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.

Video Archive...

Introducing star ratings to Morningstar Australasia equity research
27/04/2017  What investors can expect from Morningstar's roll-out of its star rating methodology across Australian and New Zealand equity research, as explained by the regional director of equity research, Adam Fleck.
French elections: Macron versus Le Pen
26/04/2017  Following the first round of the French Presidential elections, the 7 May vote is now between Emmanuel Macron and Marine Le Pen. What does it mean for investors?
How climate change will impact your portfolio
20/04/2017  Ignore climate change at your portfolio's peril, says Jeremy Grantham, founder of asset manager GMO.
How dwindling resources will push up commodity prices
13/04/2017  Jeremy Grantham, renowned investor and founder of GMO, explains how a growing population is putting a strain on global resources.
How retirement spending affects withdrawal rates
10/04/2017  Data shows that the withdrawal rate gets higher as spending decreases in retirement, says Michael Kitces, a US-based financial planning expert.
What lies ahead for mining and materials
10/04/2017  Iron ore, coal, lithium, and uranium: some end-markets will rise and others will fall behind, says Morningstar commodities and resources analyst David Wang.
The evolution of multi-asset investing
07/04/2017  More difficult market conditions in a rising interest rate environment highlight the value of active management across your portfolio, says Simon Doyle, Schroders' head of fixed income and multi-asset.
When is the right time to buy stocks?
29/03/2017  Davis' Associates Chris Davis says the best time to invest is when you have the money, and to ignore market "noise".
How misinterpreting risk impacts financial returns
28/03/2017  Dr Gerd Gigerenzer says fund providers need to invest in education so that savers are better equipped to deal with risk--and can make better financial decisions.
Are European stocks overvalued?
27/03/2017  Isabel Levy of French asset manager Metropole Gestion explains how she uses fundamental industrial analysis to avoid value traps and identify the fair value of European equities.
Which funds are worth paying for?
23/03/2017  High active share funds--that is, those managers who take off-benchmark bets--outperform those which are low active share. So, ban closet trackers from your portfolio.
Bond market wobbles no cause for panic
21/03/2017  Australian bonds see only a slight tremor in response to the Fed's rate rise, says John Likos, Morningstar's senior credit analyst, who also provides insights on the new, and anticipated, hybrids from Australian banks.
ESG: Essential steps for successful long-term investing
21/03/2017  Want sustainable long-term returns? Morningstar UK reveals the essential components and the fund providers who are getting it right.
Few values left in global stock market
20/03/2017  Morningstar's directors of equity research think investors need to be cautious in the market today and offer some of their best investment ideas.
Why the time is right to invest in emerging markets
20/03/2017  Hilde Jenssen from Norwegian fund manager Skagen admits that emerging markets have disappointed investors over the past three years--but says valuations are attractive and reforms are boosting returns.
Johnson: Fed's path may not be smooth
16/03/2017  The Fed's plan for stair-step rate hikes in the coming years will likely be derailed by economic reality, says Morningstar's Bob Johnson.
First-half 2017 earnings season insights
15/03/2017  Companies produced reasonably good results overall with only a few standouts, even as a cost-out theme dominated, says Peter Warnes, head of equities research, Morningstar.
The growing appeal of LICs
06/03/2017  The popularity of listed investment companies is on the rise once again, but there are several things investors need to be aware of before buying in, explains Michael Malseed, Morningstar senior analyst, manager research.
Earnings season wrap: BHP exercises good cost control
27/02/2017  As the curtains close on the 1H17 reporting season, BHP books earnings that are slightly softer than expected, while Woolies takes market share at the expense of margins.
Possible $2.5bn tailwind to drive hybrid demand in 2017
22/02/2017  Strong supply dynamics and ongoing economic stability should create significant opportunities for hybrid investors in 2017, according to John Likos, senior credit analyst, Morningstar Australia.