US stock markets have broached record levels recently, while our own local indices have flat-lined by comparison. But not all is lost. Opportunity to deliver strong risk adjusted returns still remains just as strong in the domestic equities market according to boutique portfolio manager Andrew Martin. He is portfolio manager of the Alphinity Concentrated Australian Share Fund and one of four founding principals of the highly rated boutique Alphinity Investment Management (Alphinity). The Alphinity Concentrated Australian Share Fund is one of the nation’s best performing funds over the past five years on a risk-adjusted basis. “Delivering what it is designed to do,” Mr Martin notes.
“The Australian economy is holding up well, interest rates are low and likely to stay that way for some time, commodities have improved, the Chinese economy is stable and global growth is improving which will all benefit Australia and ultimately our stock market” he says.
“When combined with positive company fundamentals we believe Australian equities will be in favour as investors realise there is potential for earnings growth over time that echoes offshore markets.”
“The market here offers reasonable value especially on a yield basis, and even more so when adding in franking credits for domestic investors, which should help the local market”
He also notes that some 40% of earnings of the top 200 ASX listed companies are generated from offshore, providing some global exposure. “Both through the Australian economy in general and individual companies you can get exposure to the improving global environment right here in Australia”.
Mr Martin adds: “The latest Australian reporting season reflected earnings growth expectations of 4-5% for the next 12 months which looks reasonable – and business confidence and conditions remain strong. Add 4% dividend yield with some franking and investors have a solid return.
“By actively looking at company fundamentals coupled with targeted quantitative signals, we have identified several stocks we believe will outperform the general index over the next year or so.
Sectors he favours include some resources, banks, tourism and insurance stocks among others.
“For resource companies, we expect commodities to remain higher than what the market is expecting near term, which bodes well for resource company earnings which we expect will be revised higher. We are also taking into account what our people are seeing on the ground in China during our frequent research trips and the impact trends there will have back here in Australia.”
As for the local market’s largest component, Mr Martin says: “Australian banks are one of the few sectors receiving upgrades in the near term. Whilst small, upgrades are a bit of a rare commodity at the moment. If you can look through the negative media sentiment on the sector, risks are now slightly more in favour of the banks’ earnings than against, and credit quality remains strong. In the current environment we favour the more business-orientated bank stocks such as NAB and ANZ”.
Mr Martin says: “We also like Sydney Airports, especially as the number of visiting tourists grow more than expected, including increasing guests from China. The fact that they also then take several flights within Australia bodes well for Qantas, another of our favoured investments.”
“As for insurance stocks, the local cycle has finally turned and commercial insurance in particular is looking much better, which bodes well for the domestically focused insurers over the next couple of years.”
As for concerns that Mr Martin keeps his eagle eye on, they include increased consumer pressure in Australia from higher mortgage rates, as well as higher electricity and insurance prices, which could offset the benefits of steady employment growth, low interest rates and strong house prices. “Interest rates are another thing we watch closely, even though they are not expected to rise anytime soon, but you have to keep an eye on underlying reasons for potential shifts there. It is the same with inflation. We continually watch what is happening in China and how it is likely to impact companies in Australia.”
Alphinity is a true success story of the Australian Funds Management industry. The team manages over $8.5 billion in both Australian and Global equity strategies and have been working together since the early 2000’s. The Concentrated Australian Share Fund is well rated by industry research consultants and available on the majority of platforms. The Fund is suitable as a core Australian equities holding.
The team co-invest alongside investors in the Alphinity funds, having what they call “skin in the game”. Recent research by Fidante Partners showed that Boutique investment managers who are aligned with the interests of their investors via meaningful ownership stakes and co-investments are likely to outperform non-Boutique investment managers who own little or no interest in their underlying businesses.
Originally published in Money Management.
