Tag Archives: All-Weather Stock

Rudi’s View: All-Weather Portfolio, Charts & Conviction Calls

In this week's Weekly Insights (this is Part Two):

-In Search Of 'Value', Avoiding 'Cheap Junk'
-All-Weather Portfolio Update
-Unveiling The US Corporate 'Secret' - Three Charts
-Conviction Calls
-Rudi Talks
-Rudi On Tour
-Rudi Talks

All-Weather Portfolio Update

By Rudi Filapek-Vandyck, Editor FNArena

It only took one highly unusual race at the Winter Olympics of 2002 for Australian Steven Bradbury to become a colloquial reference in modern day language.

Just type in Steven in Google search and it is the second suggestion that pops up. No additional info required.

Bradbury has become synonymous for the unexpected victor, the result that nobody expected, the win that is achieved through external and uncontrollable circumstances; when Dame Fortuna smiles upon you and luck is blatantly on your side.

Having read about how the final cricket world cup contest was decided between England and New Zealand, or the Wimbledon tennis final between Novak Djokovic and Roger Federer, I think maybe it's time we also developed a quick reference for playing the game of your life, and still ending up losing by the narrowest of margin at the final finish line.

The thought came to my mind even before both sporting finals had come to their conclusion, when I was doing the sums and calculations for the All-Weather Model Portfolio at the close of mid-2019. In isolation, the Portfolio experienced its best performance over a six months period since its launch in late 2014.

But, really, a return in excess of 13% (before fees) looks rather pale when the ASX200 Accumulation index achieves nearly 20% over the same period. Enter the New Zealand cricket team, and Roger Federer who's understandably taking a full month's rest from tennis.

Below is an overview of how the Portfolio has performed over the past twelve months. Last week, I shared some of my analysis as to why the index outperformed the Portfolio with stocks like Amcor, CSL, REA Group and TechnologyOne, but also Reliance Worldwide, Link Administration, Bapcor and Orora.

See also "Do I Have A Few Surprises For (Most Of) You" https://www.fnarena.com/index.php/2019/07/04/do-i-have-a-few-surprises-for-most-of-you/

And also: https://www.fnarena.com/index.php/2019/07/17/smsfundamentals-10-reasons-why-many-fund-managers-are-now-blank-spaces/

The news about active managers versus passive investment returns has taken another negative bend, according to data supplied by Chant West.

As reported in the Australian Financial Review on Thursday, the two best performing growth funds in Australia, QSuper Balanced and UniSuper Balanced, have achieved returns of 9.9% for the financial year ending on June 30th (FY19).

S&P/ASX 300 Index returned 11.4% over the period while the S&P/ASX 200 Index returned 11.5%. In line with my own observations, the ASX50 performed best, while small cap indices barely managed to return a positive result.

Equally typical for this year's market dynamics, data released by Mercer revealed the Martin Currie Australia Real Income Fund was the best performing over the year with a total return of 18.8% before fees. According to Mercer, the median manager among 134 strategies measured in the Australian shares category delivered a 9% return before fees.

At the bottom of Mercer's total return rankings we find Forager Australian Value with a loss of -18.8%. Next sits Bennelong Concentrated's -6.4% loss. Remarkable, because at the end of the prior financial year Bennelong had ranked the second-best Australian strategy with a 33% gain.

Not all funds are ranked and monitored by Chant West or Mercer. The worst result spotted by FNArena is -20.6%.

Unveiling The US Corporate 'Secret' - Three Charts

For many years, investors in Australia have marveled at the continuous up-trend in US equities carried by what seemed a superior class of corporate entities run by a superior class of business leaders, managing to grow profits for shareholders, year-in, year-out, year after year after year, irrespective of how high the US dollar or how low US Bond yields.

But maybe there is a lot more to this story than meets the lazy eye from far-away Australia?

Glushkin Sheff's Chief economist and strategist, David Rosenberg, always keen to highlight the finer details most bullish commentators elsewhere prefer to ignore, included the three charts below in his daily market commentary last week, and at the very least the three charts combined should answer a large number of questions, while raising a few more.

Consider, for a few seconds, that contrary to bullish market sentiment in the USA, and that one President that cannot get enough of new record highs, the fact that corporate profits, without accountancy adjustments or divided by outstanding shareholders capital, has largely remained stagnant since 2013.

Yes, correct. Stagnant. Similar to what essentially has occurred with corporate profits in Australia over the past six years. See chart number one below.

So how can we explain the American growth numbers that have been supporting this extended bull market? Charts number two and three provide a rather incisive look-in.

Corporate debt (chart number three) has steadily risen to all-time highs and chart number two suggests businesses have been using the additional balance sheet leverage on the back of the historically low cost of debt, to buy in ever more shares.

Anno 2019, the total number of outstanding equities in the US has fallen to a 19-year low (chart number two).

Basic economic theory teaches us that growing demand combined with falling supply equals rising prices, and that's exactly what US share markets have experienced over the past six years.

But these three charts combined also reveal how important the fall in bond yields and ongoing support from the Federal Reserve have been to keep this positive growth story alive.

MST Marquee investment strategist Hasan Tevfik, prior employed by Credit Suisse for many years, points out equity markets are shrinking in the US, Europe, New Zealand and this year also in Australia.

Tevfik predicts that, because of the exceptionally low cost of debt, de-equitisation is like to stay with us for longer. While this might work to the benefit of investors, it does make for an awfully challenging backdrop for business models that are leveraged to expanding volumes and expanding equities supply.

The once almighty Deutsche Bank earlier this month decided to quit trading equities. Tevfik predicts more of such decisions are in the pipeline worldwide.

I am fully aware that the title mentions three charts and one extra will exceed that number, but I nevertheless thought it apt to add the one below, published by economists at National Australia Bank on Thursday morning, as a reminder of how US equities have mostly outperformed just about every other equity market around the globe.

It's not just you, Australia.

Conviction Calls

On Wall Street, Morgan Stanley equity strategist Michael Wilson (and the rest of the strategy team) stand above the crowd in that the investment bankers' view on the outlook for equities hasn't changed in 18 months.

That view is that US equities are now capped inside a rather large trading range in between 2400 on the downside and 3000 at the upper end of the range.

Back in January last year (2018) when the S&P500 index surged towards 3000 for the first time, Morgan Stanley strategists warned their clientele to prepare for a multi-year consolidation period. As we know now, US equities sold off subsequently, then made a gradual come-back to again stare at 3000 within reach by September.

After that came the Big Sell-off, as I am sure we all still remember.

By late December, the S&P500 had fallen to around 2350 which, strictly taken, is below the 2400 suggested bottom but what are 50 points between friends, n'est-ce pas?

Approximately seven months of upwards and onwards rallying has now put the S&P500 back near the top end of the suggested range. The index last week rose slightly beyond the 3000 level.

And yet, Morgan Stanley's view has not changed. The decline in interest rates has made US stocks more attractive, acknowledges strategist Wilson in his latest market update, which largely explains why the US index is back near the top of the trading range, but the fundamentals underneath the rally have weakened considerably.

Investors should prepare for disappointment which shall pull back the S&P500 from its current lofty high, warns Wilson. Both corporate earnings and economic growth are on his assessment most likely to disappoint from here onwards. Market consensus still sees a significant resurgence into 2020, but Morgan Stanley remains of the view those expectations will be proven too optimistic.

To be continued, without a doubt.

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Sector updates are usually heavily dominated by relative valuations, and the latest update by stockbroker Morgans on local insurers and diversified financials is no exception.

Having marked-to market for all sector members under coverage, Morgans lined up its sector favourites in order of preference, and relative valuation shines through like a full moon on a stormy, dark night in Cornwall. Never been to Cornwall, but that's how I imagine it, and it sounds kinda funky.

The order of preference for investors seeking access to this sector is thus Link Administration ((LNK)) first, followed by Kina Securities ((KSL)), Afterpay Touch ((APT)), QBE Insurance ((QBE)), Zip Co ((Z1P)) and Suncorp Group ((SUN)). Other names missing on that list, such as Computershare or Perpetual, are rated Hold with one exception: the local stock exchange ASX ((ASX)) carries the sole Reduce rating due to elevated valuation.

Equally noteworthy: Morgans analysts believe the risk during reporting season for this particular sector remains to the downside; if not in actual released results, than potentially via forward guidance. Health insurers are seen as the exception.

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Sector analysts at Citi have a different take on things. Number one observation is there are no Buy ratings left for the sector at Citi.

This does not stop the Citi team for putting together a ranking order in terms of preference, but investors should note: most stocks mentioned are rated Neutral, with the exception of ASX and IOOF Holdings ((IFL)).

Citi's order of preference is Janus Henderson ((JHG)) on top, followed by Computershare ((CPU)), Challenger ((CGF)), Link Administration, Perpetual ((PPT)), then ASX and IFL.

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One most interesting High Conviction Call was released by CLSA analysts Richard Barwick and Mark Wade this week.

Interesting because, as one industry observer put it, "amazing there's still research coming out of there". For those not up to date: US competitor Jefferies has raided the CLSA office luring the core of the Australian operations over (probably offering a lot more money) and market rumour has it talks are continuing with what used to be the local equities team at Deutsche Bank, but no concrete result has been announced thus far.

Apparently, the ex-Deutsche Bank team is trying to stay together. Meanwhile, a number of industry predators are trying to cherry pick their preferred candidates. It truly is a dog-eat-dog world in equities.

Back to CLSA. This week's High Conviction Call was equally interesting because it involves Treasury Wine Estates ((TWE)), of which the share price has been failing to keep any momentum going with market speculation rife distributors are left with excess inventories in China, which must, if accurate, at some stage create a painful bottleneck for the company.

CLSA analysts toured through China, spoke with 45 wine distributors locally, of which 30 distribute Treasury Wine produce, and they have found no indications there is any truth behind the market speculation.

Instead, CLSA reports Penfolds continues to perform well, with Rawson's Retreat a distant second. US based Beringer is doing it tough because of tariffs. Forget about all the other brands in the portfolio: these are the only ones that measure in China.

Chinese consumers continue to love French wine the most, further underpinning Treasury Wine Estates' strategy to develop its own French brand under the label of Maison de Grand Esprit.

Most importantly, management is still aiming at increasing the company's distribution foot print in China by 50% over the next three years. This, CLSA explains, simplistically translates into roughly 15% growth per annum.

On the basis of these fresh on-the-ground insights, CLSA suggests Treasury Wine Estates shares could well present themselves as a huge opportunity in August. Price target is $23 (unchanged). Rating: High Conviction Buy.

Rudi Talks

Audio interview on Wednesday:

https://www.youtube.com/watch?v=BTmBz-IC8JA

Rudi On Tour In 2019

-AIA National Conference, Gold Coast, Qld, 28-31 July
-AIA and ASA, Perth, WA, October 1

(This story was written on Monday and Tuesday 15th & 16th July 2019. 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. Part two follows on Friday).

(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).

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

Rudi’s View: Afterpay Touch, Nearmap, And a2 Milk

In this week's Weekly Insights (this is Part Two):

-This Too Shall Pass
-The Other Story About Small Caps
-Afraid About Growth: Nearmap
-Who Invests In Negative Yielding Bonds?
-Conviction Calls
-Rudi In The Australian
-Rudi On Tour
-Rudi Talks

The Other Story About Small Caps

By Rudi Filapek-Vandyck, Editor FNArena

This truly deserves a dedicated story, based upon more detailed in-depth research, but for now I have to restrict myself to merely pointing out one of my pet observations from the past 17 years: small cap investments can generate large, above average returns, but on average, small caps do not outperform in Australia, despite the fact this is convincingly the case in overseas markets like the USA.

On my non-researched hunches, factors in play locally are smaller average company size (what is mid-cap in Australia is merely small cap in the USA), more mining companies and explorers, different dynamics as Australia is a much smaller economy, and, equally important, a much smaller share market with limited liquidity, in particular during times of economic stress. I have a suspicion the big overweight in local indices towards large banks and resources also plays a role.

Whatever the case, investors shouldn't automatically assume there are no outsized gains to be achieved from large cap names in Australia, with the smaller end of the share market the automatic magnet for investors looking for large upside on offer. The statistics, however, tell a different story.

Below is a recent chart I picked up from Colonial First State. I'd wager the big gap in performance between the Top100 in Australia and the tiddly piddly small cap stocks grouped together in the Small Ordinaries has as much to do with CSL, Brambles, REA Group, the banks, iron ore and Telstra as it has to do with the unusually strong performance for Goodman Group and Transurban and the likes, plus the fact that the investment sweet spot in Australia is situated in between positions 51 and 100 of the ASX200.

For those not familiar with the composition and rankings of the ASX200, the aforementioned sweet spot includes names such as Xero, Fisher & Paykel Healthcare, Magellan Financial, WiseTech Global, ResMed, Afterpay Touch, IDP Education, and many other fast growing upcomers. These have been the little engine that could for the Australian share market for a long time now.

In the USA, each of these names would be part of the small caps index. In Australia, all are part of the ASX100, which is outside the typical hunting ground for small cap funds managers.

The second chart, from Ord Minnett, provides more detail into how small caps in Australia performed throughout fiscal 2019.

