for a lot, though not necessarily always and in the immediate moment.

I try my best communicating any updates and changes through my writings, usually as Weekly Insights. I guess the message for me to take away from your question, and other questions I receive, is that I need to update regularly, and explain my approach through 4 baskets, as well as the various lists on the website.

FNArena recently published the transcript of an interview, which I think explains it well. You can access this story via Rudi’s Views on the website: “Rudi Interviewed: Four Baskets For Equities Portfolio”.

I hope this explains it well.

(This story was written on Monday 23rd November, 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).

(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: info@fnarena.com or via the direct messaging system on the website).

****

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/

FNArena regularly receives questions about its service, content, policies, tools & data, and even about its corporate independence. The Editor shares four responses that likely carry broader interest among investors and subscribers.

It goes without saying, none of this consists of providing financial advice. It's all about sharing experience and insights with subscribers and investors.

Question #1

Question:

I am interested in subscribing to your publication. Can you please tell me your policies on:

1. Privacy

2. Licensing with the regulator in Australia

3. Investment by you or your staff in the stocks you recommend

4. Your investment interest in any organisation related to your business, for example funds managers.

Response:

I'll start off with the most important characteristic of FNArena: totally independent. The company is owned by the journalists (some of them, not all) and has no affiliation with any financial services provider.

We never on-sell or pass on details of our database, which is also communicated on our website. We don't keep details about your payments as our payment processing is outsourced, currently to PayPal. That also answers any questions about security. We are preparing to integrate another fintech for payment processing.

We have been in business for 18 years, and counting.

FNArena is officially headquartered in the UK, but we operate within the laws and regulations of both the UK and Australia as an online media company. That latter part is important as it means we do not have a license to provide financial advice, and as a media company we don't provide financial advice.

We are agnostic towards our audience and subscribers buying and selling securities and other financial instruments. If any of the staff members owns shares in a given company, this is disclosed in stories written and published.

There is no danger of front running from within, as we don't provide any service that would accommodate this. Note: we do not give Buy/Hold/Sell recommendations ourselves. Our aim is to inform and to educate. Apart from daily news stories and data updates, we have developed proprietary tools and applications that support investors who self-manage and conduct their own research.

As the Editor of FNArena, I have developed my own research focus in the Australian share market which I have labelled 'All-Weather Performers'. It is the culmination of a change in appreciation post-GFC of the fact that beyond short-term, day-to-day share price movements and volatility, the importance of corporate quality is paramount for investment strategies with a long-term focus.

We are currently in the process of adding significantly more data to our website, as well as additional content and services.

My research into All-Weather Performers has led to the birth of the All-Weather Model Portfolio which is based upon my research and underscores the importance and validity of my research and share market analysis. This Model Portfolio runs independently from the FNArena service on the website. I communicate regularly about its progress and about changes made and investment considerations.

Paid subscribers (6 and 12 months) have access to a dedicated section on the website, which also includes eBooklets and Special Reports and slides of webinars and on-stage presentations (pre-covid). My research functions as an add-on information source on top of all the data and insights provided via the FNArena website.

If we do assist in the promotion of financial products or services, it is usually done through advertising on the website or via commercial emails, but we make it abundantly clear we are solely participating as a distribution channel. No endorsements have ever been given.

Probably the most practical piece of evidence to showcase the independence under which we operate is the fact that The Australian Broker Call Report, which is one of the popular features on our website, reports on key updates and changes communicated through stockbroker research reports every morning irrespective of whether those brokers like it or not.

We think of our service as keeping the market transparent. When we think of our audience and subscribers, we think 'informed investors'.

Question #2

Question:  I am wondering where TechnologyOne ((TNE)) fits. Is it an income stock or a growth stock?

Response:

To use a company like TechnologyOne for income/dividend purposes one must have patience and let time do its magic. Assuming TechnologyOne can grow its dividends at the same pace as it has done over the past three years, which is a healthy 17% per annum, today's paltry looking 1.7% yield will become 3% in five years' time.

That's how growth combines with dividends/income and becomes a wealth & income generator for investors who can let stocks grow instead of needing instant gratification. Of course, we don't know whether 17% growth will repeat itself, but it's the principle that applies.

