Risk, return and the share price triple threat |
-- |
11/01/2019
Text size 
| 
|
| Tweet |  |
<p><strong>Glenn Freeman</strong>: I'm Glenn Freeman for Morningstar, and I'm talking today to Morningstar Investment Management's Peter Bull and we are speaking about investment styles within equity portfolios.</p>
<p>Peter, thank you for your time today.</p>
<p><strong>Peter Bull</strong>: Sure.</p>
<p><strong>Freeman</strong>: When we were speaking earlier, you were explaining how much markets have fallen since probably late September or the start of October particularly and how well process that's been followed or the investment style by Morningstar Investment Management has served you in protecting on that downside. So, that's probably an interesting lead into what you are talking around fundamental risk. What is fundamental risk? Are we talking there about things like interest rate movements or market corrections or more specific? So, if you can just explain that firstly for us.</p>
<p><strong>Bull</strong>: Sure. You could look at it in those terms. Really fundamental risk is that when you look at an investment, it's what can interrupt the earning power of the company you are investing in. And you can think of that in terms of extremes like banks going into the Global Financial Crisis. Or Australian banks, if residential property falls over, that's a big fundamental risk. So, that's something we always ask ourselves. So, it's essentially asking what are you buying before you actually go in and buy it.</p>
<p>In the GFC, if you look at the prices of high-quality companies like Microsoft or Walmart, sure, the prices went down along with the rest of the market, but they soon recovered. And that's because when you look at the sales and the profits and the actual fundamental performance of these companies, the Global Financial Crisis basically didn't happen. So, it's that discipline that we always start with when we look at companies to invest in.</p>
<p><strong>Freeman</strong>: And following on from there, how do investors look at required return versus expected return and how does that influence some of the investor behavior when they are tracking the company earnings multiples, for instance?</p>
<p><strong>Bull</strong>: So, the fundamental risk leads directly into this question of required return. So, if you have a company, very low-risk, like maybe a bank account (indiscernible) or if you have deposit insurance and your savings rate is 3 per cent, that's great. What if you don't have that deposit insurance and you are buying, I don't know, a short-term paper fund, there's no guarantee of what's the good return above 3 per cent? 4 per cent, 5 per cent? It's the same thing in equities. So, when you have gauged that fundamental risk, that leads you to be able to answer what is your required return for this company.</p>
<p>People can get excited by, oh, it is a high expected return on this company, but it's that context. If it's a very safe company like Microsoft or relatively safe, 6 per cent, 7 per cent, 8 per cent on earnings yield basis might be okay. And when you look at the multiple in the market and the multiples that the market puts on companies, really a lot of that is driven by the earnings quality. And if a company re-rates from a low multiple to a high multiple, it's because the attitude is changing. It's a higher-quality company, earnings are more visible and more stable going forward.</p>
<p><strong>Freeman</strong>: If I understand what you are saying it's that the P/E ratios for companies in some sectors may be / naturally tend to be – even in a good condition they will be much higher in a good market environment than they might be in another sector. Is that part of what you are saying there?</p>
<p><strong>Bull</strong>: Absolutely. Some of the higher-quality – if you are just looking at P/E multiple, you may never buy into sort of the higher-quality segments of the market. We call it the equity valuation triple threat. So, there are three things really that can drive up a stock price. That's sales growth – and they can compound sales growth and then there's profit margin. So, it's basically keeping a higher percentage of sales as a profit. And then, P/E multiple which is the third thing, the price that the market is willing to pay for those earnings. So, any of those three things that can increase the value of a stock investment, but they also can compound each other. And so, we pay attention. You don't have to have all three, sort of, firing off. That's the Holy Grail to get these huge outperformers. If you've got a company at a high P/E multiple, maybe it's got a high profit margin, high and stable profit margin.</p>
<p><strong>Freeman</strong>: And how does the interplay between your Australian equities versus your international equities change, or has it changed in more recent times? Is there more quality to be found in Australia or in some of the maybe the offshore markets, maybe developed or emerging?</p>