Afraid About Growth: Nearmap

Australian investors are not used to dealing with structural growth companies. Hence why the likes of CSL and REA Group do not feature prominently in most investment portfolios (while they most definitely should).

To make matters worse, the general idea that buying cheap looking stocks -otherwise referred to as "value investing"- is the only viable methodology for long term investors, instills the fear of God into many an investor when confronted with rapidly growing success stories including a2 Milk, Pro Medicus, and Afterpay Touch.

Assisted by hopelessly misguided narratives such as "stocks cannot continue to trade above a Price Earnings Ratio (PE) of 15x", the usual response is to criticise from the sidelines and await for the share price to tumble. I have had quite the exchanges via Twitter over the years past!

And, of course, while it is correct to point out the disasters that awaited shareholders in, say, BWX and Speedcast International, it is equally correct to point out that large gains have been made by staying on the shareholders register of the stocks I mentioned earlier, plus many more!

It goes without saying, ever since my own research into All-Weather Performers and in particular since the publication of my book "Change. Investing in a Low Growth World" (2015), I have been genuinely surprised by how deeply engrained the belief about buying cheap looking stocks is as the only sensible investment strategy, despite the accumulating evidence that most cheaply priced stocks are not participating in the bull market for very good reasons.

Yes, I know, the generalisation is over the top as some cheap looking stocks successfully turn around and become highly profitable investments for multiple years after. But here's a personal observation I believe can withstand the test of closer scrutiny: I am convinced more money gets lost every year in the Australian share market through investors trying to pick bottoms, turnarounds and cheap looking stocks in general, than on the other side of the ledger where growth stories occasionally experience a hiccup.

The decade-long outperformance of Growth over Value (in the US. In Australia the story is only six-seven years old) is not pure coincidence, and neither do I believe it is simply cyclical as some experts have been arguing. I believe it is as much the result of a thoroughly changing world as is president Trump inside the White House.

And, yes, I agree it is most likely that Growth stocks will ultimately end up being priced too expensively, potentially into stratospheric valuations, but good luck with trying to time that story. Meanwhile, many among today's laggards will simply remain that, laggards. They'll never catch up, and if occasionally they do, it is highly unlikely to last.

Which takes me to a recent conversation I had after my presentation to members and guests of the Australian Investors Association (AIA) in Adelaide. As has become pretty standard, my presentations contain lots of charts and statements like you just have been reading in prior paragraphs.

With part of the crowd gathering around me, firing away questions about how much growth can this or that company possibly still have up its sleeve and why another company cannot get its share price moving away from the bottom, one statement was thrown at me about Nearmap ((NEA)) by someone who said he had a long career inside the industry.

Here is where things get genuinely interesting. Why do you think the share price is in a bubble, I responded, other than that the share price has doubled this year, which is no evidence at all, believe it or not?

The answer came swiftly: the company is trying to replicate its success in the USA, but over there it has to deal with much larger and better equipped competitors. It's only a matter of time before investors in Australia come to realise this!

My response: the fault in your thinking is that Nearmap needs to take the whole of the American market. It doesn't. Do you know what A2 Milk's market share in China is? It's less than 3%. Have you looked at what achieving 3% in China has done to the A2 Milk share price?

Currently analysts are excited about A2 Milk's growth prospects in North America. A recent report by UBS projected A2 Milk's US market share to grow to 2% in the years to come. That's even less than the 3% in China. Watch what happens if Nearmap successfully builds out a network of loyal customers in America. You won't recognise the share price, irrespective of the gains already booked this year.

And this, as they say, is the crux of investing in small cap growth stories. They start from nothing, so everything looks promising and exciting in the early stages, but success does not come only by wrapping up the whole wide world and growing into the next Facebook or Alphabet or Amazon. Accountancy software provider Xero will never be the sole standard for its industry in every single country. It cannot even achieve that status here in Australia. The same principle applies to Altium, and to Nanosonics, and to Appen, and to WiseTech Global, and a number of others.

The Australian share market has become the home ground for some extremely exciting growth stories, with lots of potential left for the next decade, but the main danger is many an investor will not benefit because he/she is afraid of PEs above 15x, the absence of a high yield, or this idea that Australian companies simply can never achieve success for long when venturing overseas.

The latter might be true upon reflection about how Foster's had to withdraw from China, how QBE Insurance lost billions overseas, while nobody has forgotten about National Australia Bank, or Telstra, or Wesfarmers.

The other side of this story is that high quality, well managed companies starting life in Australia have been extremely successful overseas for many decades. From News Corp, to Computershare, to Westfield, ResMed, Cochlear, and the two resources giants, BHP Group and Rio Tinto.

Carried by the increasing digitisation of the global economy, local growth stories such as Nanosonics, Appen and WiseTech Global are ready to potentially add the next chapter. And yes, Nearmap is part of the burgeoning new generation of Australian businesses as well.

Is ultimate success guaranteed? Of course not! But neither is failure. And that is the long and the short of this story.

Earlier in the year I launched the CSL Challenge (click here) -most likely the most successful growth story in the Australian share market of our generation. Apart from finally pulling investors on board of this tremendous success story, I remain of the view that observing, studying and learning from CSL will prove an invaluable asset for most investors.

If anything, it'll help understand what makes an exceptional company, with the ability to apply such insights when selecting emerging growth stories, plus it also cures the fear of owning shares trading on a PE higher than 15x. Honestly, I cannot even remember the last time CSL traded on a PE of 15X or lower.

As anyone can see from the historic price chart for the CSL share price, that hasn't stopped this large cap champion from pampering loyal shareholders with plenty of above average returns over a very long horizon. It is never too late to join the CSL Challenge, or to start researching local growth stories.

It is my intention to update the various lists that make up the All-Weather Performers section on the website, as well as write up the next update for the CSL Challenge. Thus far this year time has run ahead of my intentions, and with the August reporting season looming, as well as the annual conference of the Australian Investors Association, both updates are most likely to occur in September.

The next update will see Nearmap included in the selection of Emerging New Business Models. The stock has recently been added to the All-Weather Model Portfolio.

To read up on and join the CSL Challenge:

https://www.fnarena.com/index.php/2019/01/14/rudis-view-join-the-csl-challenge/

Conviction Calls

Ord Minnett has removed Afterpay Touch ((APT)) from its Best Stock Ideas. The reason? An increase in competitive threat now that Visa has announced its intention to also move into the buy-now, pay-later arena. The analysts note Afterpay Touch had become a Conviction Buy in January 2018 and generated a return of no less than 217% over the period.

Ord Minnett's list of conviction calls consists of four sub categories. Below are the remaining names for each of the four sub-divisions:

Core Blue Chip:
-ANZ Bank ((ANZ))
-APA Group ((APA))
-CSL ((CSL))
-GPT Group ((GPT))
-Oil Search ((OSH))
-Rio Tinto ((RIO))
-Sonic Healthcare ((SHL))

Value/Income
-AusNet ((AST))
-Charter Hall Long WALE REIT ((CLW))
-Event Hospitality and Entertainment ((EVT))
-National Australia Bank ((NAB))
-Perpetual ((PPT))

Growth
-Ansell ((ANN))
-Aristocrat Leisure ((ALL))
-Boral ((BLD))
-Charter Hall ((CHC))
-QBE Insurance ((QBE))
-ResMed ((RMD))
-WorleyParsons ((WOR))

Small Caps
-Alliance Aviation Services ((AQZ))
-Austal ((ASB))
-Clover ((CLV))
-Hub24 ((HUB))
-Integral Diagnostics ((IDX))
-Pacific Current Group ((PAC))
-Service Stream ((SSM))
-Viva Energy REIT ((VVR))

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Also, the Equity Strategy Portfolio at Macquarie has traded in Treasury Wine Estates ((TWE)) for A2 Milk ((A2M)) while also preferring defensive exposures that are not so much reliant upon bond yields continuing to move lower.

Macquarie thinks typical bond proxies have done more than their dough in recent months and likely to underperform from here onwards.

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Portfolio managers at Baillieu have been making a number of adjustments post mid-year re-assessments. This has led to buying more shares in Milton Corp ((MLT)) and selling out of Monadelphous ((MND)) and Vocus Group ((VOC)), while reducing exposure to Macquarie Group ((MQG)).

Their peers at stockbroker Morgans have been topping up on Oil Search ((OSH)) and on Telstra ((TLS)), while reducing exposure to Aristocrat Leisure ((ALL)) and People Infrastructure ((PPE)).

Rudi In The Australian

My recent story on Australian gold producers got picked up by The Australian newspaper to lead the Wealth section on July 2nd.

Unfortunately, the times when I was able to include a direct link to my story are well and truly past - News Ltd likes to keep its content behind a stringent pay wall.

For those who missed the story, there is always the opportunity to still read the story via the FNArena website:

https://www.fnarena.com/index.php/2019/06/28/which-gold-stocks/

Rudi Talks

Audio interview on Wednesday about how much central bankers are invested in today's financial markets, and how far exactly is this going to take them:

https://www.youtube.com/watch?v=wFktIuKZji4

Rudi On Tour In 2019

-AIA National Conference, Gold Coast, Qld, 28-31 July
-AIA and ASA, Perth, WA, October 1

(This story was written on Monday and Tuesday 8th & 9th July 2019. 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. Part two follows on Friday).

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- 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.
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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

Do I Have A Few Surprises For (Most Of) You!

In this week's Weekly Insights (published in two parts):

-Do I Have A Few Surprises For (Most Of) You!
-M&A Is Back; Who's The Next Target?
-Conviction Calls
-Three Charts To Mark Mid-2019
-Caveat Emptor: Retail Landlords
-Rudi On Tour
-Rudi Talks

Do I Have A Few Surprises For (Most Of) You!

By Rudi Filapek-Vandyck, Editor FNArena

The first six months of calendar 2019 have again superbly proved as to why this equities bull market has been dubbed "the most hated in history".

At face value, equity markets have rallied by up to 20% suggesting making money from asset price inflation via the share market has seldom been easier for investors, but a closer look reveals nothing could be further from the truth.

Imagine an investment portfolio consisting of Adelaide Brighton, Bank of Queensland, Challenger, Caltex Australia, Domino's Pizza, Flight Centre, Link Administration, Pendal Group (the old BT Investments), South32 and the old Westfield, now Unibail-Rodamco-Westfield.

An equal weighted portfolio of these ten household names in Australia generated a negative return of nearly -10% between January 1 and June 28. That's ex-dividends, but the average yield from the portfolio cannot fully compensate for the erosion in capital values. Besides, the ASX200 Accumulation index is up nearly 20% over the same period.

And that's assuming investors venturing into some of the riskier stocks on the ASX haven't been caught out by disasters experienced by Syrah Resources (down -39%) or Wagners (-42%) or Bionomics (-72%), and numerous others.

Many a self-managing investor has portfolio exposure to the big four banks, large resources and energy producers, as well as Telstra, Woolworths, and Wesfarmers-Coles. They don't necessarily need to compare their performance with a benchmark, so they most likely are feeling happy with the Big Bounce post the Grand Sell-Off during the closing months of 2018. In particular if they also managed to pick up some additional gains from smaller cap highflyers such as Afterpay Touch, Austal and Credit Corp.

For professional fund managers, however, the scenarios for share markets in 2018 and the first half of 2019 have made beating the index an extremely tough challenge; indications are most have continued to underperform. This, mind you, at a time when ETF providers offer ever cheaper alternatives and most retail investors would feel emboldened about their own talent and capabilities too.

It should thus be no surprise that, with the notable exception of Magellan Financial ((MFG)), most listed asset managers have been relegated to the basket of consistent underperformers on the ASX, with shares in Janus Henderson ((JHG)), Platinum Asset Management ((PTM)), Elanor Investors Group ((ENN)), K2 Asset Management ((KAM)), Pinnacle Investment Management ((PNI)), and others overwhelmingly in the doghouse at a time when most investors feel like celebrating.

Internationally, the first signals are becoming apparent the industry of actively managed investment funds is ripe for consolidation, or otherwise a shake-out. Locally, all major banks with exception of Westpac ((WBC)) have unveiled plans to divest their wealth management operations, while Magellan Financial acquiring Airlie Funds Management and Ellerston Capital acquiring Morphic Asset Management are but two early indications the industry locally is equally facing major transformation in the years ahead.

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But why exactly is it that most active managers cannot beat their benchmark?

One narrative that has been going around recently is that investor exuberance is largely to blame. With stocks like Afterpay Touch ((APT)), Appen ((APX)) and other smaller cap technology stocks up 100% and more in the space of only a few months, the narrative goes that institutional investors cannot own these stocks as they are trading on valuations that can never be justified, and with these kinds of share price gains, it makes beating the index a near impossible task.

Sounds plausible, yes? Except that it doesn't stand up to the test of deeper analysis.

Everyone familiar with the major indices in Australia is aware that Financials make up more than 30% of the ASX200 (of which the Big Four Banks more than 20%) while Materials + Energy adds another 23%. Combined these sectors represent more than 50% of the index. Add a few extra large cap names such as Macquarie Group, CSL, Telstra, Woolworths and Wesfarmers and the index representation rises above 66%.

