First XI of stocks.The cricket has got me thinking about what a First XI of stocks would look like. They’d have to always make the grade and hang in there even when the market gets bowled over.
A bank and a health stock would be must- haves, according to my selection committee of some of the best professional investors, but then what? You might be surprised.
One of the most blue chip stocks Telstra, for instance, misses the squad. Though to be fair that’s more because it was always mentioned as an afterthought rather than with any enthusiasm. And remember fund managers aren’t all that impressed with dividends – Telstra’s only delivery – preferring growth instead.
So here are the stocks most nominated for a First XI. Oh, and they’re in alphabetical, not batting order.
You don’t need me to tell you about ANZ or any of the other big banks. Record profits despite next to no growth in lending, and delivering some of the best dividends going. Even so, fund managers are becoming less smitten as the big four have become pricey, though ANZ still has some fans. Based on its price-earnings ratio, which shows how many years of profit it takes to recoup your investment, making it a handy measure of value, it’s the second cheapest, beaten by NAB which is less fancied because it has one foot in the quagmire of the UK economy.
ANZ ticks all but one box: a big bank in an oligopoly, record profits, cutting costs, a juicy dividend that comes with a 30 per cent tax rebate from franking, giving it a 7 per cent annual return and (the clincher) it’s building an Asian business. The missing box is price. All the banks are expensive but when the next economic upswing hits they’ll probably have seemed a bargain now.
”You want the big four banks because they’re diversified financials,” says George Boubouras, chief investment officer of Equity Trustees.
If you’re optimistic about the sharemarket, as you should be if you’re prepared to be patient, there’s something to be said for having shares in who runs it. Especially when it makes its profit not from where the market is heading, but how many are going along for the ride. The more shares that tick over, the more commission ASX makes. Speed trading, where institutions buy and sell in a nano-second, must be a godsend.
While it’s not quite a monopoly – brokers can also trade on Chi-X and other stock exchanges are becoming more accessible – it isn’t exactly challenged either. ”It faces increased competition,” says Geoff Wilson, who runs listed share funds through his listed Wilson Asset Management. ”But trading in shares has been growing at two or three times the rate of inflation and its costs are fairly fixed. As volumes grow by 8 or 9 per cent then a significant percentage of its income will fall to the bottom line. And it has a good cashflow.”
3. BHP Billiton
Come in spinner. As we’re one of the biggest producers of iron ore, coal, nickel and natural gas, a resources stock would have to be in the Australian First XI. Since BHP Billiton is in all these and more, it would be a brave fund manager to overlook it, though its inclusion wasn’t unanimous. There are those who wouldn’t touch a resource stock at the moment. But then it’s almost unAustralian not to select it, even if strictly speaking it’s only semi Australian. As John Abernethy, chief investment officer of Clime Investment Management says: ”I don’t see how you can ignore BHP when Australia relies on its resources output. If it doesn’t perform, then there’s not much hope for the broader Australian economy.”
4. Breville Group
Bet there’s a Breville thermo-this or extractor-that somewhere in your kitchen. Or a kettle. Breville is an icon brand and the stock was chosen by Don Williams, chief investment officer at Platypus Asset Management because ”it has a very good long-term profile and high-quality innovative products”. Breville designs and sells products it has made cheaply offshore and collects a nice margin on them. The stock isn’t cheap, but has runs on the board.
As a world leader supplying vaccines, plasma products and pharmaceuticals, it’s no surprise CSL was selected by more fund managers than any other stock for the First XI. Williams says ”despite being in a mature industry and already a very large company its growth rate is still a pretty respectable 10 per cent. And it has a good R&D pipeline”. For research house and fund manager Lincoln’s chief executive, Elio D’Amato, CSL is simply ”a global leader. The world’s population is growing and its services are directly aligned to this growth. It’s a must-have”.
