Fund manager bullish on 3 sectors in five-year outlook
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Shares in consumer staples, utilities and non-bank financial sectors are among the most attractive in 2017, according to the chief investment officer of Legg Mason-owned fund manager Martin Currie.
Reece Birtles, who heads up Legg Mason's Australian operation, ignores the noise around the imminent inauguration of Donald Trump as President of the United States, focusing instead on the five-year market outlook.
"What I'm saying is that it hasn't been an easy market environment for companies in the last five years, and I think it will be easier in the next five years," he told a gathering of media in Sydney yesterday.
He points to 2016 as something of a watershed year, when the outperformance of low-volatility funds versus their value-focused equivalents reversed.
"2016 was a massive reversal, and that's because value companies, without stronger market position, are more reliant on the economy. Their performance is a much greater signal of the magnitude of the change last year ... if you look at the difference between low volatility funds, which returned near zero, and value funds, that did near 20 per cent, it's a huge discrepancy," Birtles says.
In terms of the global picture, he sees Australia as "extremely lucky" because unlike the US, there is no huge government debt problem, which means the economy will be "far more resilient to higher interest rates," along with commodity exports and strong population growth.
However, he also singles out the higher concentration risks for Australian investors focused solely on the local market.
Birtles highlights the fact that more than 50 per cent of the income for ASX 200 Index comes from just seven stocks, and more than 40 per cent of the income of the total Australian market comes from the banking sector.
"We believe that you need to have equity income for retirees ... we felt that all the products out there hadn't been built with a retiree's investment agenda in mind," he says.
"Accumulation investors want to maximise their dollar, whereas 65-year-olds want to provide a secure income for the rest of their life. And as a fund manager, they're two quite different challenges."
In response, he says Martin Currie focused on building portfolios that were index-agnostic, where no single stock accounts for more than 5 per cent of the total portfolio value, and no sector was more than 20 per cent.
"It's about minimising the risk to that income stream from any one component," Birtles says.
Asked to name some companies he's most bullish on at present, he points out consumer staples, which "hasn’t been an easy sector for a number of years, but we're seeing a lot of opportunities now".
Specifically, he mentions Woolworths (ASX: WOW) and Coca-Cola Amatil (ASX: CCL). "They've both been under a lot of pressure, but are both very strong businesses, with strong market share, and have been re-working themselves to deal with those challenges ... those stocks are underappreciated."
Birtles also sees opportunities in utilities companies, such as AGL (ASX: AGL), particularly as coal-fired power stations are decommissioned.
In the financials space, while he believes there is an over-reliance on Australia's big four banks by Australian investors, he likes some of the non-bank financial companies.
"Insurance Australia Group (ASX: IAG) is in a very strong market position in car and house insurance, with improving rate cycles that are both resilient in a market downturn."
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Glenn Freeman is Morningstar's senior editor.
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