In most years, underperforming or outperforming against the index is determined by how these large cap stocks perform versus exposure in investment portfolios.

But let's first tackle the misguided narrative mentioned earlier.

The WAAAX stocks as a group, comprising of WiseTech Global, Afterpay Touch, Appen, Altium, and Xero, represent a total index weight of 1.58% as of June 1st. The average gain from these five stocks is a smidgen over 80%. However, Fortescue Metals ((FMG)) alone weighs 1.35% and its shares went up by more than 117%. Plus Fortescue pays a big dividend and the WAAAX stocks don't.

In other words: Fortescue Metals shares have contributed more to the index gains than all of the WAAAX stocks combined. That's one myth gone.

This example does, however, further highlight one of the key characteristics of the local share market in recent years: the internal polarisation is enormous. The gap between winners and losers is extremely wide and both baskets contain plenty of household names each. It makes outperforming the index not only a case of picking enough winners; it's equally about avoiding the losers (see also portfolio mentioned at the beginning of this story).

This, of course, is more easily done with the advantage of hindsight. With most professional funds managers in Australia practicing a value-oriented approach, owning share market disappointments is pretty much par for the course. This year in particular, as corporate profit warnings have come out in large numbers throughout May and June.

Making matters worse, most managers have been running their funds with larger-than-usual allocations to cash and, certainly up until recently, an underweight exposure to the banks. The latter has proved unequivocally beneficial in years past as the banks underperformed the broader share market. In 2019, however, the banks have staged a notable come-back on the back of a surprise Labor election loss and the promise of RBA rate cuts.

And yet, for the six months to June 30th, the performance for the banks has not kept up with the ASX200 Accumulation index. Even if we exclude National Australia Bank ((NAB)), lagging once again, the Big Four Banks combined, and including above-average dividends, slightly underperformed the index.

Which leaves us with large cap resources stocks. BHP Group ((BHP)) shares added 21%-plus ex-dividend, which is better than the index, but Rio Tinto ((RIO)) rallied 32% ex dividend and shares in Fortescue, as mentioned, more than doubled. In the Energy sector, Woodside Petroleum ((WPL)) narrowly underperformed the index including dividend, but Santos ((STO)) shares went up by 29.43%.

What these numbers show is that underperforming or outperforming the local index over the past six months has been determined by a few large cap stocks only. In particular if we consider that Woolworths and Wesfarmers equally did not keep up with the index. In their place, large cap names Amcor ((AMC)), Brambles ((BXB)) and Telstra ((TLS)) -probably best described as "come back stocks"- all posted stronger than average gains.

Add Aristocrat Leisure ((ALL)) -up 43% ex-dividend, Goodman Group ((GMG)) -up 37% ex-div, Transurban ((TCL)) -up 25.5% ex-div- and Newcrest Mining ((NCM)) -up 51% ex-div- and it is clear most of the strong index gains this year occurred on the shoulders of no more than ten large cap stocks in Australia.

The most outstanding themes have been iron ore, gold, lower interest rates and bond yields, and structural growth stories in the case of Aristocrat Leisure, Goodman Group and the WAAAX companies. At the same time, less confidence and more investor caution has swung the market pendulum heavily back in favour of the large caps, both here as well as internationally.

Note, for example, the Small Ordinaries index barely scraped in a positive return for full financial year 2019, and only if we include paid dividends, for a total return of 1.92%. Over the past six months, the Small Ordinaries' total return was 16.81%. The Top 20 gained 26.72% ex-dividends. CSL too performed strongly, but equally could not match the index. Scentre Group ((SCG)) is responsible for the sole negative performance among Top 20 stocks.

The negative performance for stocks including Scentre Group and UR-Westfield contrasts sharply with the market beating performances for Goodman Group and Transurban. In prior times, all four would have been considered beneficiaries of lower bond yields. This time around, however, investors are excluding the structural challenges from online competition and household budgets under pressure, testing the patience -and frustration- of your typical value hunters in the share market.

After five years of notable neglect, value stocks have made a sharp come-back post late 2018 sell-off, as witnessed by (some) bank stocks in Australia, and via equally selective names among media companies, consumer oriented businesses and resources stocks. Meanwhile, the lure of disruptors and new technology-driven business models has not disappeared.

The latter remains equally one of the key characteristics of this hated bull market. Hated by you know who.

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Richard Coppleson, nowadays at Bell Potter, equally published analysis and stats on the performance of the Australia share market this week. Below are a few extra stats from his work to add extra colour to this week's theme:

The ASX200 Accumulation index gained 11.55% for the financial year to June 2019. This marks the third consecutive year of double digit percentage gains, which tends to be a rare phenomenon for the local share market. Last time this happened were the four financial years leading into the Global Financial Crisis of late 2007. Back then gains were 20%-plus each year rather than 10%-plus.

Top performers in terms of most index points added over the full financial year are BHP Group (+104.2 points), CommBank (+67.4 points) and Telstra (+56.5 points). To put these gains in perspective: the ASX200 added 424 points over the past twelve months. The three companies mentioned are responsible for 228 of those points.

Worst detractors have been Origin Energy, AMP and Lendlease.

Revisiting the narrative of the WAAAX stocks again: Afterpay Touch, WiseTech Global and Appen added the most index points to the Small Ordinaries of respectively 33.3, 20.4 and 20.1 points. The Small Ordinaries ultimately lost -25 points over the year (-0.90%) as stocks including WorleyParsons, Costa Group and Nufarm lost respectively -26.7, -20.9 and -19.3 points.

A long list of the past year's winners and losers shows average gains at the top of the table are larger than average losses, but average losses remain higher as one descends through the rankings.

Nearmap, Clinuvel Pharmaceuticals and Afterpay Touch (all up more than 60%) have been the top performers in FY19. Galaxy Resources, Eclipx Group (even after 100% share price rally) and Nufarm have been responsible for the largest shareholder losses.

Equally remarkable is that Healthcare (+87%) remains the best performing sector over a four year horizon, while telcos (-35.4%) and banks (-9.8%) still have a lot of catching up to do, even after this year's come-back performance. The Energy sector's performance over the period is exactly zero percent.

Similarly, all major indices have performed pretty equally; 44%-45% over the past four years, dividends included, but the Small Ordinaries still stands out with 55% in total return, whereas the Top20 lags heavily with a total return of 17.9% only.

The ASX200, up 11.5% over twelve months, beat the S&P500 (+10.5%), as well as the DJ Euro Stoxx 50 index (+6%), the FTSE100 (+1.6%), the Nikkei 225 (-2.6%), and most other indices around the world.

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As far as the FNArena Vested Equities All-Weather Model Portfolio is concerned, with nil exposure to miners and banks, and more small and medium sized companies in portfolio, the first half of 2019 has been one of few periods since inception in late 2014 wherein we felt we simply had no chance in hell to even loosely keep track of the local index.

Winding back six months in time, everybody would have been elated with the prospect of 13% in return over the subsequent six months. In comparison with what we know now, which is that the ASX200 Accumulation index added 19.73% over the period, opinions are likely to be more divided.

This puts the portfolio performance for the full financial year at 5.52% versus 11.55% for the ASX200 including dividends. The difference in relative performance reversed in January.

In line with the analysis above, it's not the lack of winners, of which we hold plenty, but the small group of laggards and disappointments that can ultimately be held responsible for what appears to be an underwhelming return when measured against the world beating performance for the Australian market.

Stocks including Bapcor ((BAP)), Orora ((ORA)) and GUD Holdings ((GUD)) simply could not muster any enthusiasm from investors thus far in 2019. We still hold them because we remain confident in the potential for each longer term. Elsewhere, two of the companies owned issued a profit warning this year which understandably made investors extra-cautious after pushing share prices down.

We have thus far elected to retain both Reliance Worldwide ((RWC)) and Link Administration ((LNK)), but continue to monitor further developments.

In line with the general elevated sense of risks and uncertainties, the All-Weather Model Portfolio has kept what might look like an overly cautious allocation to cash, currently still between 19-20%.

We are also about to lose DuluxGroup ((DLX)) from the Portfolio with shareholders having accepted the take-over price offered by Nippon Paint. According to research we encountered recently, DuluxGroup shares have been the third best performer on the ASX since separating from Orica in 2010.

Admittedly, this year's premium offer issued by the Japanese suitor has had an impact on total return over the period, but it doesn't detract from the underlying story as to why stocks like DuluxGroup have been, and still are, a core constituent of the All-Weather Model Portfolio.

Quality companies are an investor's best friend in the long run, just not all the time or under all circumstances. The past six months have marked one such exception.

Rudi Talks

Audio interview Wednesday this week:

https://www.youtube.com/watch?v=1iqrF0o8AjQ

Rudi On Tour In 2019

-AIA National Conference, Gold Coast, Qld, 28-31 July
-AIA and ASA, Perth, WA, October 1

(This story was written on Monday and Tuesday 1st & 2nd July 2019. 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. Part two follows on Friday).

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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:

In Quality We Trust

In this week's Weekly Insights (published in two parts):

-Conviction Calls, Part I
-In Quality We Trust
-Conviction Calls, Part II
-Rudi On Tour

[Non-highlighted parts will appear in Part Two on Friday]

By Rudi Filapek-Vandyck, Editor FNArena

In Quality We Trust

About one year ago today there was virtually no one in the Australian share market who was interested in buying shares in TechnologyOne ((TNE)).

There was the occasional analyst who dared to point out the shares looked too cheap in light of the company's admirable track record, and ongoing buoyant growth prospects, but few only were paying attention.

One of the few was I because the FNArena/Vested Equities All-Weather Model Portfolio (see further below) owns shares in the company and I personally regard TechnologyOne the highest quality software company listed on the ASX, and one of the true all-weather performers locally.

But, as said, nobody wanted a bar of it. Upon persistent failure to move away from the $5 mark, the share price spent some time near $4.50 before turning back to around $5, where it still resided when I presented at the national conference of the Australian Investors Association (AIA) in early August.

There I was asked about my stock tip for the year ahead and I nominated TechnologyOne. More than ten years of growth in earnings per share averaging circa 15% per annum, and the decade ahead will most likely see more of the same, I explained at the conference. What exactly is there not to like?
It's not a question many are asking about this same stock today. In between last year's AIA conference and the company's interim earnings report earlier this month the share price had rallied to near $9.50, or more than double the $4.50 it was languishing at a little over a year ago.

Yes, I am hopeful this stock might catapult me to last year's best stock picker at the upcoming AIA conference in late July, even though the share price has rapidly given back a chunk of that massive rally since the interim report was released. Truth is I never thought TechnologyOne shares would double from last year's too cheap sub-$5 price level, but I knew it would only be a matter of time before momentum would revisit this champion software company.

This is what I have learned from observing the Australian share market over nearly two decades: a great and high quality, reliable performer such as is TechnologyOne can fall temporarily out of favour, for all kinds of reasons, but it never lasts long. This is one key difference with shares in companies of a lesser quality and with a far less admirable track record; they can remain out of favour for far longer than you and I can keep our faith in a favourable ending.

Most investors get interested in a stock after it has fallen by what appears a ridiculous percentage, and then risk getting caught into temporary rallies, followed up by ongoing bad news and further share price weakness. EclipX Group ((ECX)) is one such fine example. iSentia ((ISD)) is another one.

Sure, Myer ((MYR)) shares doubled between early March and mid-April, so congratulations to everybody who was on board (conveniently forgetting all the money that was lost trying to pick the bottom in the Myer share price during the eight years prior).

As I have been highlighting over the years past, there is a viable, far less riskier strategy for long-term oriented investors and that is through buying high quality when the share market temporarily doesn't feel like it, rather than through scavenging through the rubble at the bottom of the beaten down dogs basket of the ASX.

One of the key factors as to why too many professional funds managers have found beating the market too difficult over the past five years is because most cheaply priced stocks revealed themselves as being traps for "value" seeking investors.

On the other hand, quality stocks including CSL ((CSL)), ResMed ((RMD)), REA Group ((REA)), Altium ((ALU)), Carsales ((CAR)), and TechnologyOne equally experience rallies and dips, but the dips are always an opportunity. Everyone can see this from opening up a price chart from the past ten years or so.

Admittedly, not every stock on my list of All-Weather Performers has this year managed to rise above peak share price levels recorded last year, but many have, and history suggests for the others it'll be simply a matter of time.

Unless, of course, something fundamentally changes the outlook for the company involved.

It happened to Ramsay Health Care ((RHC)) which saw its shares peak below $80 in 2016, then fall to mid-$50s last year. The shares are back near $70 this month as investors are starting to consider the potential implications of a turnaround in operational dynamics.

The story for InvoCare ((IVC)) looks pretty similar. InvoCare shares peaked in late 2017 around $17.40, then tumbled to near $11. They have rallied back to above $16 this month.

Both examples show us a lot of pain is inflicted on popular quality growth stocks when the future outlook becomes uncertain and investors start doubting which will be the way forward. But investors should keep in mind the punishment is not necessarily less for cheaper priced stocks. Of that an example such as EclipX Group can serve as a fresh reminder.