If you are not aware as yet, we have a dividend calculator in Stock Analysis on the website. It'll show you exactly what I have just explained. You should try it out if you intend to use growth stocks for your dividend and income planning.

Question #3 (has previously been included in Weekly Insights)
 

Question: FNArena receives regularly questions about the lists FNArena subscribers have access to as part of my research into All-Weather Stocks on the ASX. There appears to be some confusion about the selection of All-Weathers and related sub-selections. Below is my response to such questions last week.

Response:

I have identified exactly 20 All-Weather Stocks listed on the ASX. That selection doesn't change often, but what I do, sometimes, is shifting stocks from "Potential All-Weather" to "All-Weather" or to "All-Weather with a question mark".

That latter selection is simply me making investors aware there are some issues that might temporarily impede on this company's performance, but I am keeping it as an All-Weather. The latter is important as it indicates that whatever is creating the question mark might be temporary, or we yet have to find out whether it might be more permanent.

In the case of Ramsay Health Care, the private hospital sector has become increasingly caught out by governments not wanting to spend money, and this is squeezing the sector in many countries, including in Australia, the UK and France; all countries in which this company operates.

In Australia, Ramsay is facing the additional challenge of private health policies shrinking in total numbers, as younger people refuse to pay for older people’s costly care, creating a dog fight between health care providers and private health insurers about who will get the dirty end of the proverbial stick.

We have yet to find out whether this year’s pandemic will fundamentally change industry dynamics, as a lot will come down to government priorities post-2020.

I shouldn’t be telling you anything new about Ramsay Health Care; the above is exactly what has been reflected in the share price that hasn’t gone anywhere but sideways over the past four years. I think the outlook looks uncertain, but positive for the next, say, two years.

However, if by that time industry dynamics haven’t changed, I might remove this company from the list of All-Weather Stocks, with or without a question mark. For now, however, I am focused on the trajectory that should be ‘up’ for the foreseeable future.

There are cases where the question mark disappears and I move stocks back to All-Weather (without a question mark). One such example is Coles, together with Woolworths. Both have been listed as All-Weathers with a question mark for a while, but are now firmly back on the list of All-Weathers (no question mark).

That question mark related to Kaufland, the German discounter, who was preparing for a major expansion in Australia. This, I believed, would prove a major challenge to all grocery operators in Australia. As it turned out, Kaufland abandoned its intention and won’t be back anytime soon.

The Kaufland decision, in my view, marks a major turning point in the outlook and good fortunes of both Coles and Woolworths. Both are therefore back as an All-Weather Stock, no question mark. Instead, I have moved Wesfarmers, now without Coles, to the list of “All-Weathers with question mark”.

At the end of the day, whether any of this matters or not is completely up to the investors who pay attention to my research and my lists. And this includes myself. The FNArena-Vested Equities All-Weather Model Portfolio owns all of Ramsay Health Care, Coles and Woolworths, but not Wesfarmers.

To a large degree, this is due to personal insights and preferences. I am sure investors who own Wesfarmers shares are pretty happy about it. What counts is that no portfolio can own all the stocks listed on my selected lists. It’s about making educated and well-thought of choices.

My research into All-Weather Stocks has identified that some businesses are far more resilient than others, and this shows up during tough times and over longer periods of time. That’s the essence of my research. The selections I share through my writings and on the website are merely there as a broad guide for investors looking to build a better, more resilient portfolio. It’s there so that everyone can pick and choose at their own volition and in line with their own goals and strategy.

This is also why I don’t provide Buy recommendations, entry or exit levels, or recommended portfolio weightings. The aim is not to provide financial advice (which I am not allowed to), but to assist investors with understanding shares, the market, and the importance of portfolio construction.

The same base principles also apply to the sub-selections I included, like “Prime Growth Stories”, “Emerging New Business Models” and “Dividend Champions”. These selections are all an attempt to identify those businesses that have that little bit of “special” attached to them, which should show up, again, during tougher times and over a longer period of time.

At the risk of blowing my own trumpet, I do think share price performances for the selected stocks have, in general terms, vindicated the view that embedded business quality counts, for a lot, though not necessarily always and in the immediate moment.

I try my best communicating any updates and changes through my writings, usually as Weekly Insights. I guess the message for me to take away from your question, and other questions I receive, is that I need to update regularly, and explain my approach through 4 baskets, as well as the various lists on the website.