<p><strong>Bull</strong>: Yeah. It's a very interesting question. Australian equities are – they are sort of unique as a group. If you look globally and you look at – if you segment the equity market into stable industrial sectors, globally that's the majority of the market. And the more cyclical lower-quality sectors, financials, resources, energy, they may be safely, maybe at most 30 per cent. When you come into Australia, obviously, that's flipped. So, financials, resources, energy are more than 60 per cent. So, it becomes a very different exercise in Australia if again you are looking for that – your first sort of protocol are the stable industrial sectors where you get the growth return but with also the downside protection.</p>
<p>So, in Australia, you've got that sort of – you've got that – if you want to build a quality-focused portfolio, you don't have much to choose from. And secondly, that part of the Australian equity market tends to be overvalued. So, you are either paying sort of overvalued for high-quality companies in Australia or you are stuck with the cyclical risky two-thirds of the market. So, it's not quite as much fun.</p>
<p>And thirdly, the Australian dollar is very procyclical. I think it's the only developed market currency that actually is correlated with equity markets. That's not something that you find in other developed markets. So, you have this natural incentive for Australian investors to diversify out of their own currency in that respect for more stable investment returns. So, it's a great opportunity. Put it this way, Australian investors should not be underinvested in global equities for those reasons.</p>
Finding good returns in alternatives17/01/2019 When all else is falling, alternative asset classes such as hedge funds, soft commodities, emerging market debt and banks loans can offer decent returns, says Morningstar's Brad Bugg.
Changes ahead for ETF investors15/01/2019 The inclusion of mainland China shares in more indexes including S&P Global, an expanding menu of active ETFs, and the potential for more ESG-focused funds are among trends investors can expect in 2019.
What to expect from bonds in 201914/01/2019 Fixed income assets will be even more important to investors’ capital preservation strategies this year than last, but some sectors are safer than others, says John Likos.
Risk, return and the share price triple threat11/01/2019 The challenge of creating a quality-focused share portfolio using only Aussie stocks is one of several reasons why a broader focus is important, says Morningstar Investment Management’s Peter Bull.
The rational investor is dead10/01/2019 The banking royal commission and other inquiries have shown product disclosure regulations alone are not enough to protect investors, especially from themselves, says The Chaser’s Julian Morrow.
Why a share price slump does not always mean buy09/01/2019 Disciplined investors always urge others to buy on the dips - but not all stock market falls create buying opportunities.
US remains dominant macro theme in 201908/01/2019 The resumption of a US-China trade war and the Fed’s ability to stave off recession are the most important global themes for Australian investors this year, says Morningstar’s Peter Warnes.
3 ways to cope in tough investment markets07/01/2019 Drowning out the noise and creating personal policy statements are among Christine Benz's top tips for sticking to your strategy as the market downturn bites.
Apple shares look attractive04/01/2019 Our US$200 fair value estimate for the iPhone maker is unchanged as stronger services and wearables revenue should offset China weakness.
Banking inquiry, global market rout among key influences of 201824/12/2018 The banking royal commission, pronounced falls in global markets and continuing ETF tail-winds are among the stand-outs of 2018, say Morningstar experts.
Global debt, Aussie housing dominant themes for 201921/12/2018 Record global debt alongside mixed signals from the Fed, and the link between Aussie housing, consumption and GDP will be next year’s big macro themes, says Morningstar’s Peter Warnes.
Sydney casino a jewel for Crown21/12/2018 Its new Sydney casino set for a 2021 open underpins Morningstar’s continued positivity on Crown, despite falling VIP gaming volumes and other challenges.
China could lead an EM rally in 201919/12/2018 Asian equities could lead an emerging market uptick in 2019, even after a tumultuous 2018 dominated by the US-China trade war and geo-politics.
State Street: be ready to invest in 201918/12/2018 State Street Global Advisors' Kevin Anderson says 2019 will be volatile - but there will also be opportunities for investors who are ready to pivot.
Spotting potential amid Brexit volatility17/12/2018 Knowing which Brexit scenarios are priced into equity, fixed income and currency markets is key, says James Foot, who sees value in the pound, and potential in short-term volatility.