Most importantly, and this statement is backed up by historical evidence, high quality companies such as CSL, Altium, et al are far less likely to issue a profit warning, let alone one as severe a la EclipX Group and iSentia. And share prices tend to recover much quicker from a temporary draw down. Just look at what has happened to ResMed, REA Group, and the other stocks I just mentioned over the past year or so.

On my analysis, the biggest mistake made by investors is by treating every listed stock in the same manner, as if they are all the same, with relative value the only point of difference. In practice, however, stocks are not all similar. Quality commands, deserves and receives a premium. In particular when most sectors and listed companies are challenged and unable to deliver sustainable, uninterrupted growth.

This is one of such periods.

One of the stocks on my personal share market radar, Treasury Wine Estates ((TWE)), included in my domestic Prime Growth Stories selection, has this year somewhat fallen from grace as can be seen from the share price languishing around $15 when $18-$19 was not out of the question not that long ago.

Given the share price's track record since 2015, it is easy to suspect that investors might want to put this stock in the same basket with CSL, InvoCare, REA Group, and so forth but I have become a lot more circumspect about what goes on inside the global operations of this former market darling.

The reason is because market chatter about bloated distributor inventories in China for second tier wine from the producer of some of Australia's finest continues to resurface. This makes me anxious there possibly is some truth to it, regardless of company management's continued denials.

As the story goes, every distributor in China keen to stock up on Treasury Wine's high quality, prime wine products (such as Penfold's Grange) is forced by the company to also purchase volumes of lesser quality, cheaper wine. It is these second tier inventories that are reportedly hard to sell.

If the speculation is correct, none of this shows up in Treasury Wine's financial reporting, but common logic tells us this will become a serious problem at some point. Hence my reluctance.

Investors should be aware Treasure Wine Estates is essentially an 80/20 proposition whereby 80% of the profits stems from 20% of all wines sold (the prime priced quality section) but problems in the 80% of cheaper volumes can still cause havoc with the share price and its valuation.

A more attractive proposition, perhaps, was recently put forward by tech analysts at Bell Potter. Local technology company Integrated Research ((IRI)) has been on my personal radar for quite a while, but the company issued a sudden profit warning last year which explains the big tumble on the price chart from a peak in the share price as high as $4.

I don't like companies issuing profit warnings, for obvious reasons. I consider it a lack of management control and it certainly removes whatever was there beforehand in terms of "quality" label attached to the company.

Integrated Research's profit warning also reminded investors about how quickly fortunes can turn for smaller cap software and technology companies. A large number of peers have equally issued profit warnings, if not more recently then certainly over the years past.

Once again, this observation emphasises the true quality that resides with TechnologyOne; a fact I simply cannot repeat often enough. Consider this statistic for a moment: 99% retention of customers.

Back to Integrated Research. Bell Potter observes the company has experienced a good year post last year's debacle. The share price is back near $3, still nowhere near $4 but also a long way off from the bottom below $1.70. Bell Potter thinks the upcoming full year result should be strong, showcasing double digit percentage growth in both revenues and profits.

Of more importance, I would argue, is the fact that if Integrated Research is indeed back on track to continue the company's track record prior to last year, then the years forthcoming should see a resumption, and continuation, of double digit growth in earnings per share per annum. This is indeed the forecast put forward by Bell Potter.

Somewhat irresponsibly almost, Bell Potter argues both Integrated Research and TechnologyOne should grow at 15% on average per annum over the next three years. Of course, the two are not comparable just because both are wearing the label of "technology", and that's why the latter shares should trade at a hefty premium to the former.

Anyway, none of this means Integrated Research shares cannot be re-rated again on vast improvement of management's execution of the company's growth path. Investors who are prepared to give the company a second chance might want to have a closer look. Bell Potter thinks Integrated Research should provide positive guidance for the current fiscal year at some point in July and that this will act as a catalyst for the share price (all else remaining equal).

On Tuesday, as I am writing this story, I notice shares in TechnologyOne have stopped falling post interim report (whatever the exact disappointment was). After an initially timid move higher, they ultimately rallied in excess of 4% on the day.

It again reconfirms the observations I mentioned above. It also feeds my confidence that some of the resilient smaller cap quality stocks owned by the All-Weather Model Portfolio that have not been able to attract positive investor sentiment thus far in 2019 will eventually regain their prior mojo a la TechnologyOne and Aristocrat Leisure ((ALL)) post interim profit result last week.

I am specifically thinking about Orora ((ORA)), Bapcor ((BAP)) and GUD Holdings ((GUD)).

At a time when many an investor has fallen for the lure of jumping on, and staying on board, positive momentum stocks, it's great to be reminded that positive investment returns can still come from quality stocks, even when they are temporarily out of fashion.

As explained so often in "Reminiscences of a Stock Operator", it's the sitting and waiting that reaps the biggest rewards, at least for those that can withstand the mind's impatience when a share price is not moving, and all others, so it seems, are.

As long as investors don't confuse CSL with EclipX Group, or TechnologyOne with iSentia, of course.

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Note: paying subscribers at FNArena have access to a dedicated section on All-Weather Performers on the website.

Note II: investors interested in attending this year's national AIA conference on Queensland's Gold Coast can still enjoy discount prices until May 31st.

https://administration.investors.asn.au/civicrm/?page=CiviCRM&q=civicrm%2Fcontribute%2Ftransact&reset=1&id=3

Note III: Reminiscences of a Stock Operator by Edwin Lefevre is one of the all-time classics about trading and speculating in US shares. I highly recommend reading it for those who haven't as yet

Also, for more information about the FNArena/Vested Equities All-Weather Model Portfolio send an email to info@fnarena.com, plus see further below.

Rudi On Tour In 2019

-AIA Adelaide, SA, June 11
-AIA National Conference, Gold Coast, Qld, 28-31 July
-AIA and ASA, Perth, WA, October 1

(This story was written on Tuesday and Wednesday 28th & 29th May 2019. Part One was published on the day in the form of an email to paying subscribers, and again on Thursday as a story on the website. Part Two appears on the website on Friday).

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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:

Subscriptions cost $420 (incl GST) for twelve months or $235 for six and can be purchased here (depending on your status, a subscription to FNArena might be tax deductible): https://www.fnarena.com/index2.cfm?type=dsp_signup

Everybody Is Waiting…

In this week's Weekly Insights:

-Everybody Is Waiting...
-No Weekly Insights Next Week
-CSL Challenge: Market Share & Margins
-Conviction Calls
-More Pain For Active Funds Managers
-Rudi On TV
-Rudi On Tour
-Rudi Talks

By Rudi Filapek-Vandyck, Editor FNArena

Everybody Is Waiting...

The concerns of the less-than-bullish investors and investment experts have been perfectly captured in the graphic below: global equities have de-coupled from underlying corporate earnings forecasts and the gap between rising share prices and tentatively recovering profit growth prospects has become quite large in 2019.

Australian investors have been equally enjoying the power of central bank support. Every time the RBA sends a signal it might be ready to lower the cash rate, Australian equities find more buyers lining up from the sidelines. As witnessed, again, on Tuesday when the minutes of the most recent RBA board gathering further fueled market speculation about an imminent rate cut.

Beyond the RBA again coming to the international central bank stimulus party, global equities remain supported by a general expectation that economic data in key regions, including Europe, China and the US, should soon start generating better looking trends of improvement. Further out, corporate profits in the US are still expected to bottom this quarter and next, and rise again in Q4.

Meanwhile, of course, many an institutional portfolio is holding an above average level of cash. So what happens when everyone is ready to jump in on the next sell down?

Yes, indeed, the market refuses to give in, instead making all the cash holders on the sidelines look foolish, and let them wait for longer than they thought feasible.

No Weekly Insights Next Week

Next week starts with an Easter holiday on the Monday (and, coincidentally, my birthday) so there will be no Weekly Insights. Next Edition is therefore scheduled for the final day of April, just before I leave for my next presentation in Melbourne.

CSL Challenge: Market Share & Margins

After having advocated for years that every investor with a long term outlook should have CSL shares in the portfolio, I launched the CSL Challenge at the beginning of calendar 2019. For more information: see the link at the bottom of this story.

ECP Asset Management, a long term shareholder in Australia's highest quality outperformer CSL ((CSL)), recently updated its thoughts and views on one of its substantial shareholdings as follows: "In CSL, we see a company that is organically growing the supply of plasma ahead of the industry, while in a supply constrained market.

"The company's sustainable competitive advantage is driven by its extensive suite of products that allows it to generate higher revenue per litre than its competitors, and is also the lowest cost producer, a powerful combination."

However, while such is an unquestionable positive assessment, it is also a longer term view and the share market doesn't do long term well, in particular not when something somewhere raises questions in the short term.

In the short term, market talk is all about "margin pressure" which first arose in late 2018, depressing the share price then, and it's now prominently present in the latest research reports, and subsequently (somewhat) depressing the share price this month. So how a serious issue is this "margin pressure" and should we, long term shareholders in the company, be worried?

Hardly.

For starters, CSL remains the international benchmark for an industry that continues to experience stronger demand than supply can satisfy. Not only does the company remain better placed than each of its competitors, it also remains the only supplier that is seriously investing in expanding its collection facilities, thus effectively increasing market share, further enhancing its international number one market positioning.

But we seem to have entered a phase whereby the investments in new collection centres are likely to have a slight negative impact on margins initially. On top of this comes the argument that as the US economy strengthens, collection centres such as CSL's need to offer higher rewards to continue attracting sufficient numbers of donors, which also exerts downward pressure on the average margin.

Healthcare analysts in Australia are now increasingly adjusting their numbers downwards, while readily acknowledging this is far from a fait accompli. For a complex business such as is CSL's, many other factors play a role, including new products and geographies, the mix in between various products (with general acknowledgment the high margin products are doing just fine) and management's drive to find cost efficiencies.

Most importantly, I think, is that CSL's specialised products, such as Hizentra for the treatment of Chronic Inflammatory Demyelinating Polyneuropathy (CIDP), are as yet unknown throughout most of the global health sector. So one big unknown remains how much more leverage/demand can be created by getting more people familiarised with this product and its advantages for treatment of CIDP.

The bottom line: even with downgrades in forecasts coming through, growth expectations -in constant currency terms (CSL reports in USD)- for earnings per share (EPS) for the foreseeable future (three years ahead and more) remain between high single digit and low double digit percentages in each year. Really, the differences between the various forecasts are not more than 2%-3% between low markers and the more bullish analysts; or between those who have downgraded as yet and those who have not.

Which makes this whole issue more like an exercise in hair splitting, really, even though short term traders and those who wish the CSL share to crash might still jump on board the bandwagon and try to create something important out of it. Apart from short term pressure on the share price, I very much doubt whether it'll turn out more than a tiny blip in an ongoing robust, long term uptrend for the shares.

While I am at it, I thought I'll provide some background behind short term issues and question marks for other high quality healthcare stocks on the ASX:

-ResMed ((RMD)): while question marks remains about management's newly chosen strategy to expand into SaaS and out-of-hospital care through acquisitions, there remain plenty of analysts who remain convinced the best strategy will prove to grant management the benefit of the doubt. Stockbroker Morgans, for instance, has kept the stock stoically as one of its Conviction Buys. ResMed is scheduled to release Q3 results on May 3, Australian time.

-Cochlear ((COH)): long running concerns about a constantly elevated valuation have been replaced with concerns about the company's competitive edge now competing companies seem to have momentum on their side. It is now up to management at Cochlear to formulate an effective response. And what-do-you-know, this morning the company announced in a release to the ASX "the launch of the Nucleus Profile Plus Series cochlear implant,designed for routine 1.5 and 3 Tesla magnetic resonance imaging scans without the need to remove the internal magnet".

One thing you can always count on with quality companies such as these, they seldom let their clients and shareholders down for long. It'll still be a few quarters before this new product gathers all the required licenses and approvals, and market traction, but the response is in the pipeline.

-Ramsay Health Care ((RHC)): only Blind Freddy has missed the share price recovery and subsequent stabilisation for private hospitals operator Ramsay Health Care, despite the threat of a Labor government post May keeping a tight lid on health insurance cost inflation, which also makes life more difficult for private hospitals in Australia. But signs of increasing improvement in operational dynamics in Europe is feeding into growing optimism that better times lay ahead after a few truly challenging years for the former market darling. To put things in perspective: we are still talking 2%-3% potential to the upside, but sometimes little things can have large impacts, and Ramsay Health Care's prospects could be on the rise again, which is supporting the share price.

A few weeks ago I invited readers of Weekly Insights to share their experiences as a CSL shareholder and we received truly amazing, wonderful, touching and surprising responses. I'll put them together in a follow-up story in the not too distant future. Plus an update shall follow about who will be the lucky receiver of a nice bottle of wine via Australia Post.

The FNArena/Vested Equities All-Weather Model Portfolio holds shares in all four companies mentioned.

To find out more about the CSL Challenge: https://www.fnarena.com/index.php/2019/01/14/rudis-view-join-the-csl-challenge/

Conviction Calls

Model portfolio managers at stockbroker Morgans have elected to reduce exposure to Wesfarmers ((WES)) while increasing exposure to Woolworths ((WOW)). At the same time, portfolio weighting for Cleanaway Waste Management ((CWY)) has been slightly reduced as well.