FNArena recently published the transcript of an interview, which I think explains it well. You can access this story via Rudi’s Views on the website: “Rudi Interviewed: Four Baskets For Equities Portfolio”.

Direct link: https://www.fnarena.com/index.php/2020/11/06/rudi-interviewed-four-baskets-for-equities-portfolio/

I hope this explains it well.

Question #4 ((has previously been included in Weekly Insights)

Question: Can you explain to me the significance of the 200 day moving average line in charting and the other lines involved. Which is considered the most important?

Response:

Investors and traders treat the 200 days moving average as a longer-term trend line, to give them that extra handle on what the possible outlook is for a given stock.

And continuing on that path, the 60 days or 50 days moving averages are used to gauge short term direction/sentiment/funds flows.

Here at FNArena, we long ago decided to opt for the 60 days instead of the more broadly used 50 days. Often, the difference between the two is pretty small, but at that time we took guidance from a number of experienced traders who preferred the 60 days proclaiming it was the superior trend line of the two.

Whatever your focus or preference, we only display these trend lines on price charts as a broad and general indicator for price action.

As an investor myself, I do not much pay attention to such technical tools. I find they are often as misleading as they are useful, also because I am not necessarily interested in what is happening with the share price in the immediate future.

You might want to take into account my long-term observation that technical analysis works best for low quality, small cap minnows that often lack any fundamental underpinnings. It most often fails when you’re dealing with high quality, large cap stocks.

I am sure you can draw your own conclusions from this.

(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.)  

P.S. I - All paying members at FNArena are being reminded they can set an email alert for my Rudi's View stories. Go to My Alerts (top bar of the website) and tick the box in front of 'Rudi's View'. You will receive an email alert every time a new Rudi's View story has been published on the website. 

P.S. II - If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

FNArena is proud about its track record and past achievements: Ten Years On

In early August 2020, FNArena Editor Rudi Filapek-Vandyck was interviewed by LiveWire Markets co-founder James Marley.

Below is the written transcription of that verbal exchange, corrected for typical conversational aberrations and grammatical inaccuracies.

The interview took place ahead of the August 2020 reporting season, but with Rudi explaining his five-year portfolio strategy, the core basics of his analysis, and what to look for during reporting season, FNArena believes the interview has a much longer shelf-life.

****

James Marlay:

Rudi, great to have you back on and thanks for joining us.

Rudi Filapek-Vandyck:

James, it's a pleasure to be here.

James Marlay:

You recently published an article on Livewire, titled, “My Seven Secrets to Investment Success”. And it was a distillation of a number of lessons that you picked up from running your own, the 'All-Weather Portfolio', as you call it, over the past five and a half years and we might touch on some of the performance of that in a moment.

But the first thing that stood out to me, was that quality beats valuation. Could you talk me through that view that you hold that it really is quality that outperforms valuation?

Rudi Filapek-Vandyck:

James, I can illustrate this with a very simple example. We all could have bought CSL ((CSL)) shares in the IPO in 1994, and that would have cost us $3,000.

If you held those shares until earlier this year, late last year, we would have been millionaires. So, $3,000 becomes $1 million. If you are that type of investor that keeps shares for a long time, just ask yourself how much difference would it have made that in year one or year three, or even in year five of when you are holding those shares, that your shares were temporarily overvalued? And that's essentially the long and the short of my analysis.

It basically comes down to what type of investor you are. If you are the type of investor that likes to hold shares for a really long time, then you have to realise that overvaluation is a temporary thing. As long as you have the type of company that increases in value over time and continues to find growth.

I think that's the simplest example that I can put forward. On my observation, and I am going to insult a few people now and surprise the others, my observation is if you buy cheap stocks, on many occasions these stocks only bounce temporarily.

The way I compare them is: last weekend I went to the supermarket and I saw strawberries very, very cheaply priced. I've now learned from the share market that if something is priced cheaply, there's something wrong with it.

So I turned over all the punnets of strawberries and almost every single one of them had at least one strawberry inside that had a little bit of mould to it. That instantaneously made me realise: that's why they're cheap!

In the share market, you have to ask the same question. Do you want to buy cheap strawberries that you have to eat immediately and you make sure you fish out the one with the mould? If you want to stack up your pantry with food that you don't have to eat immediately, you're better off buying good stuff, great stuff.