3 global stocks in power, EV and biotech13/12/2018 A German utility, Japanese electric vehicle play and US biotech are singled out as three global stocks to watch by UK fund manager Killik & Co.
Beware the allure of geared funds12/12/2018 Geared funds can offer spectacular returns compared to the sharemarket, but they can equally plunge when things sour, warns Morningstar's Alex Prineas.
Emerging Asia: Lower expectations, outsized opportunities11/12/2018 Japanese financials and technology firms in Taiwan and Korea are among some of the most attractive opportunities on Morningstar Investment Management’s radar into 2019.
How to reduce risk in your portfolio10/12/2018 Reducing risk in your investment portfolio doesn't have to mean de-railing your long-term plan, says Christine Benz.
Euro economies insulated from Italian drama07/12/2018 Italy's government is shaking up local politics, but even their anti-EU policies aren't necessarily a harbinger of doom for investors.
Bank probe prompts board-exec relationship reset06/12/2018 The banking royal commission has forced a shift in the way boards and company executives interact, which will affect the entire listed corporate sector, says Mornignstar's David Ellis.
3 top picks: Roads, power and education05/12/2018 Large-cap companies Transurban, Navitas and Spark are highlighted by the head of Lazard’s defensive income strategy, Aaron Binsted.
Property crash, royal commission are key for income investors04/12/2018 Australia’s residential property downturn and banking inquiry have influenced this income-focused strategy’s portfolio in 2018, as have commercial property valuations.
2019 will be a difficult year for the markets, says Psigma03/12/2018 The upward rising markets of the past decade are over and investors should brace for a risky year ahead, says Psigma chief investment officer Tom Becket.
The elephant in the room of retirement planning29/11/2018 Long-term care expenses in retirement are commonly overlooked, even among those who plan for the out-of-pocket ongoing costs, says Jean Young from Vanguard in the US.
Where ETFs fit in 4 retirement stages27/11/2018 Exchange-traded funds have pros and cons depending on your investment style and other variables as you approach retirement, along with applications in the accumulation and withdrawal phases, explains State Street's Jonathan Shead.
Some flawed thinking from emerging market investors26/11/2018 The way many investors think about emerging markets is incorrect – they’re not uniformly volatile, and over-exposure to individual sectors and stocks can be problematic, says Morningstar Investment Management’s Nimalan Govender.
High risk, high return: scoping out small-caps23/11/2018 More investors are looking to small caps for higher returns, in sectors such as healthcare, dairy and data storage, but there are risks, says Morningstar's Ross Macmillan.
Coles priced to perfection following spin-off22/11/2018 The IPO of Coles, as it split from Wesfarmers earlier this week, leaves the grocery giant close to its fair value and now directly comparable with competitor Woolworths, says Morningstar’s Johannes Faul.
Australian retirees lack confidence21/11/2018 Superannuation complexities, investment risk and regulatory uncertainty mean a shortfall in confidence is understandable in our current environment, says State Street’s Jonathan Shead.
4 stocks Buffett bought20/11/2018 Morningstar looks at which companies Berkshire Hathaway bought and sold during a surprising third-quarter 2018.
The art and science of valuing stocks19/11/2018 Morningstar's Adam Fleck guides us through the process his team uses to build a forecast, discount future cash flows, and incorporate a company's moat into their analyses.
The double-edged sword of listed investments16/11/2018 There are very good reasons for the popularity of listed investment vehicles, but some of these attributes also give rise to potential challenges, explains Morningstar’s Matthew Wilkinson.
Super policy shifts and the retirement roadmap15/11/2018 Saving for retirement is well catered-for within existing superannuation provisions, but the transition to pension mode isn’t as developed, says Vanguard’s Robin Bowerman.
Where to now for big four banks?14/11/2018 Morningstar's senior banks analyst David Ellis explains why he has cut his fair value estimates for the major Australian banks, even as they remain undervalued, and why Westpac navigated the royal commission “least-worst”.
Different viewing lens for consumers versus investors13/11/2018 Changing tariffs and rising inflation in the US have different implications for individuals as investors and consumers, says Morningstar Investment Management’s Peter Bull, following on from his presentation at Morningstar Individual Investor Conference 2018.