The portfolio managers communicated their moves as maintaining discipline at times when the overall share market is potentially stretched.

Following the same mantra, the broker's Growth Model Portfolio has trimmed exposures to BHP Group ((BHP)) and to Rio Tinto ((RIO)) while selling out of Computershare ((CPU)). This portfolio holds "higher than usual cash, ready to deploy into upcoming opportunities".

Elsewhere, the Cross Asset Income Model Portfolio has further trimmed ownership of Transurban ((TCL)) shares.

More Pain For Active Funds Managers

Anecdotal observations suggest 2019 is not the ideal hunting ground for active funds managers looking to beat their benchmarks without counting on pure plain luck or taking on excessive risk.

A recent update on domestic funds managers data by JP Morgan (data available up until the February reporting season) suggests few institutions are believers in sustainable upside for Australian banks, still, but they also started reducing overweight positions in resources, while average cash positions remain on the rise.

More interesting, perhaps, is JP Morgan's analysis into how domestic funds managers tend to perform in each of the corporate results reporting seasons of August and February. Analysing data for the past five years, JP Morgan analysts conclude more managers are able to outperform each year in August, but not so in February.

This, of course, raises a few questions such as: what is so different about February that makes outperformance too much of an ask for most?

JP Morgan's analysis suggests the Value style of investing performs better in August, not so in February. But then the Growth segment of the share market displays a similar pattern, albeit with smaller losses in February. Small cap managers in particular would find Februaries hard to outperform in, concludes the analysis, with higher volatility in stocks ex-50 and ex-100 likely to blame.

For those interested in the statistical numbers: only 44% of funds managers on average manages to outperform benchmarks in February while in August that percentage rises to 60%. Within this context, February 2019 actually proved an above average positive month for the sector with just over 50% beating their benchmark. Among active managers researched by JP Morgan, 45% outperformed in February.

Rudi On TV
My weekly appearance on Your Money is now on Mondays, midday-2pm.

Rudi On Tour In 2019

-ASA Melbourne, May 1
-ASA Toowoomba, Qld, May 20
-U3A Investor Group Toowoomba, Qld, May 22
-AIA Adelaide, SA, June 11
-AIA National Conference, Gold Coast, Qld, 28-31 July
-AIA and ASA, Perth, WA, October 1

Rudi Talks

Last week's audio interview about what's happening in the Australian share market:

https://www.youtube.com/watch?v=FpCnk1RSnCY

(This story was written on Tuesday 16th April 2019. It was published on the day in the form of an email to paying subscribers, and will be again on Thursday as a story 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:

Rudi’s View: Join The CSL Challenge

Included In Today's Story:

-Join The CSL Challenge
-Bell Potter's Top Picks For 2019
-Best Wishes From FNArena

Rudi's View: Join The CSL Challenge

By Rudi Filapek-Vandyck, Editor FNArena

For many years I have held a positive view on CSL ((CSL)) shares listed on the Australian Stock Exchange, and I have written and talked about this stock ad infinitum.

And with good reason, one might conclude, as the shares have clocked up more than 400% in returns for shareholders since 2011. Its steady climb in the rankings of local stocks, ranked by market capitalisation, has now made CSL Australia's fourth largest company, only preceded by CommBank, BHP and Westpac.

When I arrived in Australia, eighteen years ago, CSL was but a mid-cap stock. This truly has been, and still is, an incredible success story.

Yet, according to feedback and day-to-day observations, and to my genuine frustration, Australian investors seldom own shares in the company. They remain deterred by other expert voices who tell them you simply cannot buy these shares, they are too "expensive".

Others are wrongfully of the idea that successful investing starts with buying stocks that trade on low Price-Earnings (PE) ratios. So they lose their shirt through owning stocks including Retail Food Group, Vocus, iSentia, AMP, or even IOOF. Then there are those who don't understand the intrinsic weakness that comes with chasing high yielding industrials, which has seen Telstra shares lose more than -50% in just a few quick years.

Plenty of reasons as to why investment portfolios in Australia do not have any exposure to what is undeniably one pivotal success story from corporate Australia over the past three decades, if not ever.

My heart bleeds when questions I receive are whether I think this or that beaten down small-cap industrial stock is finally worth buying, or are Australian banks finally turning the corner? Australian investors, including their advisors and many a market commentator, are way too narrowly focused on finding "value".

Whereas the cold hard truth is CSL shares, carried by exceptional quality and supportive market dynamics, have been one of the best investments any investor could have made since listing in the 1990s. And they most likely still are. This is why Australian investors need to wake up and smell the blood plasma and influenza vaccines, so to speak.

In ten years time, CSL might be this country's most valuable ASX-listed entity, further crowning an already impressive track record. How on earth will Australian investors justify not having been part of its story, instead losing focus, sleep, money, direction and potential return via owning stocks of lesser quality, generating lower returns?

It is my conviction you don't need to. Allow me to provide you with the most valuable investment experience you can possibly expose yourself to in the years ahead.

Add CSL to your portfolio. Maybe include ResMed ((RMD)) and Cochlear ((COH)) as well.

It doesn't matter how many shares you buy. Buy as many as you can be comfortable with. If you are extremely cautious, buy one share of each. It might look like it isn't worth it, given the transaction costs involved, but you can consider those as an investment in your personal education.

And while this is about achieving a return on your investment (of which I am very confident), this is equally as much about education: allow yourself to be surprised by how much benefit your investment portfolio can retrieve from exposure to high quality stocks, with long-term robust growth outlooks.

Once you own a piece of the action, you will feel "connected" to these high quality success stories. You'll pay more attention to what goes around in each particular segment of the global corporate world, you'll read analysts' reports in a different manner, you might even download their annual reports and show up at AGMs.

Most importantly, however, you will learn first hand that, beyond the immediate horizon, "quality" is far more important than cheap "value". The difference may not necessarily reveal itself next week, next month, or even by mid-year. But you can be as confident as I am that your journey will conclude with a positive experience.

So when should you join the "CSL Challenge"?

Pick your moment. My own strategy for buying these High Quality stocks is to wait until the share price weakens. You just have to accept you probably won't be able to jump in at the lowest price point possible, but it's probably not good timing to buy at the summit of a strong short term bounce.

But you will become part of something new, something exciting, and something very beneficial to your own insights and understanding about investing in the share market. I from my end hereby solemnly promise I shall regularly update on share price movement and prospects for all three companies. Once you have joined the CSL Challenge, and you are as yet not on the FNArena mailing list, you can send me an email and I shall keep you posted too (info@fnarena.com).

In case this might have escaped your attention: CSL shares produced a 30% positive return over 2018, despite also falling victim to the bear market sell-off from September onwards. Over the past six weeks, the shares already recovered by circa 10%, significantly outperforming local indices and most stocks listed on the ASX.

CSL shares have now returned to where they were trading in October last year.

But all this short termism is really but noise in the greater scheme of things. We are here to learn what investing and sustainable returns from quality growth stories really looks like, through first-hand involvement.

Who's ready to join the "CSL Challenge"?

I cannot provide any guarantees, but am pretty confident you will not regret this. C'mon, what are you waiting for?

P.S. I couldn't help but noticing CSL shares are weaker today...

P.P.S: Do send me an email once you have joined the CSL Challenge as you will want to remain connected to your High Quality inclusions: info@fnarena.com

Bell Potter's Top Picks For 2019

Stockbroker Bell Potter recently revealed its Favoured Top Picks for calendar year 2019. Keen observers of my own research into All-Weather Performers will notice there are a few names represented in both selections. For All-Weather Performers, including updated share price performances, paying subscribers can access the dedicated section on the website.

Bell Potter's selection of favourites consists of: ALS Ltd ((ALQ)), Caltex Australia ((CTX)), Challenger ((CGF)), CSL, Goodman Group ((GMG)), Macquarie Group ((MQG)), Netwealth Group ((NWL)), Oil Search ((OSH)), Sonic Healthcare ((SHL)), and Woolworths ((WOW)).

Best Wishes From FNArena

FNArena is gradually ramping up its service this month, with broker views and forecasts up to date via The Australian Broker Call, daily emails and news stories resuming this week, and with Greg Peel re-joining us from next Monday onwards.

As I am presenting at the Australian Investors Association's (AIA) one-day seminar in Melbourne on January 29th, Weekly Insights shall resume from the first week in February onwards. Our Australian Corporate Results Monitor is ready to start adding the first results scheduled for the final week of January.

The team here at FNArena wishes you all a prosperous year ahead.

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

Rudi’s View: All-Weather Portfolio Considerations

In this week's Weekly Insights (this is Part Two):

-Late Shock: 2018 Is The Annus Horribilis
-Outlook 2019: The 'Bear' That Keeps On Rolling?
-The Curse Of The Magazine Front Cover
-All-Weather Portfolio Observations And Considerations
-Gartman's Rules Of Trading
-Final Weekly Insights For 2018
-Rudi On TV
-Rudi On Tour

[Non-highlighted parts appeared in Part One on Thursday]

The Curse Of The Magazine Front Cover

By Rudi Filapek-Vandyck, Editor

One of the old beliefs on Wall Street is that pivotal points of reversal in market trends are usually preceded by front covers of popular magazines. The most famous example of this adage remains the "death of equities" declaration by Business Week in August 1978, roughly three years before one of the strongest bull markets announced itself.

This time around, Wall Street eyes are looking back at the cover of The Economist which in early November last year declared A Bull Market In Everything!

To be fair to the team at The Economist, that declaration went in hand with asking the question: when will it all end?

All-Weather Portfolio Observations And Considerations

Over the past four years equity markets have experienced three serious pullbacks. First there was the gradual deflation that started in late May 2015. It was preceded by nearly six months of piling into everything -anything- that paid out dividends and represented "yield". The downturn that subsequently unfolded simply kept on going until a capitulation bottom was reached in February the following year.

Next came the Big Portfolio Switch late in the third quarter of 2016. Most Australian investors won't have too much recollection about this particular drawdown because banks and resources became the new momentum trade and most portfolios would have been overweight these two sectors.

Next we had a bit of a wobble in February-March this year, but as things turned out, that really was just a blip ahead of what would descend upon us in October-November. With only five weeks left until 2019 arrives, the Australian share market is in negative territory year-to-date, and (potentially) about to accumulate double digit percentage losses over three consecutive down-months.

Ignoring the pain, the angst and the portfolio losses for a moment, the key lesson to learn from all three experiences is that every time, really, is quite different. And what makes each period of rough share market weather unique in its own right are the following three factors:

-the reason(s) for the shift to a downward trend
-whatever happened prior
-portfolio positioning of large institutional investors

Given we are living through a period in which most investors, consciously or otherwise, are trend followers, one might be inclined to think factors two and three are tightly intertwined, which is often the case. But back in 2015 there was no sudden switch in portfolio allocations which meant the pullback was gradual, drawn out and relentless nevertheless, but many an investor had been positioning anti-consensus and was simply feeling a lot of pain on the way down.

By late 2016, however, just about everybody had become overweight cycle-agnostic stocks and expensive defensives. Equally important, there was a genuine general belief that newly elected President Trump was about to ignite the late cycle reflation trade. And thus the switch was violent and relatively quick, but equally relentless.

By now we are late in 2018. September (-1.78%) was mildly challenging, while October (-6.1%) took no prisoners and November (-2.14%, thus far) failed to deliver the widely anticipated relief rally. Three negative months in a row. Most assets down year to date, including most equities in Australia. Time to sit up and take note, if one hasn't already.

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Observation number one, and this one cannot be highlighted soon enough: holding cash has really made a key difference throughout the extreme day-to-day volatility over the past nine weeks. This was not as much the case back in 2015 and 2016. Gold has, sort of, stood its ground throughout the turmoil, but that's the best it could do and it equally showed some wobbles at various times. The same can be said about government bonds, but inside the share market there have been very few places to hide and not feel the pain of broad selling pressure.

Traditional safe havens such as Woolworths ((WOW)), Transurban ((TCL)) and Sydney Airport ((SYD)) initially were sold down as well, if they hadn't fallen quite noticeably throughout September already, but they regained their status in November as amidst the global share market turmoil bond yields started dropping. (When institutional investors shift funds into bonds prices rise, which lowers the yield, with positive read-through for bond proxies in the share market).

Only few stocks have managed to keep the sellers at bay from the get-go, posting gains along the way, when others kept falling. Stocks like Goodman Group ((GMG)) and Charter Hall ((CHC)) certainly picked their opportunity to shine when all got pulled into darkness, but equally so stocks including Alliance Aviation Services ((AQZ)) and TechnologyOne ((TNE)).

Not all of these performances would have been predicted beforehand. In fact, on my daily observations most movements in share prices have been irrational, illogical and inexplicable, other than that selling begets more selling and investors simply were looking to pull cash out of the falling market.

Hence there have been quite a number of utter surprises, both positive and negative. Which just goes to show, when panic buttons are being pressed and withdrawing liquidity becomes the dominant force du jour, one simply cannot be too confident about what likely comes next and what won't happen.