For quality, you pay.

It doesn't mean that you never pay attention to valuation, of course, but it does mean that when you realise that you pay up for quality, that the PE ratio is not the only measurement you pay attention to.

People know I'm a big fan of CSL and I'm a long-term investor in CSL. What stood out for me is that every time investors say, "You can't buy it, it's too expensive." And every year it goes up. So obviously, there's something wrong with that narrative.

I think the problem with that narrative is that a reliable quality performer has a price attached to it. And it's not a low PE on a single digit number.

James Marlay:

Rudi, I think there would be not many people that could hold a good argument against your CSL example. It's proven itself over a really long period of time.

I get the impression that the real frustration comes around companies with lower earnings and less proven business models. The buy now pay later is an obvious market segment to highlight, but there are others.

I'm keen to understand your distinction between a company like CSL and a company like Afterpay ((APT)), where the track records are far different and earnings profiles are not comparable.

Rudi Filapek-Vandyck:

It may be good to explain here, I'm not your typical growth investor. I'm a quality investor. But as the market evolves and, as it has transpired, because I focus on quality, I understand growth better, because I'm not looking for cheaply priced assets.

In 2015, I wrote a book titled “Change”. I thought at the time, I better be quick in getting this out, because the financial world looks forward and they are going to be all on the case in no time.

To my surprise, even today, there are hordes of investors that are paying almost no intention to the changes that are taking place in society.

The fact is when I wrote his book, five years ago, I predicted we would go through tremendous changes in society, and that those changes will have an impact on economies and on the share market.

I underestimated the changes that were going to happen. Where a lot of typical value investors have gone wrong is, they have completely ignored those tectonic changes that are taking place.

At the very least, societies are going through a transformation that is probably the biggest in hundreds of years; and even if that's not the case, it's definitely going to be the most transformative period in our lifetime.

What I discovered while doing my research is that I had to create three or four baskets of stocks in the share market.

My first basket was made up of high-quality stocks that are immune or not affected by those changes that are taking place.

Another basket are stocks that are benefiting from those changes that are taking place.

In the first basket you get the likes of CSL. In your second basket, you get the likes of Afterpay.

The third basket are reliable, solid, sustainable dividend payers. For example, you put a Waypoint REIT ((WPR)) in there, previously known as Viva Energy REIT.

The fourth basket is the one that I've been avoiding for the past decade. And those are the laggards that have to transform, that are facing headwinds and will find it increasingly difficult to maintain their profit level, their margins, and to create value for shareholders.

Those four baskets have served me incredibly well. This is what I've been trying to communicate to investors.

Low-interest rates have created an even larger gap between these baskets. That is because low-rates have benefited the quality stocks and the beneficiaries of the changes, and not stocks in basket number four.

In addition, this year we got a pandemic, which throws some complications in the mix.

In general terms, if investors had viewed the share market through those four baskets and had acted accordingly in their portfolios, they would have done much better than most have done so far.

I'm basing this from anecdotal evidence and from the rankings I see and the updates I receive from professional investors.

James Marlay:

Rudi, let's bring it into reporting season. On that note, a lot of people are talking about this reporting season, being a bit of a judgement day and the opportunity to recalibrate expectations.

Is this the inflexion point where bucket four starts to even, or make up some ground on buckets, one, two, and three and settle some of the score or are those frustrated value investors going to feel more pain?

Rudi Filapek-Vandyck:

I think they're going to be frustrated for much longer. The ruling narrative over the past two, three years from that part of the investment community was "the share market is crazy, investors are paying too much for success stories. You wait until the next recession arrives and we will have our day under the sun."

I have consistently been saying, "No, no, no, you wait until we have a recession and you will still not have your day under the sun."

Of course, what happens in a recession, and what we've seen with the pandemic this year, is that the weakest companies get carted out first. That's exactly what happened in the sell off this year.

The cheap stocks simply became a lot cheaper and a lot of the so-called expensive stocks deflated a little bit, but they were back up before you knew it.

And that's what you get in a time when you see tectonic changes taking place. Investors want to be part of the future and they don't want to be part of the laggards solely because they are cheap.

When we get out of this situation, and the exact “when” remains a big question mark, investors will face a situation like 2009, like the second half of 2012, or like the first half of 2019, when the laggard stocks, the value stocks in the market, will have their moment under the sun. But that's only half of the story.