Where Morningstar readers see investment opportunities: taking the pulse at MIICAU1812/11/2018 Investors are bracing for more volatility, but attendees at the Morningstar Individual Investor Conference in Sydney see pockets of opportunity in travel, mining and medical cannabis.
Consumption drives investment not the other way around09/11/2018 As Australia’s equity market nears its peak and share buy-backs hit unsustainable levels, investors need to also be mindful of rising interest rates and government policy, says Morningstar's Peter Warnes.
Switching up your SMSF for income08/11/2018 There are still considerable benefits when switching your SMSF to drawdown phase, despite the complexities and potential political changes ahead, says SMSF Association’s Peter Hogan.
Trump, trade and volatility: taking the pulse at MIICAU1806/11/2018 As the ASX hits its lowest levels in 12 months, reporter Emma Rapaport speaks to attendees at the Morningstar Individual Investor Conference in Sydney to get a sense of what's concerning them most.
Rising inflation hits both equities and bonds05/11/2018 Rising rates in key global markets have boosted asset prices, magnifying the importance of good investment portfolio construction, says Janus Henderson’s Jay Sivapalan.
SMSF paperwork crucial to avoid legal problems02/11/2018 Recent SMSF court cases in Queensland highlight the importance of keeping your documentation in line, says lawyer Shane Ellis.
Buying opportunities are out there01/11/2018 Andrew Clifford, CEO of Platinum Asset Management, outlines where in the world and in which sectors and companies he sees investment value – even in a global environment many regard as late-cycle.
Market volatility can be an investor’s friend31/10/2018 Market volatility effects various global sectors in different ways, and there is a crucial distinction investors must make between company cash flow and share price stability in this context, explains Magellan’s Vihari Ross.
Why Alphabet is now good value30/10/2018 Google's parent company is an attractive option among global technology stocks, according to Morningstar US analyst Ali Mogharabi
What Amazon's latest result means for investors29/10/2018 Mixed third-quarter results from Amazon don't detract from Morningstar's long-term positive assessment.
Too much trading in ETFs, says Bogle24/10/2018 The Vanguard founder says although there are some good uses for ETFS, he still sees lots of bad and poorly used products in the market.
The risks of timing factor investing23/10/2018 Vanguard founder Jack Bogle sees a place for some factor funds but thinks trying to trade between factors is a losing proposition.
Bogle: optimum returns come from staying the course22/10/2018 Jack Bogle says trying to time trades is a flawed decision, and investors should not try to beat the market.
How Amazon is delivering for the consumer19/10/2018 Morningstar analyst Johannes Faul examines Amazon's edge on delivery and outlines how Myer has priced in some challenges to emerge as an undervalued retail play.
Netflix keeps burning cash18/10/2018 International subscribers boosted growth, but we still think the firm will have to spend heavily over time to fend off competition.
Bogle: Index funds should top investor lists17/10/2018 Vanguard founder Jack Bogle explains the difference between long-term and speculative returns, and where he believes markets are headed over the next decade.
Finding value in troubled emerging markets16/10/2018 Want to make money in emerging markets? Look for stocks that are uncorrelated to trade war fears and US central bank policy says T Rowe Price's Ernest Yeung.
Decoding the volatility in tech stocks12/10/2018 Morningstar analyst Gareth James explains why tech stocks are prone to volatility, citing WiseTech Global as an example, and examines the strategy behind the recent takeover bids for accounting software play MYOB and education business Navitas.
Fear not the red, play the long game11/10/2018 The effects of the stock plunges in the US and Australia are scary but investors should avoid panicking and stay in it for the long haul, says regional director of equity research for Morningstar Australasia Adam Fleck.
Yield curve points to slowdown but no recession11/10/2018 The shape of the yield curve indicates slower growth for late 2019, but we'd need to see a sharp deceleration in the US economy for it to enter into a recession in 2020, says Morningstar Australasia senior portfolio manager Brad Bugg.