Part of the reason as to why this withdrawal has been so chaotic, and so broad-based, even when only a selection of stocks had been carrying the index to a new cycle high in Australia, is because of the multitude in factors that impacted, all pretty much around the same time. This is not simply about the Federal Reserve tightening rates and US bond yields rising. This is equally about global economies losing momentum while there seems no relief in tensions between Trump and Beijing. This is also about market consensus probably being too optimistic on corporate profit margins, and about growth stocks becoming a well-overcrowded trade, while the valuation gap between high growth and low growth stocks -"Growth" versus "Value"- had once again stretched to extreme.

In Australia, worries about Emerging Markets falling and overcooked US share market sentiment mixed with a deflating housing market, and ever more bearish forecasts, and growing signals the consumer is starting to hoard instead of continuing to spend. More revelations about the banks at the Royal Commission and a seemingly dead men walking federal government in Canberra, while many an investor worries about Labor's intention to fix the budget through reining in negative gearing and franking credit cash repayments, further add to the quagmire.

This is equally about the sum total of extreme liquidity injections by the world's major central banks coming to an end, with every investor worth his salt knowing full well this never before seen injection has pushed up asset prices around the world over the years past. But now global liquidity is pulling back, what will be the exact effect on global assets? Then there is that growing sense this could be the final phase of this cycle.

Combine all of it together and it is not difficult to see why investors are uncertain and worried, and why many an expert preaches caution and restraint. Actually, if one is brutally honest about it all, the first question to ask is why did it take this long for the US share market to finally take notice?

****

We can ask the question, but the answer doesn't really matter. Markets finally woke up to the serious challenges that lay ahead, and they responded with a vengeance. Now the world and its outlook have materially changed. For investors it's best to take notice, and respond responsibly.

The FNArena/Vested Equities All-Weather Model Portfolio had been outperforming the broader index, while at the same time throughout the second and third quarter the percentage of cash held in the portfolio increased steadily. At first it seemed this caution had been applied too early, but by the time October arrived it became instantly clear the level of cash was nowhere near high enough. So we increased it.

I advised FNArena subscribers they should do the same. The logical way to achieve this is by getting rid of failures and disappointments. Most investors "take profits", which means they sell off winners and keep the losers. I, however, am convinced the best way forward is by owning higher quality, solid, reliable and sustainably growing companies. In my experience, these are most likely among the outperformers in the local share market.

The Portfolio only had a few genuine disappointers, so a general review and re-allocation had to take place. It is here where past experience mixes with share market "science" and personal assessments. Overlooking the portfolio as a whole, the highest priority is not whether one is attached to a certain stock or not, and certainly not what price had been paid for it. The highest priority is freeing up cash.

The aim is to reduce risk. So you sell/reduce exposure to leveraged balance sheets with lots of debt (if you happen to own such stocks), in particular small cap stocks and cyclicals. Large cap stocks might fall less than smaller cap stocks. In the latter case: watch out for the drying up of liquidity or the departure of one large shareholder.

Companies that do not make profits (as yet) are most vulnerable, in particular if they are small. Don't stick with companies going through a bad news cycle (the last thing you want is them issuing yet more bad news). The most important thing is to go through the portfolio on a case by case basis, every time trying to assess what type of risk are we taking on in this particular case. Part of my consideration was to trust in the quality of out-of-season financial results reporters in that they were most likely to announce good news. Indeed, good news is what most have reported, but in many cases this did not stop the selling, or sometimes only briefly.

One notable exception has been Appen ((APX)) which is acting like a stock reborn after management upgraded guidance for the year in mid-November. Another portfolio member that has put in a remarkable performance, helped by yet again a high quality growth performance, is the aforementioned TechnologyOne. Note that out of caution, the portfolio exposure to both had been reduced, as part of the overall de-risking. Decisions do not have to be 100% in or out. It is easier to buy more shares at a lower level than it is to add from scratch again (it's how the human brain is wired).

A number of other stocks saw their initial rallies upon good news being used as an easy source for more profit taking, including REA Group ((REA)) and ResMed ((RMD)). Others held up well initially, but then succumbed to that same principle of becoming logical targets for profit taking. Here I would certainly include Bapcor ((BAP)), DuluxGroup ((DLX)), Xero ((XRO)), and Orora ((ORA)).

Certainly, a large contingent of stocks has fallen significantly more than I thought they would, and way more than seems justified even if profit forecasts for the year ahead must come down. In cases like Macquarie Group ((MQG)) and Link Administration ((LNK)) the world out there is simply showing its ignorance and lack of specific knowledge because both companies are not nearly as much aligned with the general status in the share market, but during times of panic and turmoil there is no opportunity to set up a debate with the sellers.

And other investors tend to think if the share price drops it must be for good reason, of course. One of the most difficult decisions to make during the past two months is to sit quiet and not re-allocate cash back into the share market. We are far from convinced that the end of turmoil is near. This can potentially get a lot nastier, still. Most importantly, there will be rallies here and there (there always are), but it seems highly unlikely this new phase for global risk assets will be over soon.

The down trend between May 2015 and February 2016 ultimately lasted nine months with a sharp sell-off in the final two months. The portfolio switch post Trump election lasted five months before selling down stocks like CSL ((CSL)), Aristocrat Leisure ((ALL)) and NextDC ((NXT)) reversed into new uptrends.

Having said so, we did buy in a few extra shares near what might have been the market bottom (for now) recently, and among the opportunities we jumped upon were Macquarie, Link Administration, Bapcor, Carsales and Orora. Prior to last week, circa 30% of the All-Weather Portfolio had no exposure to the share market. On my assessment, this has been one decisive factor in keeping overall losses contained, and smaller than the broader market.

That percentage has now declined to circa 25%, which means 75% is invested in the local share market in a basket of 20+ stocks that have no resemblance to any of the market indices. While we have taken the view the changing outlook should not be underestimated, we are also of the view this does not by default mean we are staring at a repeat experience of 2008-2009 or 2000-2002. It doesn't even have to be a repeat of 2011-2012 or of 2015-2016.

But neither of such scenarios should categorically be excluded at this stage and we remain prepared to further reduce risk if circumstances so require. In the meantime, we agree with other voices elsewhere two months of (near) persistent weakness for the local share market has made a large number of stocks look very attractive. Instead of looking through a list of stocks that have fallen the most, as is the inclination for many, I'd strongly suggest investors continue de-risking their portfolio.

In terms of fresh opportunities to take advantage of, why would any investor with a longer term horizon now ignore the fact that high quality, less risky, solid and reliable performers in large numbers have sold off -15%, and more? This is where the real opportunity lies in today's share market.

Paying subscribers have access to my research into All-Weather Performers, including a dedicated section on the FNArena website. I strongly suggest this becomes your new Ground Zero for the future.

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In terms of All-Weather Portfolio performance, October saw a loss of -4.71% compared with the -6.05% that befell the ASX200 Accumulation index. Thus far in November, with three more trading sessions left, the loss is -1.86% for a combined -6.57% for the past eight weeks. The ASX200 Accumulation index has thus far added -2.14% for a combined -8.19%.

Calendar year to date the index is down -2.65% and for the running financial year it is down -6.65%. The All-Weather Portfolio has remained in positive performance territory throughout calendar 2018, albeit with a non-spectacular +1.17% year-to-date (still marking a noticeably better performance); for the financial year to date the performance number is -5.32%.

Late addition: As we are about to publish on the final trading day of November, it appears the All-Weather Portfolio might just escape a negative performance for the month, unlike the broader index.

Gartman's Rules Of Trading

He may not be perfect in all his views and calls, but Dennis Gartman still carries more day-to-day hands on financial markets experience than most of us have aged since birth. Below are his Rules of Trading, as updated and released at the end of last week.

THE RULES OF TRADING - 2018:

1. NEVER, EVER, EVER ADD TO A LOSING POSITION: EVER!:
Adding to losing positions will eventually lead to ruin. All great market humiliations are precipitated by someone doing so such as the Nobel Laureates of Long-Term Capital Management, Nick Leeson, Jon Corzine and now optionsellers.com.

2. TRADE LIKE A “MERCENARY:”
As traders/investors we are to fight on the winning side of any trade. We are pragmatists first, foremost and always with no long-term “allegiance” to either side.

3. MENTAL CAPITAL TRUMPS REAL CAPITAL:
Capital comes in two types: mental and real. Holding losing positions diminishes one’s finite and measurable real capital AND one’s infinite and immeasurable mental capital always and everywhere.

4. WE ARE NOT IN THE BUSINESS OF BUYING LOW AND SELLING HIGH:
We are in the business of buying high and selling higher, or of selling low and buying lower. Strength usually begets strength; weakness, usually, begets more weakness.

5. IN BULL MARKETS ONE MUST TRY ONLY TO BE LONG OR NEUTRAL:
The obvious corollary is that in bear markets one must try only to be short or neutral. There are few exceptions.

6. “MARKETS CAN REMAIN ILLOGICAL FAR LONGER THAN YOU OR I CAN REMAIN SOLVENT:”
Lord Keynes said this decades ago and he was… and still is… right, for illogic does often reign, despite what the academics would have us believe about efficient markets!

7. BUY THAT WHICH SHOWS THE GREATEST STRENGTH; SELL THAT WHICH SHOWS THE GREATEST WEAKNESS:
Metaphorically, the wettest paper sack breaks most easily and the strongest winds carry ships the farthest and the fastest.

8. THINK LIKE A FUNDAMENTALIST; TRADE LIKE A TECHNICIAN:
Be bullish when the technicals and the fundamentals run in tandem. Be bearish when they do not.

9. TRADING RUNS IN CYCLES:
In the “Good Times” even one’s errors are profitable; in the inevitable “Bad Times” even the most well researched trade shall go awry. This is the nature of trading; accept it. Move on.

10. KEEP ALL TRADING SYSTEMS SIMPLE:
Complication breeds confusion; simplicity breeds profitability.

11. AN UNDERSTANDING OF MASS PSYCHOLOGY CAN BE MORE IMPORTANT THAN AN UNDERSTANDING OF ECONOMICS:
Simply put, “When they’re cryin’ you should be buyin’ and when they’re yellin’ you should be sellin’!” But it’s difficult…very!

12. REMEMBER, THERE IS NEVER JUST ONE COCKROACH:
The lesson of bad news is that more almost always follows… usually immediately and with an ever-worsening impact.

13. BE PATIENT WITH WINNING TRADES; BE EVEN MORE IMPATIENT WITH LOSERS:
The older we get the more small losses we take… and willingly so.

14. DO MORE OF THAT WHICH IS WORKING AND LESS OF THAT WHICH IS NOT:
This works well in life as well as trading. If there is a “secret” to trading… and to life… this is it!

15: CLEAN UP AFTER YOURSELF:
Need we really say more? Errors only get worse.

16. SOMEONE ALWAYS HAS A BIGGER JUNK YARD DOG:
No matter how much “work” we do on a trade, someone knows more and is more prepared than are we… and has more capital!

17: WHEN THE FACTS CHANGE, WE CHANGE!
Lord Keynes… again… once said that “When the facts change, I change; What do you do, Sir?” When the technicals or the fundamentals of a position change, change your position, or at least reduced your exposure, perhaps exiting entirely.

18. ALL RULES ARE MEANT TO BE BROKEN:
But they are to be broken only rarely and true genius comes with knowing when, where and why!

Final Weekly Insights For 2018

This is the final Weekly Insights for calendar 2018. I hope you all enjoyed reading my weekly snippets and analyses as much as I did researching and writing them. It's been a long and eventful year, and not just because of share market shenanigans at the very end of it.

During my presentations and media appearances this year I have felt on numerous occasions a genuine connection with investors in that they sensed the overall context for the share market was changing, but nobody had as yet properly explained the how and why of it all.

At FNArena, the team has continued developing new additions and further improvements to our service. Last week we launched ESG Focus, a new dedicated segment to our news service. We have one more fresh initiative upon our sleeves before year-end holidays kick in.

That'll be my final-final effort for the year, before I retreat to spend some time near the water, hiding from the sun, catching up on a million things left to do, including reading some more, and recharging the inner battery.

I sincerely hope 2018 hasn't been too much of a disappointment, and that our efforts at FNArena, including my personal observations and insights, have made a significant and positive contribution. Next year will be different again, as is always the case. May Dame Fortuna smile graciously upon you all.

Weekly Insights will resume at the end of January. Till then take care, and all the best. We shall continue this relationship in 2019, hopefully.

Rudi On TV

My weekly appearance on Your Money (the channel formerly known as Sky News Business) is now on Mondays, midday-2pm.

I shall make an appearance on Peter Switzer's program on Your Money on coming Monday, 7.30pm.

Rudi On Tour In 2019

-ASA Inner West chapter, Concord, Sydney, March 12
-ASA Sydney Investor Hour, March 21
-ASA Toowoomba, Qld, May 20
-U3A Investor Group Toowoomba, Qld, May 22

(This story was written on Tuesday 27th November 2018. It was published on the Tuesday in the form of an email to paying subscribers at FNArena, and again on Thursday as a story on the website. Part Two will be published on the website on Friday morning).

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

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

Rudi’s View: Macquarie, Aristocrat Leisure And Emeco

In this week's Weekly Insights (this is Part Two):

-Out With The Garbage
-Change: Rudi On TV
-Zimbabwe on Top Of The World
-Conviction Calls
-UBS On Inflation
-Rudi Talks
-Rudi On Tour

[Non-highlighted parts appeared in Part One on Wednesday]

Zimbabwe On Top Of The World

Some things a sane mind simply cannot make up, no matter what the context.

