Finding value in the market

Christine St Anne  |  20/11/2012Text size  Decrease  Increase  |  
Christine St Anne: Russell Investments recently reweighted the stocks in its Australian value ETF or exchange traded fund. Today, I am joined by Russell's Scott Bennett to give us an insight into what value he's finding in the Australian market. Scott, welcome.

Scott Bennett: Thanks, Christine, great to be here.

St Anne: Scott, so what sort of sectors are you finding value?

Bennett: I guess the main kind of theme for the value ETF at the moment following last weight balance is really; one, it kind of gained more cyclical exposures. So, kind of the key sectors that were overweight include things like metals and mining is a part of the market we're seeing very attractive opportunities at the moment, and largely in the major miners there, so looking at things like BHP and Rio Tinto. In terms of that metals and mining sector, it's generally underperformed the market by about 20 per cent for the past year. So, we think that without kind of discount to the market, it's looking relatively good value at the moment; attractive opportunity.

Outside of that, we're also seeing some good opportunities in – as I say, the other cyclical areas such as media. So, Seven West Media is something we've brought into the portfolio or into the index back in 30th of September, and we think that that – the fundamentals on that Company look solid and they came out with a very good announcement earlier this week as well. Looking outside of that, other firms such as Incitec Pivot at the current valuation is looking very attractive as well. So, they're the kind of main cyclical themes that are driving the portfolio at the moment.

Outside of that, we also have an allocation to banks as well. Banks aren't looking overwhelmingly attractive from a valuation point of view, but relative to the more defensive parts of the market, they are looking relatively cheap. So, seeing good opportunities in the banks, and especially in this part of the interest rate cutting cycle, banks generally do perform very well.

St Anne: Scott, you mentioned the mining sector, but with the mining boom cooling, is that really of concern?

Bennett: Yeah, that's been a theme around for probably the last 18 months or so, and we've actually seen that kind of being reflected in the prices of a lot of these companies. We saw kind of obviously the slowing of Chinese growth issue. In 2013, we expect kind of China's growth to be back above 8 per cent and we expect – we think that most of the discounting of that, softening in the commodity cycle is actually more than factored into the prices at the moment. So, we think that the market is kind of over-discounted during that times, softening in the commodity cycle.

St Anne: Scott, in your report you're also underweight in the defensive sector. What are the key reasons behind that?

Bennett: Yeah, I mean largely it's due to valuations. So, if you look at kind of the key defensive sectors in the market, so if you look at healthcare, telecommunications and REITs are traditional defensive sectors. So, for the telecommunications, so effectively Telstra and the healthcare sector, the returns to those sectors have been over 40 per cent over the past year and the market is up roundabout 10 per cent. So, they've actually outperformed by 30 per cent. And for the REIT sector, they're up roundabout 30 per cent over the past year.
So, without effectively those premiums baked into that pricing, we think it's probably a little bit too much, and we think the investors are paying too much for a premium for certainty, and when kind of market sentiment shifts, you'll actually see those sectors to be the first sold as people look to kind of put more risk on into their portfolios.

So, purely from a valuation perspective, those companies are very good companies, and they do charge you a premium for a very good reason. But we just think that there are much more compelling opportunities in the market at the moment.

St Anne: Scott, and finally, can you give us an insight into what sort of processes you use when rebalancing this ETF?

Bennett: Yeah. So, with the ETF, it's focused on large-cap companies in Australia, and what we effectively do is we look at really two factors. So, we look at a valuation factor. So, we look to kind of measure how cheap a company is and we do that relative to other companies within the large-cap space as well. So, we're trying to find those that are trading on the cheapest multiples relative to others.

And then we also have almost a contrarian factor or anti-popularity factor. So what we look at is we look at expected growth rates for particular companies and we actually look to favor those companies almost with the lower growth rates. So, we're looking for those companies that are not very loved by generally the broking community. So, the types of stocks that we're really looking for are what we call contrarian stocks.

So, these are the things that are very unloved by the market. They've been sold down heavily, and people don't expect them to do much. What we generally find is that those stocks generally outperform in the market over time, but they're traditionally not the stocks that you'll hear about at the barbecue on Sunday, or the taxi driver braking on the way to the airport.

St Anne: Scott, thanks so much for your insights today.

Bennett: Thank you.

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