There isn’t a delicate way of putting this but let me try. Australia has an ageing population and Invocare runs cemeteries, crematoriums and funeral parlours – sorry ”funeral homes” as it calls them, the best known being its White Lady Funerals – if you get my drift. Or as Kieran Kelly, whose Sirius Fund Management caters for well-off investors, put it ”come hell or high water, this business isn’t going away”.
Invocare has been returning an average 20 per cent a year for 10 years. Strewth, that’s even better than the banks. Then again, it’s a lot dearer than them based on its price/earnings ratio.
There are lucrative pickings for those charged with managing our super, which is worth $1.6 trillion and still counting. And for once the banks don’t have it all their own way, thanks to the growth of DIY funds, competition from smaller and more nimble fund managers, and growing interest in overseas shares. Unlike banks, fund managers don’t borrow either – the money is more or less given to them. Magellan Financial Group, which runs six global investment funds, is in the team courtesy of Sebastian Evans, portfolio manager of Naos Asset Management.
”It’s already grown to $20 billion [of funds managed] and its aim is $50 billion. Its global equities funds face very little competition, apart from Platinum. Its managers are well regarded and their distribution [I.e. sales network] is excellent – you don’t just want performance. The lower dollar will be good for it too,” he says.
8. Sirtex Medical
Biotechs are the stocks of the future but apart from a CSL or Cochlear (a surprise omission from the First XI, almost certainly because it’s facing tougher competition and lower returns), choosing the right one is no easy challenge, starting with understanding what it does. Two fund managers selected Sirtex, which has a treatment for liver cancer using radiotherapy through a microcatheter. It’s one of the few biotech stocks that makes money.
”It has a fantastic management team and a net cash balance sheet. There’s only one competitor in radioactive spheres. In two to five years its market size could quadruple. It’s had 25 to 30 per cent compound growth in the past five years and it’s a beneficiary of the lower dollar,” Evans says.
9. Sydney Airport
”Infrastructure has got to be a cornerstone” of any share portfolio, says Kelly, who suggests the owner of Sydney Airport, our international gateway, fits the bill. At first glance it looks like a googly since a federal government finally seems poised to nominate a site for a second airport in Sydney. But it’s not widely known that Sydney Airport, which recently escaped the clutches of Macquarie Bank, is in the cockpit for a second airport.
”It has the first and last right of refusal to build and operate a second airport,” Kelly points out. It’s the number of passengers on a plane, and where they go, not how much they paid for their airfare, that determines Sydney Airport’s take. And thanks to bigger planes it’s getting more fees with no extra flights. Oh, and did you know Sydney-Melbourne is the world’s second busiest air route? Just remember it’s an infrastructure stock so carries a lot of debt.
As the owner of Coles, Bunnings, Target, Kmart, Liquorland and companies you’ve probably never heard of in resources, chemicals and who-knows-where, Wesfarmers has overcome fund managers’ normal aversion to conglomerates. ”It’s well managed with a great consistency in delivering results. The multiple businesses are well co-ordinated and Wesfarmers ticks all the boxes for predictability, sustainability and good management,” David Bryant, general manager investments at Australian Unity says.
The 11th man
When you put fund managers on the spot to pick their First XI the problem is that the more of them you ask, the more likely one will come up with a stock the others would never select. Which is why an all-rounder is called for. Having the entire market would bring too many duds, so how does getting the top 200 stocks in one hit sound?
That’s possible with an exchange traded fund such as SPDR’s S&P/ASX200 – it has its own ASX code (STW) and trades like any other share – which has the 200 biggest stocks in proportion to their size.
After a small fee it will return exactly what the market does.
If you want to do better than the market but without going to an unlisted managed fund, you could try a listed investment company where the resident experts select the best stocks. ”You get market performance and a bit more with an expert manager,” Wilson says, suggesting the Australian Foundation Investment Company.
This gives you a range of stocks, with 82 per cent comprising the top 25, all bought at lower prices, but then the stock is also trading at more than they’re worth.
This story Administrator ready to work first appeared on Nanjing Night Net.