With equity markets globally in turmoil, and the Australian share market giving up all the gains that had been booked over the first nine months of calendar 2009, the stock exchange in Harare, Zimbabwe was celebrating an all-time record high.

Make no mistake, the ruling elite is still enriching itself while ruining further what once was a thriving exporter in the south of Africa.

Hyperinflation is no more, but economic decay remains and nobody believes the official inflation estimate currently printing 4.8%.

Businesses are being affected by acute shortages in foreign currency. Investors are treating equities as a preservation of wealth. In local currency, the Zimbabwean Stock Exchange has appreciated some 18% this year, which makes it one of the best performers in the world.

Conviction Calls

First up, a warning from me, again, to all investors out there: do not get sucked into this whole theme of "value" is now going to outperform "growth" by buying into (or holding onto) the wrong stocks.

On Monday, I referred to Domain Holdings ((DHG)) and Fairfax Media ((FXJ)) issuing a profit warning. On Wednesday, as I am writing Part Two of this week's Weekly Insights, shares in The Reject Shop ((TRS)) are down by -34% after yet another profit warning from an under pressure business model that has a long legacy for surprising into the negative.

These examples should remove two misconceptions that have long survived inside the financial industry: the first is that a lower share price takes care of all the risks, which clearly is not the case (not even after this month's heavy sell-off) and the second one is that High PE stocks represent higher risk because, you know, watch what'll happen when they disappoint.

The irony here is, of course, that if you pick the high quality companies among the High PEs you'll seldom encounter a nasty surprise such as delivered by Domain and The Reject Shop. Whereas The Reject Shop shares had fallen from $8 to $6 already, and then further to $4.50 as the share market met broad based selling.

By that stage the shares were trading on PE ratios well below market average and an implied dividend yield well above the banks and the market average. And as we know now, the shares still had another -34% downside in them on the back of today's profit warning.

Fact remains, most stocks in the "value" basket are carrying a lot of operational risks and uncertainties, as old economy stalwarts are struggling to cope with a changing market place, increased competition, technological advances and government policies (or the lack thereof).

Many of the quality growth companies had become too popular and the current share market correction is taking care of this. However, it remains yet to be seen if and for how long these quality companies, providing robust growth outlooks, will remain out of favour.

In the meantime: don't get stuck with value traps such as The Reject Shop which, coincidentally, would also have been a yield trap for those investors desperately seeking income and lured in by what must have looked like a very attractive yield.

(See also Part One published on the website on Wednesday)

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Shares in Aristocrat Leisure ((ALL)) have put in a solid rally this week and that should not surprise. Amidst ongoing positive feedback via industry reports, sector data, conferences and stockbroking research, the shares kept sliding from a high around $33 in July to near $28 on Monday.

Enough reasons for experts to step into the limelight and declare the shares are nothing but a buying opportunity. Cue Mathan Somasundaram, market portfolio strategist at Blue Ocean Equities, alongside analysts at Deutsche Bank, UBS, Wilsons, Baillieu Holst and CLSA (I might have forgotten a few) who all declared Aristocrat shares are a screaming buy at these beaten down levels.

Baillieu Holst upgraded to Buy on Tuesday, declaring the -17% fall from the record closing high of $32.98 "has come to be a rare opportunity in recent years to buy the stock on material weakness". Baillieu Holst upped the new price target to $33.15 from $31 previously. Among the positives cited in support of the move was favourable feedback from last week's global gaming expo in the USA; G2E.

One day earlier, in the midst of the severe sell-down of Australian equities, Wilsons declared it is time to step up and declare Aristocrat shares an unmitigated buying opportunity. Wilsons has a fair value assessment around $33. It's price target sits at $32.95. Over at CLSA the analysts have a price target of $41.26.

I do know Aristocrat Leisure, due to its link with pokie machines in Australia, is not everybody's taste. Just saying...

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CLSA (senior) banking analyst Brian Johnson has been a long time groupie of the Millionaires Factory nowadays operating as Macquarie Group ((MQG)) and amidst October turmoil he has shown no intention to change his view. Quite to the opposite, when selling orders started hitting Australia, and Macquarie Group shares too started sliding ever further away from the $130 all-time high, Johnson issued a special missive to the database of clients: buy the dips.

Admittedly, said Johnson, this is a high beta stock, and one cannot but point out Macquarie is, essentially, "an asset recycler leveraged to rising asset values in an environment where bond rates are also rising". But this is no time to bail, declared he.

Amongst the numerous reasons pointed out, Johnson points out conservative accounting virtually guarantees tailwinds to persist for a long while yet. Unless impairments would rise, market consensus forecasts are most likely to be proven too low yet again for the years ahead.

The company is also a beneficiary of market volatility, a weaker AUD and US tax cuts. Plus it carries surplus Common Equity Tier 1 (CET1) capital in combination with regulatory approval for a $1bn buyback, while generating $750m in suplus CET1 each year.

Bell Potter banking analysts TS Lim and Tim Piper, on Monday, equally used a general preview to the upcoming banks reporting season to reiterate their sector preference remains with Macquarie Group. This despite Bell Potter rating three of the Big Four as Buy (Westpac ((WBC)) being the exception) while also viewing Suncorp ((SUN)) shares worthy of the highest rating possible.

Bell Potter has a $132.50 price target for Macquarie Group, declaring "the recent share price decline provides a great opportunity to invest in this “Cash and Growth” story".

In case you wondered, and I have no doubt many among you do, here's Bell Potter's view on the Big Four: "ANZ ((ANZ)) and NAB ((NAB)) appear to be most resilient to medium term Royal Commission headwinds while CBA ((CBA)) has, in our view, reached an inflexion point that now justifies an upgrade to a trading Buy".

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One of the yield/value traps that had many an investor bamboozled in 2018, G8 Education ((GEM)), has proven quite resistant this month. I guess there's only so far a share price can fall and Australia's number one owner/operator of childcare centres is still paying dividends, despite persistent industry headwinds.

Those dividends were cut in FY17, and the same scenario applies to FY18 (financial year to December). Most analysts covering the stock are projecting dividend increases again from next year onwards. We'll see. In the meantime, analysts at Wilsons are not budging from their view the shares are not worth more than $2.03 (around where the shares are trading) and their message to long suffering shareholders is as clear as pie: you will have to be patient.

Inside the FNArena universe of stockbrokers covering this stock, Wilsons sits near the bottom in terms of valuation, rating G8 Education no more than a firm Hold. If you have access to Stock Analysis on the FNArena website, you'll find the likes of Morgans, UBS and Ord Minnett are still willing to stick with a more positive view.

But hey, take it from me, there's nothing as easy as adopting a positive view after the share price has been walloped. Investors do it every day in the share market. It didn't work so well with Slater & Gordon ((SGH)), iSentia ((ISD)) or The Reject Shop, just to name a few.

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One sector that has quite a number of analysts excited are the contractors and equipment providers to miners and energy producers. Overall activity is forecast to pick up for the coming 2-3 years or so, though this hasn't helped RCR Tomlinson ((RCR)) of late. And who could forget Forge Group?

Nevertheless, Goldman Sachs this week initiated coverage on Emeco Holdings ((EHL)) with a Buy rating and a price target of 47c, suggesting significant upside given the share price on Wednesday is trading around 38c, no doubt already on the up because of Goldman's positive expectation.

Emeco, which is Australia's largest mining equipment rental firm, is making a come-back after having been in the dog house from 2014 until mid-2017. If Goldman Sachs' projections prove correct, CAGR for the next three years is 27%. Further adding to the analysts' confidence is the forecast Emeco will announce the return of a dividend for shareholders in the second half of FY20.

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Investors should note analysts have equally stepped up support for shares in Link Administration ((LNK)) this week past, but we already published a story about this on Wednesday:

https://www.fnarena.com/index.php/2018/10/17/treasure-chest-investors-missing-link/

For full disclosure: All three of Aristocrat Leisure, Macquarie Group and Link Administration are proudly held in the FNArena/Vested Equities All-Weather Model Portfolio (see also further below).

Investors can read more about the Portfolio here:

https://www.fnarena.com/index.php/2018/10/04/rudis-view-all-weather-model-portfolio/

UBS On Inflation

Prepare for an inflation shock by month's end.

No, not what you are thinking right now. Economists at UBS have conducted a deep dive into what is occurring underneath underlying consumer prices inflation in Australia and their conclusion is the quarterly update locally, scheduled for October 31, is most likely to surprise to the downside.

Mind you, quarterly CPI readings have mostly underwhelmed over the past two years, so we shouldn't be shocked by this. But there is a higher oil price, and a weaker Aussie, plus a number of economists continues to hammer home that wages inflation, it is coming.

If UBS's calculations will be vindicated by month's end, the third quarter is about to generate one of the lowest inflation readings on record. Yes, you read that correctly. One of the lowest, ever.

UBS thinks a reweighting of the CPI basket, plus price deflation for child care, education and autos will more than just compensate for dearer fuel and tobacco tax hikes. On UBS's current estimate, Q3 underlying CPI will print 0.3% (versus 0.4% the previous quarter) to pull down the year-on-year number to 1.7%.

Combine this forecast with a bearish view on the housing market and it is no surprise UBS thinks there will be no action from the RBA until 2020.

Rudi Talks

Audio interview from last week in which I advocate investors raise more cash and keep a list of stocks they do not own, but would like to:

http://boardroom.media/broadcast/?eid=5bbd2c4b7410a23524811618

Rudi On Tour

-Presentation to ATAA members and guests Sydney, on 18 October
-AIA Celebrity Lunch, Brisbane, on November 3

(This story was written on Monday 15th October 2018. It was published on the Monday in the form of an email to paying subscribers at FNArena, and again on Wednesday as a story on the website. Part Two was written on Wednesday and published on Thursday).

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

Out With The Garbage

In this week's Weekly Insights (published in two parts):

-Out With The Garbage
-Change: Rudi On TV
-Zimbabwe on Top Of The World
-Conviction Calls
-UBS On Inflation
-Rudi Talks
-Rudi On Tour

[Non-highlighted parts will appear in Part Two on Thursday]

Out With The Garbage

By Rudi Filapek-Vandyck, Editor FNArena

After what seems like an eternity of more selling than buying, the Australian share market is now heavily over-sold. Market indices have given up all gains accumulated earlier throughout the running calendar year, plus some. And it all went in a heart beat or two.

If markets follow the standard blueprint, we should see a relief rally, followed by yet another move to the downside. Only then will there be stabilisation, which can develop into a platform for the next rally upwards. Or not.

While it is fashionable to now reel out all kinds of statistics about how many -5%-plus market down drafts have occurred since the second week of March 2009, when the last bear market of late 2007-Q1 2009 was put in a coffin and buried, the objective observation is this bull market is getting more mature by the day, economic momentum inside and outside the USA might be peaking, the Federal Reserve is a lot further into its tightening process and global bond markets seem a bit restless.

In such context, bad things can, and usually do, happen. Quod erat demonstrandum. Forecasters including myself had been building the case that 2019 would likely be a lot tougher for global equity markets, but it now increasingly looks like "tougher" has arrived much earlier.

For good measure: there is no evidence whatsoever to suggest the forward trend is now irrevocably south. But there is a real possibility that equity indices might have peaked, at least for the time being, and a more cautious approach seems but appropriate.

Most experts elsewhere are now telling investors they should grab this opportunity because this October market sell-off has created bargains everywhere. I have a different proposition. I agree share market weakness creates opportunity, but, as always, investors need context to assess what type of opportunity.

Irrespective of what happens to share prices tomorrow or the day after, there's no denying risks have been building throughout calendar 2018. Investors have largely ignored these risks, until the past two weeks. For long term oriented investors, the best strategy is now to de-risk portfolios and to try to avoid that one risk event can completely erase all the positive achievements from the years past.

Conclusion number one: cash is now a valuable asset.

Many a professional funds manager had been increasing cash levels earlier in the year, and so did the FNArena/Vested Equities All-Weather Model Portfolio. You might have done the same, if you'd read my Weekly Insights and had acted accordingly. If not, it never is too late to make changes to one's strategy and/or portfolio.

More importantly: share markets might look over-sold in the short term, this means nothing for the risks that have been building. Hence why I believe the best strategy is to look forward 1-2 years and consider the many risks that may or may not impact over that time span.

On international level, we have US bond yields that might surge a lot higher, the US dollar can rally a lot higher too, which means the Aussie dollar might crash, while crude oil prices can still rally higher too, while growth globally is slowing, US equities can have a much deeper correction (-10-15% is possible), Emerging Markets can throw up a tantrum, and the tension between the Trump administration and China can turn genuinely nasty, with Australia finding itself on the "wrong" side (from China's perspective).

Not to be forgotten: there is debt everywhere.

Domestically, we have banks and the Royal Commission, a housing market that is now correcting, household budgets further under pressure and a political cycle that is not favouring the incumbents.

All this seems a lot to take into account, which is why my preference lies with high quality, resilient businesses, that have a robust growth outlook, with as little risk attached as possible.