Colchester's rigorous approach to bonds11/10/2018 Colchester's silver-rated fund takes a rigorous approach to global government bonds and screens out any that aren't up to scratch, says Morningstar Australasia's associate director for fund research Tim Wong.
Investors lose confidence as currencies slide09/10/2018 State Street's Michele Hardeman tells Emma Wall how falling emerging market currencies have affected investor confidence.
Interim reports suggests corporate cops will get tougher05/10/2018 Despite providing more questions than answers, the banking inquiry's interim report nevertheless suggests corporate regulators will be more aggressive in the future, says Morningstar analyst Chanaka Gunasekera.
Even I get scared in volatile markets, says Asia guru04/10/2018 Concerns about a trade war are justified, but investors should stay the course or they risk missing the recovery, says Aberdeen Standard's veteran Asia-watcher Hugh Young.
Will You Hit Your Projected Retirement Date?03/10/2018 Many factors can impact when you can retire, so targeting a specific date to stop working may not be an ideal strategy.
A triple-hit for emerging markets in 201827/09/2018 Bonds in countries such as Turkey, Argentina and South Africa have been hit by a few fundamental factors, but the longer-term picture for the broader EM segment is more positive.
Seizing on a2 Milk's China formula26/09/2018 Morningstar's regional director of equity research Adam Fleck explains the decision to start coverage of a2 Milk and how sales in China's infant formula market could boost growth.
5 megatrends shaping the future of investing25/09/2018 iShares' Rob Powell talks to Emma Wall about thematic investing and how megatrends are shaping global economies and stock markets.
Retirement income: expectations versus reality24/09/2018 Schroders' global head of retirement discusses how investors approaching retirement can fill the retirement income gap, and why professional advice is so important.
3 Top Picks20/09/2018 T. Rowe Price is excited by testing company ALS and its reinvestment in mining exploration, Star Entertainment's shrewd moves to get more traffic to the gaming floors and insurer IAG's premium rate increases across the board.
Why tech, telco and mining are attractive19/09/2018 T. Rowe Price's Australian equities team has bought into telecommunications for the first time in five years, and is more bullish than many on commodities.
Earnings season insights - Part 218/09/2018 CSL and Boral distinguished themselves in their respective sectors of healthcare and materials during fiscal 2018, while mining companies rightly returned cash to shareholders, says Peter Warnes.
A different path to property exposure17/09/2018 This moated US-based commercial real estate data company should be on investors' watch-lists, says Morningstar's Michael Wong.
Earnings season insights part 114/09/2018 A 10 per cent increase in dividend growth was the highlight of a strong reporting season, which was dominated by robust gains in the resources sector, but stagnant wage growth and energy costs cloud the outlook, says Peter Warnes.
How retail stocks fared in FY1813/09/2018 Australian consumer stocks Woolworths and Wesfarmers hold little "margin of safety" for investors as we head into fiscal 2019, explains Morningstar equity analyst, Johannes Faul.
ETF flows remain strong despite emerging market turmoil12/09/2018 Currency volatility has rocked emerging market equity returns over the year, but ETF investors are staying the course, says Morningstar Asia director of ETF research Jackie Choy.
Trade worries shouldn't derail Alibaba11/09/2018 We think the Chinese retail giant is one of the most undervalued consumer-focused stocks.
A big week for Aussie banks10/09/2018 As three of the big four increased mortgage rates, they fared surprisingly well in avoiding a prolonged public backlash, including Westpac, which is also subject to speculation of a wealth-division sell-off.
Are ETFs overrated?06/09/2018 Liquidity, transparency, and tax efficiency are hallmarks of ETFs, but Ben Johnson says some of these benefits can be oversold.
Finding recession-proof companies05/09/2018 Morningstar's Peter Bull likes companies with pricing power and niche products, and names that catch his eye include Microsoft, Colgate and luxury retailers like Louis Vuitton and Christian Dior.
Balancing profitability and price04/09/2018 Telecoms and financials are Australia's most attractive sectors in terms of valuation, but investors should be wary, says Morningstar Investment Management Australia's head of equities.
As bull market hits record, stocks slightly overvalued03/09/2018 The technology sector looks the most pricey today while communications services appears to be the cheapest.
