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State Street avoids Australian banks, FAANGs

Glenn Freeman  |  28 Jun 2018Text size  Decrease  Increase  |  
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With no Australian banks or the giants of global technology within its active funds line up, this asset manager is cautious about growth stocks and selective in its consumer cyclical and defensive exposures.

"We've had a big, long bull market, let's state the bleeding obvious - 18 per cent annual returns in US and 11.6 per cent PA since 2009, coupled with earnings growth," says Olivia Engel, chief investment officer, active quantitative equities, State Street.

Looking ahead, finding returns is going to be harder. "If you think there's an interest rate rise ahead of us, earnings are starting to slow - I think we need to temper our expectations on how growth stocks are going to perform," she says.

Though State Street is increasing its exposure to banks globally within its actively managed funds, it has not held any Australian banks for the last eight to 10 months.

"When you look at the margins, the earnings, the top line that banks are earning: there are better opportunities elsewhere," Engel says.

This view is not affected by the restructuring efforts recently announced at Commonwealth Bank, which is demerging its wealth division and CommInsure, along with similar shifts at ANZ Banking Group and National Australia Bank.

Commonwealth Bank financial consumer retail banks

"It's too early to tell, but the volatility that surrounds those names, it's not worth having our investors, who have those long-term objectives, being there until we can get more certainty," Engel says.

To change its view on banks, "there needs to be a sign that they're going to start earning more, and the sentiment needs to turn".

As Mark Willis, head of State Street's Asia-Pacific multi-asset business says: "We haven't even seen the end of the royal commission or the potential regulatory framework [that may result], I wouldn't think that it's going to be all that positive".

Financials, mining

Its active funds are, however, increasing exposure to financials in other areas. Domestically, it is buying insurers, and internationally, it likes some of the smaller US banks.

It is also finding good opportunity within some cyclical sectors, including some Australian utilities. And despite a broader view on growth stocks, as outlined below, it is also increasing its holdings in some Australian commodities companies.

Where to for tech?

State Street's active funds also have no exposure to the world's largest technology firms - the likes of Facebook, Apple, Amazon, Netflix and Google's parent, Alphabet (FAANGs).
"Technology and consumer has been very strong…but the key question is when does that cycle turn?

"In the tech sector, margins have grown from 13 per cent to 20 per cent and I don't think it can get much better than that," Engel says

As an example, she refers to NVIDIA - up 1000 per cent over three years to the end of May 2018, along with Netflix and Amazon - up 294 per cent and 280 per cent, respectively, over the same period.

FOMO and the herd

Given rising inflation and upward pressure on interest rates globally, Engel is also cautious about growth stocks, "as they are very sensitive to economic conditions".

One of the risks she associates with growth companies is that their value is intrinsically tied up in the future.

Behavioural aspects also come into play, including fear of missing out (FOMO) and herd mentality.

"Investors love to buy them because if you get it right, you can do very well, but people do tend to overpay for them.

"People tend to extrapolate the present into the future…when you're looking at the stock prices rise hundreds of percentage points, it's very difficult behaviourally to think that you are right, and thousands of other investors are wrong, so herding, trends, glamour and momentum are all forces…borne by the behavioural aspect of not wanting to miss out.

"But growth companies do disappoint over the very long term, finding the right growth companies over time is what matters, and and finding the right ones is very difficult to do," Engel says.

 

More from Morningstar

• Australia's economic record outscoring rivals but for how long?

• Unsustainably high oil prices to fall back to US$55

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Glenn Freeman is senior editor with Morningstar Australia.

© 2017 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

 

 

is senior editor for Morningstar Australia

© 2020 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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