How to sort the winners from the also-rans

-- | 08/11/2019

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Glenn Freeman: I'm here at the Morningstar Individual Investor Conference. And I'm speaking to Kate Howitt from Fidelity.

Kate, thank you for your time today.

Kate Howitt: Sure.

Freeman: Now, you've just been talking about Australian equities. You heard of an adviser, a financial adviser earlier today actually said, he didn't see any opportunities in Australian equities. They're all too expensive. It's not something that you kind of have the luxury of doing, I suppose, when you're an active fund manager, and it's all about finding the relative best, isn't it?

Howitt: Yeah. So, I would agree that most shares are stretched relative to their previous trading ranges. But this is the reality of a quantitative easing world. Quantitative easing, the policy that started in Japan and the US was designed to make lower-risk investments less attractive by pushing down the returns and forcing capital to go out the risk curve.

The idea was that you were then sort of parking your money in government bonds that would mean money available to finance building widget factories and employing more people and creating economic growth. It's sort of worked like that. But it's definitely worked in depressing returns from major asset classes. So, that QE effect has kind of rippled through asset classes and made most of the major liquid asset classes in the world today fairly unattractive in terms of their valuations. But as you say, it's a relative world.

So if you take a purist view and say, oh, all of my stocks are trading above their historic means, where do you go, because if you sold up your equities, you actually find that most asset classes are at an even worse valuation situation. So, for us, it's the relative picture of finding stocks that either are going to grow into their valuation or finding stocks that for some other reason, either a better dividend or a high quality and more certainly around their earnings, you know, the best pick in that sector of the market.

Freeman: What are some of the areas that you are – I think in your Opportunities Fund, you're looking at sector by sector, you're picking areas that you like, so you don't necessarily preclude areas per se.

Howitt: Yeah. So, my portfolio construction approach in the fund is, I want all of the risk and exposure in the fund to be at the individual stock level. I want to be identifying good stocks, and where there's risk in the fund from macro exposure and cyclical exposure, I want to avoid that.

And simplistically, the way that I do that is by owning something in most of the industry groups of the market. So, I'm not placing bets of, I think the miners are going to do better than the banks.

I'm placing bets that within the miners this miner is going to do better than that one, within the banks, this one is going to do better than that one. So, that makes it a really eclectic portfolio.

But it also means that I don't have to worry as much as the market kind of – you know, these days the market wakes up one day and says trade war off and wakes up next day and says trade war on. And so, you get sectors that kind of go in and out of favor day by day. You're not going to be able to win chasing that. And so, I want to have some stocks that will do well if the trade war gets worse, some stocks that will do well if the trade war gets better. And the market can just kind of whipsaw wherever it wants and hopefully, those individual stock positions will do well within their respective sectors.

Freeman: And just finally, there's one question that was asked from the audience, what's your view on Telstra?

Howitt: The entire global telecoms industry has really had a rough run of it, because you've had this insatiable growth of data and connectivity. And everyone now wants to be able to stream Netflix while they're on the bus. You would think that that would create a great business opportunity.

But what's happened is that telcos have been lumped with making the very big investments to enable all of those data flows, but they've been monetized by Facebook, Netflix, Google. And so, this is kind of – in the value chain, the telcos have won all of the investment and not much of the revenue. And the software companies over the top have gained most of the revenue with making very minimal investments.

That's a structural challenge that telcos of the world over have tried to shift in their favor, and it's been really tough to do.

So, Telstra is a stock that at least has a reasonable dividend, particularly in a global basis. Australian companies, many of them, have very attractive dividend yields in a global context. So, we are looking carefully at the outlook for the dividend and whether it will continue to support the share price in the future. Like many, many companies and many industries, a lot of disruption going on and management really have to do some deep surgery on the business. And we're quite confident that that's moving in the right direction. But as I say, it's a tough industry globally.

Freeman: Yeah, I mean, I guess the impending – well, not impending, but the rollout of 5G is something that may – is probably one of the other big humps to come in. NBN is the other thing that – the main thing that Telstra has been trying to address, but 5G is another.

Howitt: And historically, you can look back and those generation rollouts have had a cycle to them. So, when all the investment is going in, the cash flows are not so great. And then, once you're done with the big round of investment, and you start to monetize it, particularly because Telstra has typically been ahead of peers and have an advantage, the question with 5G, there's not going to be a step-up for consumers. You can already stream your Netflix. Is 5G going to make it – you know, unless you really want to do hardcore gaming while you're on the business, you don't really need the step-up to 5G. 5G enables the Internet of Things. So, you need a whole lot of industrial adoption. So, it's going to create opportunities, but it might be a harder slog than the rollout of 4G and migrating people from their 3G phones to their 4G coverage.

This report appeared on www.morningstar.com.au 2019 Morningstar Australasia Pty Limited

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