Is active or passive better in bond investing?31/08/2018 Investors considering an active fixed income fund should be aware of their asset manager's risk levels versus skill and track record, according to a Morningstar US study.
Multi-asset strategy key in turbulent times29/08/2018 In our global climate of geopolitical crises, trade disputes and general uncertainty, a multi-asset approach to emerging market investing can be useful, says Morningstar UK's Dan Kemp.
3 stocks that are well known but not overdone28/08/2018 This European bank, UK oil major and established US software player still hold good investor value, says Franklin Templeton' s Peter Wilmshurst.
Interesting times for Aussie telco sector27/08/2018 Morningstar's Brian Han explains why corporate player Vocus faces a hard road ahead, and what a potential TPG-Vodafone merger could mean for the sector.
Finding value in complicated times23/08/2018 Geopolitical turmoil and other international market movers play a part in this team's value-selection process, explains Franklin Templeton's Peter Wlimshurst.
REA Group has growth potential21/08/2018 REA Group posted $279.9m in net profits for fiscal 2018, up 23 per cent on 2017, with still further room for growth, says Morningstar's Gareth James.
Why Turkish lira decline may spell opportunity20/08/2018 Investors shouldn't panic at the dire news headlines around Turkey's financial markets and falling currency, explains Karin Anderson from Morningstar US.
More volatility ahead for AMP17/08/2018 Shareholders should expect more volatility ahead for embattled financial services group AMP, says Morningstar equities analyst Chanaka Gunasekera.
Suncorp tipped to deliver strong dividend yield16/08/2018 Suncorp remains attractive from an income perspective, despite posting a 1.5 per cent drop in full-year profit, says Morningstar analyst David Ellis.
CBA result messy but underlying profit still up15/08/2018 Morningstar remains positive following Commonwealth Bank's full-year financial results, despite a terrible 12 months.
The importance of flexible retirement planning14/08/2018 Building a contingency plan around when you intend to retire is better than setting a firm date ahead of time, according to a recent study from Morningstar's head of retirement research.
How political change can affect stock markets09/08/2018 As Pakistan and Cambodia form new governments following their general elections, T Rowe Price's Eric Moffett examines how politics can affect profits in Asia.
3 small-cap top picks09/08/2018 Fidelity's James Abela nominates these three smaller businesses from the healthcare, tourism and engineering sectors as companies of interest.
The Aussie fund with no banks or miners07/08/2018 BlackRock's Australian concentrated industrials fund creator, Charlie Lanchester, explains his bold call to avoid holding banks and resource companies.
Rio result fails to live up to expectations03/08/2018 Morningstar's resources equity analyst, Mat Hodge, explains the mining giant's latest result and the market's negative reaction.
Top themes on BlackRock's radar02/08/2018 The prospects for Brand Australia in China are on the rise, says BlackRock's Charlie Lanchester, who has some hidden tech-stock gems in mind.
What Nine-Fairfax deal means for shareholders01/08/2018 Nine's Fairfax takeover would be a good deal for the newspaper group's shareholders, but there are still hurdles to overcome, says Morningstar's Brian Han.
A small-cap investing strategy with a difference31/07/2018 Terms like nightclub, love jungle and no-man's land aren't usually associated with investing, but they're useful signifiers, according to Fidelity portfolio manager, James Abela.
Understanding managed fund income and capital gains26/07/2018 Dividends remained quite stable, while realised capital gains fluctuated from year-to-year, according to a Morningstar study of 34 large-cap equity funds over 11 years.
3 sectors to watch26/07/2018 Beyond FAANGs, this technology field holds opportunity, as do selective parts of the energy and mining sectors, says State Street's Olivia Engel.
Why you need a retirement policy statement25/07/2018 A document detailing your retirement plans – both in the lead-up and once you begin drawing on your savings – is a great idea, according to Morningstar's US-based director of personal finance.
Wear your seatbelt as market volatility returns24/07/2018 How company fundamentals rather than statistics underpin this team's process, and why the definition of defensive assets is changing, according to State Street's Olivia Engel.