What did Morningstar subscribers buy and sell during March?
A sell-off in a quality stock and a strong showing for ETFs.
Mentioned: BHP Group Ltd (BHP), VanEck Australian Equal Wt ETF (MVW), Vanguard Australian Shares ETF (VAS), Vanguard MSCI Intl (Hdg) ETF (VGAD), Vanguard MSCI Intl ETF (VGS), Westpac Banking Corp (WBC), Woodside Energy Group Ltd (WDS)
Sharesight is a portfolio tracker that is integrated into Morningstar Investor. Their data shows the top 20 trades by Morningstar users in March 2024. The top buy trade, Woodside WDS was unchanged from February, showing that investors are building their positions in the undervalued stock. The second and third buy trades were ETFs – Vanguard MSCI Index International Shares ETF VGS and Vanguard Australian Shares Index ETF VAS.
Interestingly, investors divested from Westpac WBC in March. Westpac’s stock price has been on a bit of a run with the shares up 20% in the past year so this may be investors taking profits.
Here is what our equity and manager research analysts think about the top three buy trades.
Top buy trade: Woodside Energy WDS ★ ★ ★ ★ ★
As Australia's premier oil player, Woodside Petroleum's operations encompass liquid natural gas, natural gas, condensate and crude oil. However, LNG interests in the North West Shelf Joint Venture, or NWS/JV, and Pluto offshore Western Australia are the mainstay, and the low-cost advantage of these assets form the foundation for Woodside. Future LNG development, particularly relating to the Pluto project, encompasses a large percentage of this company's intrinsic value.
Woodside is unique among Australian energy companies in that it has successfully managed the development of LNG projects for more than 25 years—unparalleled domestic experience at a complicated and expensive task. Adding to Woodside's competitive advantages are the long-term 20-year off-take agreements with the who's who of Asia's blue chip energy utilities, such as Tokyo Electric, Kansai Electric, Chubu Electric, and Osaka Gas. These help ensure sufficient project financing during development and should bring stability to Woodside's cash flows once projects are complete.
Woodside's development pipeline is deep, enabling it to leverage the tried and trusted project-delivery platform as a template for other world-class gas accumulations off the north-west coast of Australia. Woodside is well suited to the development challenge. With extensive experience, it remains a stand-out energy investment at the right price. Gas is the fastest growing primary energy market behind coal, and the seaborne-traded LNG portion of that gas market grows faster still. China is building several import terminals, and so demand is likely to pick up, helping to move LNG pricing toward oil parity on an energy-equivalent basis.
In terms of dividends, our analysts do consider it somewhat high. Woodside has had an 80% payout ratio since 2013 while LNG expansion plans have been on hold. The official policy is to maintain a minimum 50% payout of underlying earnings. It is considered an appropriate capital allocation decision to distribute funds as dividends if you’re not investing in the business. However, our analysts believe that it would be better utilized to accelerate growth plans, expanding countercyclically, taking advantage of reduced capital costs. Regardless of this, Woodside have strong cashflow and a healthy balance sheet that should support ongoing dividend payments that are 100% franked.
Top buy trade: Vanguard Australian Shares ETF VAS
Morningstar Medalist Rating: Bronze
The Vanguard Australian Shares ETF follows a passive strategy, aiming to replicate the S&P/ASX 300 index.
Our analysts believe that this ETF is a compelling choice for core Australian equity exposure, awarding it a Bronze medalist rating. Our ratings are based on expectations for risk-adjusted future performance comparative to a category benchmark. This contrasts with how many choose ETFs which is based on how well funds have performed in the past.
A diversified index that captures the investment opportunity set well, a highly competitive fee, and Vanguard's well-recognised index tracking and trading efficiencies are the drivers of the continued vote of confidence in the strategy.
When looking at funds, one of the biggest questions is whether to go active or passive. The low price of this strategy sets a significant hurdle for active managers in the same space when looking at net-of-fee returns over the long term. However, our analysts believe that Morningstar’s best-rated active managers can add value and cross that hurdle consistently.
One consideration when looking for broad domestic equity Australia are the unique attributes of the Australian market. BHP Group BHP makes up 11% of the index, and the top 10 holdings make up 46% of the index (at 18 January 2024). The Australian market is very narrow, which means that a handful of sectors and industries dominate, including financial services and mining.
The result of this is inadequate diversification. An answer to this could be an equal-weighted ETF which invests proportionately across the index constituents. The VanEck Australian Equal Weight ETF MVW achieves this across 80 holdings that represent large and mid-cap shares in Australia. The fee is significantly higher than VAS (0.07% total cost ratio) at 0.35%, but our analysts believe this is justified.
They award MVW a Silver Medalist rating and think it is a great way to get exposure to the Australian market because it is diversified.
You’re able to read more about the trade-off between market-cap and equal weighted passive ETFs in this article I have written.
Top buy trade: Vanguard MSCI International Shares ETF VGS
Vanguard MSCI Index International Shares ETF earns a Gold Medalist rating and provides Australian investors with an affordable and efficient gateway to the global equity markets.
This exchange-traded fund and its AUD-hedged version VGAD mirror the MSCI World ex Australia Index (and AUD Hedged version for the hedged class), incorporating net dividends reinvested, setting a challenging benchmark for active fund managers to surpass. With its low expense ratio and Vanguard's expanding scale, the strategy presents a formidable challenge for active managers to beat.
The underlying index has universal appeal for constructing a diversified portfolio that spans 22 developed economies represented by approximately 1,500 holdings. The index is skewed toward the United States (a common feature across most global indexes) but given the majority of its holdings are multinationals earning sizable revenue from international markets, concentration is not a notable risk here.
The strategy will wax and wane with the index and is chained to its notable biases. Of late, it has faced intense competition from skillful active managers who, with their enhanced risk-management skills, can weather the market volatility better to beat the index.
However, in terms of long-term performance, Vanguard edges past most managers in the cohort. The vehicle may receive currency diversification benefits from investing internationally as the currency is not hedged to AUD, but for those who are currency risk-averse, the AUD-hedged version is also available at a modestly higher price.
In summary, Vanguard MSCI Index International Shares ETF stands out as a best choice for Australian investors seeking global market exposure. Its cost efficiency, broad diversification across multiple developed markets, and solid performance record, especially in a competitive landscape with skilled active managers, highlight its appeal.