The other half is these stocks bounce because they've fallen more in the first place. This is part of the economic recovery story, which always benefits the weaker ones and the laggards, but it's not a structural recovery story.

I think there's too much emphasis on what the Federal Reserve does on low-interest rates and on what governments do with stimulus.

We’re basically in a low growth environment and the weaker companies are finding it difficult to have consistency and reliability in their profit growth. And they're being punished for it, and they're being ignored for it.

It shouldn't be a surprise. Just like you pay up for a premium car or for a premium handbag or a premium jacket, you do pay up for premium companies in the share market.

James Marlay:

Well, let's run through a couple of the observations that I've picked up from your recent reports about the upcoming reporting season.

You've said guidance has never been more important, particularly around earnings and dividends. Can you go into some detail on that point? And where are some of the areas that you're expecting certainty?

Rudi Filapek-Vandyck:

On a general level, August 2019, a year ago, was the worst profit season we had in Australia post-GFC.

I was amazed after last year that some commentators would denominate it as “not too bad”. I thought that's fairly subjective, because from FNArena’s perspective this was the worst season we've seen.

February was very difficult to judge, because we basically had the pandemic raging through markets already, but it wasn't great. We will now see a reporting season that is a lot worse than August last year. We will probably set some (negative) records.

What investors should be prepared for is the cut in dividends will be at least double the loss in profits. That is an indication of the fact that corporate Australia was not in great shape coming into this recession.

Don't forget, corporate Australia started cutting dividends already last year. Payout ratios moving into this pandemic were way too high, including for the banks; they will come down.

So, you will get this double whammy where both the payout ratios will come down and the cash-flows will be down; the impact will be severe.

Contrary to the GFC, this will not be finished in 12 months. We will have companies who cut this year, then some will have to cut next year and then maybe also the following year. Then in the year after, we will have different companies cutting their dividends.

We are creating a context where reliability and sustainability are very precious words. They are rare, so those companies that can provide us with certainty and reliability will be rewarded for it.

To my surprise, the way the situation's panning out, one of the companies that has been quite a mixed performer is Telstra ((TLS)).

Expectations are now growing that Telstra might actually crown themselves as one of the standouts this season, for that particular reason.

They might be able to guarantee shareholders that they will have a certain payout and they won't waiver from it. Because of the current situation it might actually prove sustainable. That might, for once, create a different benchmark for Telstra.

If I could have a quick look at the USA; between one fifth or one-fourth of all the companies in the USA have given guidance, which is well below what usually happens.

About a third of those guidances has been negative. We've already seen since February those companies that are able and willing to provide the market with concrete guidance will be rewarded for it. You see that in better share price performances and investors will be on the lookout for it this year.

It all makes sense; it's about reducing your risk. The Australian share market has some standout dividend payers. Apart from Waypoint, mentioned earlier, you also have the likes of APA Group ((APA)) and APN Convenience Retail REIT ((AQR)), but also industrials like Aurizon Holdings ((AZJ)) and Amcor ((AMC)).

These are all dividends payers that are expected to continue increasing their dividend payout for not just this year, but through the years ahead.

You've also got companies like a CSL, ResMed ((RMD)), and a few others. These companies do not necessarily feature on investors’ radar because they trade on higher multiples and then the yield is not high enough for your typical income investors to go for those shares.

James Marlay:

Rudi, you also said that the market has developed a stomach for bad news, which means that bad news that you read in your report might not necessarily translate through to weak share price performance.

Put some more context around how people should be gearing themselves for bad news and trying to sort of correlate that with market reactions.

Rudi Filapek-Vandyck:

Nothing is as easy as calling a share market or a share price overvalued. We've all been doing it as a community for four years now. And every time we call a ResMed or CSL overvalued, the impact seems to be quite temporary.

The big lesson I've learnt over the years is that companies on high multiples that move on results are not usually the ones that come crashing down. It might happen temporarily, but there's not a correlation between high valuations, lower valuations and share price movements in reporting season.

You either disappoint or you don't.

Given the context at the moment, there is a general sense that, maybe, the share market has risen a little bit too far given what's coming. It's possible that investors will be on tenterhooks and become nervous. But I also think this is macro-picture related.

