FNArena’s Weekly Insights – October 26 2020

In this week’s Weekly Insights:

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

Equities Portfolio For 2021

By Rudi Filapek-Vandyck, Editor FNArena

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

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

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

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

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

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

Structure Through Baskets Of Shares

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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