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Perennial sees upside ahead for LICs and value investors

Glenn Freeman  |  15 Sep 2016Text size  Decrease  Increase  |  

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SMSF trustees are increasingly interested in listed vehicles, including listed investment companies (LICs) and managed funds, according to John Murray, managing director, Perennial Value Management.

"The single biggest change in the 16 years we've been running Perennial is the rise of the SMSFs," Murray says.

"And they largely have stayed away from our world, because for a whole host of reasons, they've not wanted to invest in managed funds, but instead in listed securities. They want to look at their portfolio and see how it's going.

"But I think more generally, we'd like to do more in that listed space. My broader view on this ... is there are two traditional markets--the large institutional investors of Hostplus, UniSuper, State Super, along with the retail world of financial advisers."

He suggests this retail interest in fund managers and their products has increased, "because SMSF investors tend to be bit more clever than other retail investors, they realise they have to rely on some other expertise as well".

As a result, he expects there will be a lot more SMSF money invested with fund managers five years from now.

In May 2015, Perennial launched its first LIC, the Wealth Defender Equities (ASX: WDE). This aims to deliver the upside of an investment in Australian equities, while managing the downside risks in equity portfolios.

With an ex-ASX Top 20 bias, its top five contributors are Lend Lease (ASX: LLC), ResMed (ASX: RMD), Harvey Norman (ASX: HVN), Orora (ASX: ORA) and AMP (ASX: AMP).

The LIC is distributed via brokers and financial advisers. Macquarie, Asgard, BT Financial Group and Colonial First State are currently making it available through their wrap platforms.

Earnings season overview

With a strong bias toward value stocks, the Perennial Wealth Defender Equity invests in a combination of small- and large-cap equities. Stephen Bruce, a portfolio manager with Perennial, gives an overview on how various parts of the portfolio performed over the 2015-16 financial year.

"Growth stocks really did pretty poorly during reporting season, and we think we're at a bit of a turning point," Bruce says.

"Within the market, you've had your yield trade, a quest for earnings certainty in an uncertain market, and a quest for growth because there's not a lot of that around. And that's pushed the price of stocks with perceived growth up to very high levels.

"And it's not just the PE of expensive stocks ... but it's PE adjusted for growth, so it's effectively a price/earnings growth ratio ... and on this ratio, we're back to near dot-com levels.

"When we hit reporting season, it was really interesting to see a combination of disappointment, or maybe just things getting too expensive."

Bruce refers to CSL (ASX: CSL) and Transurban (ASX: TCL) as examples, which all declined, "as beaten-up value stocks that have been left behind and delivered some pretty ordinary results".

"But you had these very strong share price responses ... so you see a bit of a re-rating across the market in general."

He believes there is something of a "turning tide in that value versus growth and defensive trade, being driven by the realisation that we've probably got pretty close to the end of the low interest rate trade".

"And maybe there is cause to think that growth is starting to pick up--the US is going okay, Europe's not too bad, Britain's bouncing back post-Brexit, and China seems to be stabilising," Bruce says.

"In that environment, maybe value stocks will go a bit better. We've seen the GDP in Australia has been very good, terms of trade seem to have bottomed out and income levels are going up as well. So I think there's cause to be optimistic."

However, he also points out that while healthcare, infrastructure and REIT sectors have been performing strongly, "at the same time, typical industrials have been quite left behind".

He believes there are plenty of good value stock-picking opportunities available to investors.

In financials, he points to AMP, Macquarie (ASX: MQG), Suncorp (ASX: SUN) and QBE (ASX: QBE). He also mentions Woodside (ASX: WPL), Flight Centre (ASX: FLT), Harvey Norman (ASX: HVN), Crown (ASX: CWN) and Lend Lease.

More from Morningstar

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Glenn Freeman is Morningstar's senior editor.

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