My observation is that for 80% or so, prior to results, the share market gets it correct. So, where ResMed is trading at is probably correct. And where GUD Holdings ((GUD)) is trading at is probably correct as well. There's quite a divergence between the two.

Too many people are calling the share market overvalued, because they actually underestimate how the share market works and the best way to illustrate this is by going back to the GFC.

Back in 2009, there was no indication whatsoever that we were going to have a quick economic recovery, yet share markets rallied from the lows in March. And they kept on rallying until early 2010.

By then they had done their dough. The share market now is trying to look forward. I think investors are largely ignoring 2020 numbers, unless the indication is that things are not quite right internally with a company. If that’s the observation, you have to revise your view.

We are dealing with two types of companies. The ones that have done well and are a beneficiary of what has been happening, like ResMed, Fisher & Paykel Healthcare ((FPH)), Afterpay, Zip Co ((Z1P)), and Carsales ((CAR)), for example.

These companies will be judged on normal metrics as per always. We put the share price at a certain level, and ask the question: how are you performing? Can we trust you that the years ahead will be okay?

The larger group of companies is trading on lower multiples. We know their numbers won't be good. But now we’re about to find out what we don't know.

These companies will have to convince us that in the year ahead, maybe in two years, profits will be back at pre-pandemic levels, hopefully.

As long as these companies can convince us, we will probably push their share price a little bit higher than where they are now. If they can't convince us, then again, these companies will become a value trap for the time being.

We can stomach bad news at this point, as long as we can keep the confidence that next year, at least in two years’ time, those companies will be in better shape.

This is also why the balance sheet and cashflow will be now very, very important. We don't care that a Qantas ((QAN)) is only having a few planes in the air, we don't care that at Sydney Airport ((SYD)), there's nothing happening.

What we do care about is: can these guys weather it out? Do they have enough cash so they can start operating normally again when things normalise?

That's another element that investors will have to pay attention to. It's not about the bad news. It's about: will they survive? Can they get back to normal?

James Marlay:

Rudi, when I looked back at our article or our interview from February, one of the things that you said, "Well, you should never be afraid to sell, and it's never too late to sell."

That was before the pandemic ripped through the global economy. So, my question to you is have you had to sell anything? Have you forced yourself, have you changed your view on anything? Is there anything in there that wasn't all-weather?

Rudi Filapek-Vandyck:

Unfortunately, there are a few I regret selling, and there are a few I'm very happy I sold. One of the reasons why my all-weather concept works so well is that we are not living through normal economic circumstances.

If you go back to late 2018, the second half of 2015 or early 2016, and before that 2011-the first half 2012, and before that 2007 until early 2009; we seem to have limited time when we have normal economic circumstances before we have these mini-crises that come along on a regular basis.

What I learned from these crises is every time you check out what hasn't performed in your portfolio, and you go through a cleansing operation. It improves the portfolio. Now, that's the theory. That's what I do every single time we go through those phases.

What I do is I chuck out, for example, a Jumbo Interactive ((JIN)), which I owned. I wasn't that confident anymore. At the moment, I'm glad I don't own it anymore. I've lots of other stocks that have done very, very well.

I've sold out of Atlas Arteria ((ALX)), for example, because I quickly established that they were not going to pay dividends and I had them in the portfolio for the dividends. So, the reason I owned them fell away.

Unfortunately, I also sold out of Macquarie ((MQG)) and that I came to regret. I thought they were in trouble. They have a lot of investments in infrastructure, including airports and the likes. I'm just as surprised as everyone else that the situation resolved quite quickly, and this quickly resulted in the share price recovering.

I can only blame myself. Macquarie would still have been a buy last week, but you get that mental barrier that builds up.

Investing is like golf. It's not about having a perfect game. It's about having a game that's good enough for your score.

Investing is the same. You will make mistakes. There will always be stocks that you would have liked in your portfolio, or that you should have sold earlier. But at the end of the day, with the stocks I own in the portfolio, I feel I could absolutely not complain in 2020 or in the years prior.

James Marlay:

Rudi, I'm going to ask you for one or two stocks in a moment that you think can deliver this reporting season. Before we do, I'm keen to hear your view on gold equities, given the level of interest that there is right now.