Some of such businesses have been communicating with investors recently. I note, for example, Amcor ((AMC)) has used its AGM to reiterate guidance for the year. Company management has a positive track record. This in itself is a de-risking event. The same can be said about Corporate Travel ((CTD)). The latter's management used a conference last week to communicate the new financial year has started strongly, while integrating the Lotus acquisition is progressing well.

Note also that, prior to the share market melting down, Carsales ((CAR)) had received three stockbroker upgrades to Buy in quick succession. Brian Johnson at CLSA and TS Lim at Bell Potter reiterated on Monday they think weakness in Macquarie Group ((MQG)) shares is creating an opportunity for investors who dare look past share market gyrations. Both would say bank shares in general look "cheap", but Macquarie remains the sector favourite.

Note that I don't think investors should be focusing on "value" but on "quality" and "risks" instead. Personally, I'm still not keen on banking shares, but I am a big fan of Macquarie (and so should you be). To prove my point about focusing too much on "value": Fairfax Media ((FXJ)) and Domain Holdings ((DHG)) unexpectedly issued a profit warning, also dragging down groom-to-be Nine Entertainment ((NEC)) and market leading competitor (and of incredibly better quality and resilience) REA Group ((REA)).

To put this in another way: shares have been falling significantly across the board. Why would you now risk being caught inside a yield- or value-trap? Surely the most devastating experience would be to survive this stomach-churning share market volatility only to be caught out in better times because one is still holding multiple stocks of the lesser quality/higher risk type?

Investors who really want to maximise this month's opportunity should, in my view, start cleansing the slate (to mix a few metaphors) and build a robust portfolio for the risks and challenges ahead.

Let's be brutally honest to ourselves: we all have a few. Stocks that seemed like a good idea at the time, but it simply hasn't worked out well. Time to ignore purchase prices and emotional attachment and ask some very apposite questions instead: would you still buy those stocks today (without looking at the share price)? Do you still think this is the ideal stock to own given the challenges ahead?

If not, you know what to do. It's time to get rid of all the garbage and add some real robust quality instead. Share prices have fallen across the board. Don't stick with a pair of brown pebbles whose gloss has worn off while you now can own a selection of true diamonds at much cheaper prices than only one month ago.

The FNArena/Vested Equities All-Weather Portfolio has done exactly this over the past week or so. We got rid of shares in companies like InvoCare ((IVC)) and Pact Holdings ((PGH)), disappointing investments that should have been abandoned earlier, but hey, we are all human. Instead we are looking at, or have been buying, shares in ARB Corp ((ARB)), GUD Holdings ((GUD)), ResMed ((RMD)), Goodman Group ((GMG)), Reliance Worldwide ((RWC)), and the likes.

At the same time, we have increased our cash position, which gives us double comfort in that we can look to deploy more, while also reducing our exposure overall to a share market climate that is volatile at best, and toxic at worst.

A few other things to take into consideration while portfolio re-calibration is in process:

-smaller cap stocks are more vulnerable during risk-off events
-stocks on higher PE ratios might sell-off more because of the perceived "richer" valuation, plus the knee-jerk response of profit taking implies past winners are sold more, and easier, than past losers (it's a human reflex thing, not necessarily useful beyond the short term)
-stocks in companies with no profits and no dividends might fall further (there is no natural support)
-investors should in particular be careful with smaller cap stocks that carry a lot of debt and whose operations might come under pressure
-local technology stocks are essentially beholden to whatever happens with Nasdaq in the US

For example: I would not be left with owning shares in Speedcast International ((SDA)) right now. The company severely disappointed in August and is carrying a mountain of debt, having acquired a multiple of companies since listing. Too much risk for my liking. In similar fashion, I did cast an eye over Ansell ((ANN)) shares, but there still is the possibility that gloves might be affected by Trump's trade tariffs.

A cheaper share price does not tell the full story. Investors should always make sure they try to gauge to the best of their ability the risks involved, so they can make (hopefully) a well-informed decision whether they want exposure, or rather not.

As has been our investment strategy since inception of the All-Weather Portfolio, the focus remains firmly on the various categories shown on the dedicated All-Weather Performers section on the FNArena website (sorry, available to paying subscribers only). To reduce risk and increase our cash position, the Portfolio has dialled back overall exposure to mid- and smaller cap stocks, and to the technology sector.

On a net-net basis, we have noticeably increased the Portfolio's cash position, which should provide both comfort and the optionality of responding to further developments.

Investors who'd like to include the August Reporting Season Monitor in their research/target selection can do so via the following story:

https://www.fnarena.com/index.php/2018/09/12/august-2018-reporting-season-wrap/

The Monitor itself is attached to the story (see top). Plus, of course, we are running a Monitor for post-August results live on the website (soon to be updated with the banks and others).

Change: Rudi On TV

As of this week, I will no longer appear on Your Money (the renamed Sky News Business) on Thursdays, but weekly on Mondays instead (1-2pm). This is likely to also impact on when I manage to write and send out Weekly Insights, in particular when a lot of reading, researching and thinking might be involved.

Hence from now onwards Weekly Insights might become more of a Tuesday event rather than the Monday evening, as has been the rhythm for quite some time. Whenever this happens, Part Two (if there is one) will be published on the website on Friday morning instead of on the following Thursday.

This week, as you might have guessed, everything will remain the same as always.

Rudi Talks

Audio interview from last week in which I advocate investors raise more cash and keep a list of stocks they do not own, but would like to:

http://boardroom.media/broadcast/?eid=5bbd2c4b7410a23524811618

Rudi On Tour

-Presentation to ATAA members and guests Sydney, on 18 October
-AIA Celebrity Lunch, Brisbane, on November 3

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Rudi’s View: All-Weather Model Portfolio

By Rudi Filapek-Vandyck, Editor FNArena

Last week a reader sent through the following questions regarding the FNArena/Vested Equities All-Weather Model Portfolio. I have decided to share my response with a broad audience as I think many more might be interested.

1) What are the exit conditions if someone elects to exit the fund and close the SMA account?
2) I tend not to invest in stocks related to gambling, alcohol/tobacco and banks in general. Do I get to choose if the fund decides to invest in those stocks?
3) Portfolio performance of 8.35% pa since inception (close to 4 years) is good but not great so far. Do you anticipate better performance (> 10% pa) going forward?

My responses:

1) What are the exit conditions if someone elects to exit the fund and close the SMA account?

One of the key factors behind our decision to run the Model Portfolio via Separately Managed Accounts (SMAs) is the wide-ranging flexibility involved. You can open an account, transfer funds, reduce funds, add more funds, and close your account at any time and at your own volition while having day-to-day insight in which shares are kept, bought and sold, the respective allocations, changes, dividends, costs and performance.

If you decide to join through FNArena you will receive a small discount on costs, but all-in-all most costs are related to platform, admin and license which are pretty much set in stone unless competition forces the platform operator Praemium to lower its standard fee. (This is not inconceivable but hasn't happened as yet).

When asked about costs I usually respond with approximately 1.5% per annum. The "approximately" refers to the fact some costs are related to the size of the funds allocated plus a minor part stems from potential and unpredictable brokerage. The latter is a tiny cost under all circumstances.

Importantly, and directly related to your question, there is no cost for closing the account with Praemium and Vested Equities; once you withdraw all funds and close down the account you simply stop paying any further fees.

Here is the full overview of the costs involved:

Minimum participation is set at $20,000.

2) I tend not to invest in stocks related to gambling, alcohol/tobacco and banks in general. Do I get to choose if the fund decides to invest in those stocks?

Unfortunately, wide-ranging flexibility does not equal unlimited flexibility. Investment decisions are made for the Model Portfolio and they are being replicated across all SMAs connected. As said above, every investors has access and can make changes anytime about how much funds he/she allocates, but the process cannot have too many exceptions and discrepancies or it simply won't work properly.

The whole idea behind the research into All-Weather Stocks is to find high quality companies with many years of growth ahead of them, that can be owned for many years in the Portfolio. You will find that high quality mostly equals companies that take good care of their staff and clients, communicate well with all stakeholders, invest for the long run and make sure they do not destroy tomorrow's future for a quick benefit today.

Investors globally are increasingly adding Environmental, Social and Governance (ESG) filters to their toolbox when assessing present and future investments and here at FNArena we find All-Weather Performers/High Quality companies are usually already using the same blueprint.

Portfolio stalwarts like Amcor and Orora might be closely linked to tobacco, sugar and waste, but these companies are also at the forefront of new technologies and recycling initiatives for the global packaging industry. Long held Portfolio constituent NextDC has decided to equip all of its data centres with as many roof solar panels as possible.

DuluxGroup is, as I understand it, a core holding for Ethical Partners Funds Management. The company equally is putting in place solar power for a new factory. The company is involved with the 'Paintback' program which aims to be a more responsible pathway to get rid of leftover paint.

Possibly the one constituent that is most likely to trigger some controversy/criticism is Aristocrat Leisure. We thought long and hard before we added this stock to the Portfolio. It is there not because Aristocrat is part of my selection of All-Weather Stocks, but because it has transformed itself into a prime growth story that still has many more years to develop.

Note as the concept of All-Weather Performers is exactly the opposite of miners and energy companies, we automatically shun coal, steel, aluminium, fracking, and other contentious business models. Australian banks are not excluded by default. If the sector ever gets back to its mojo of the 1990s and 2000s we might reconsider them as All-Weathers, but I very much doubt whether such a scenario could possibly be on the horizon in the foreseeable future.

I share my selection, insights and updates on All-Weather Performers regularly with paying subscribers at FNArena. There is also a dedicated section on the website, as well as eBooklets and two published books. Feel free to get acquainted with the companies and sectors that form part of my research and analysis. Needless to say, my research and analysis are continuously ongoing. New insights will be forthcoming and they will have an impact on future investment decisions.

3.) Portfolio performance of 8.35% pa since inception (close to 4 years) is good but not great so far. Do you anticipate better performance (> 10% pa) going forward?

I think a little bit of context is required here. When we sat down in 2013-14 to prepare for the chosen investment mandate, we very much believed that future investment returns would be lower than the circa 11% long term average the Australian share market was exhibiting at that time. That assessment has proved to be correct.

We thought circa 8% as an average per annum looked both reasonable and achievable. Thus far, the All-Weather Model Portfolio has outperformed those expectations. A little surprising maybe, is that the ASX200 has equally performed better than 8% on average, despite going through numerous periods of difficulty and weakness.

Note the All-Weather Model Portfolio has outperformed the broader share market since January 2015 ("inception") in all six months periods except for the first, when we started with 100% in cash and the share market was rallying, and the second half of 2016 when en masse portfolio switching out of defensives & winners and into laggards & cyclicals temporarily dominated the market.

Among the promises we made to investors are lower volatility in price movements and a lower risk profile, and history thus far shows we have been able to deliver. In particular the lower risk characteristic implies the portfolio return is highly unlikely to shoot up to 25%, 30%, 40% or higher. In the fabel featuring the hare and the tortoise, the Portfolio very much resembles the tortoise who crosses the finish first, having approached it in a steady and gradual manner.

But the context equally involves other funds, portfolios and strategies. Only this morning I opened a fund manager's newsletter which showed the following performance update: one month performance -0.99%; financial year to date: 0.02%, calendar year to date: -3.22%. However, the number to advertise remains the performance since inception: 198.58%.

This is typical for the large majority of fund managers in Australia. Long-term outperformance mainly stems from halcyon times many moons ago that still compensate for the fact that returns have dropped significantly in recent years. If you visit websites for large listed managers, such as Perpetual and Janus Henderson, and look up respective funds performances in Australia you're most likely to find the numbers (even before fees) are not keeping up with the broader index.

The FNArena/Vested Equities All-Weather Model Portfolio has beaten the index. We just updated performance numbers until the end of August for our brochure (see below).

The third factor to take into consideration is the Australian share market is one of only few to not experience a negative performance to date in the running calendar year of 2018. I wouldn't necessarily exclude the fact that 2019 might turn out quite the challenge, with slowing growth, ongoing Fed tightening, rising inflation, local elections and more Trumponomics just a few factors that come to mind.

Of course, financial markets have surprised in a positive sense since the global turmoil of early 2016, and they may well do so again next year and the year(s) thereafter. But I am not sure whether anyone can confidently promise you in excess of 10% annual return on your investments. I certainly won't be making any such promises.

Regarding the performance update below, one has to take into account your personal return will also be determined by the timing of your SMA, plus for a Portfolio that has run for less than four years, the significant set-back experienced in the second half of 2016 still has a large impact on the averages. Only time can change that, assuming we can continue our track record thus far.

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.

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Tag Archives: All-Weather Stock

Rudi’s View: All-Weather Portfolio, Charts & Conviction Calls

Rudi’s View: Afterpay Touch, Nearmap, And a2 Milk

Do I Have A Few Surprises For (Most Of) You!

In Quality We Trust

Everybody Is Waiting…

Rudi’s View: Join The CSL Challenge

Rudi’s View: All-Weather Portfolio Considerations

Rudi’s View: Macquarie, Aristocrat Leisure And Emeco

Out With The Garbage

Rudi’s View: All-Weather Model Portfolio