It's something that seems to be proving a bit of a bright spot and a good all-weather style part of the market at the moment, but doesn't seem to fit the traditional buckets that you've put in on there.

Rudi Filapek-Vandyck:

Well, I've got a surprise for you then. I approach gold as an investor and not so much as a trader or as a short-term investor. The largest holding in my portfolio this year was gold. And I'm quite happy with how that's performed.

James Marlay:

Was that directly in the commodity?

Rudi Filapek-Vandyck:

I bought an ETF. I go for gold and not for gold equities. The reason for that is I already have complications, because I'm buying gold in US dollars, so I already have the complication of the Australian dollar.

I do not need even more complications where I get individual company risk as well. Some gold stocks have performed absolutely fantastically this year and some have not. And that's the risk that I don't want in my portfolio.

You will go through times when having exposure through the share market relies on different dynamics than simply having exposure to the commodity itself.

I'm a lower risk investor. I just wanted to own gold, because of all the other stuff that was happening in the world. So early in the year, I made gold the largest holding in the portfolio. I'm not trading in and out, and I'm not seeking exposure to the share market either.

And I'm keeping my holding, by the way.

James Marlay:

Can you explain to our viewers why you've chosen to have that position denominated in US dollars?

Rudi Filapek-Vandyck:

Well, it doesn't matter whether you buy in US dollars or in Aussie dollars, because ultimately you always get the conversion risk.

It’s just my preference, ultimately, we have to buy in and sell out at some point, and conversion is always there.

I think that the major decision you have to make is do you buy gold, pure gold, or do you buy gold producers?

With the gold producers, you are taking on a different type of risk. I'm just after simple, straightforward and uncomplicated.

James Marlay:

Righty. Finishing up. Last question. Outside of CSL, which we know is your bellwether go to stock for reporting season. What are a couple of stocks that you're looking forward to reporting?

Rudi Filapek-Vandyck:

I own stocks like REA Group ((REA)), Carsales, NextDC ((NXT)), Appen ((APX)), ResMed, Fisher and Paykel Healthcare.

You can tell from that group already, that the portfolio has performed well this year. So, I'll definitely be paying attention to how well they are performing and whether I maybe should take a little bit off, or add a little bit more to those stocks.

I'm convinced that all of those I just mentioned still have a long runway of growth in front of them. It's just that I have to pay attention a little bit to the short-term dynamics.

I have other stocks, which have not necessarily shot the lights out. They're a little bit in that laggard camp, although not at extremely cheap levels. If they were, that would make me worried that something nasty might be coming up.

There are stocks which I believe are still representing good entry points, good operational prospects, et cetera. It just hasn't been priced in so far.

We're talking about stocks like an Amcor ((AMC)) and Bapcor ((BAP)). These are the ones that immediately come to mind.

I also have Orora ((ORA)), by the way, and they are definitely going through a challenging time in the United States, but they are, for the time being, going to pay more to shareholders. And that's probably going to keep their share price supported.

I also have stocks like a Ramsay Health Care ((RHC)), for example, and they're holding up quite well. And I suspect that once we're opening up in Victoria and in other regions, that they should do well.

Basically, I pay attention to all of them, because I own them and I have to make a decision whether I still want to own them post reporting season.

Again, most of those companies I own I tend to own for a longer time. The assessment I have to make is: whatever they come out with in August, is that going to be enough to keep those prospects alive for years to come?

James Marlay:

All right, Rudi, well listen, thanks for sharing your views and opening up on some of the stocks that you're holding and some of the ones that you're watching out for.

If I'm to summarise your view on reporting season, you're telling people don't expect to get too many bargains for the good stocks. You're probably going to have to pay a little bit up for those earnings.

The market is already expecting bad news, so don't be surprised if bad news doesn't see a big downside reaction. And the other thing that you're looking for is certainty.

Those companies that can provide concrete guidance about their earnings and their dividends are likely to be rewarded handsomely. Is that correct?

Rudi Filapek-Vandyck:

I think that's very correct. I think you summarised it quite nicely. Don't assume automatically that a stock that has performed well, that the only way next is down. Often there's more to come.

James Marlay:

Okay, great. Rudi, thanks for jumping on the call.

(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.)  

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FNArena is proud about its track record and past achievements: Ten Years On

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).

(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: info@fnarena.com or via the direct messaging system on the website).

****

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/