How the Y factor turns some stocks into smash-hits
The typical managed fund has about half its assets in shares, so market movements can make a big difference to what is left for members when they hit retirement.
It's worthwhile, therefore, to think about what's driving the sharemarket, and whether it's sustainable.
In the first 10 months of this financial year, rising share prices meant the typical super fund had returned a whopping 15 per cent, even if things cooled off in May.
But you can't help but notice that these gains came against a weakening economic backdrop, with many companies complaining that things remain tough.
It begs the question: if growth is weak, why did share prices start 2013 so strongly? And, more importantly, can it last?
Most experts agree that shares have risen this year because of the extraordinary measures being taken around the world to reignite growth.
As central banks slash interest rates and pump money into the system, it has lowered the return on government bonds and forced investors such as pension funds to snap up other assets that can provide a good return.
In the jargon, there has been a mad rush for "yield", with investors piling into high-dividend stocks such as Telstra and the banks.
You can see this trend in the graph, which comes from Macquarie strategist Tanya Branwhite. It includes a "high-yield" index of Aussie stocks, such as banks, telecommunication, listed property trusts and utilities. As the graph shows, these high-yields stocks have been a smash-hit with investors, rising 50 per cent since mid 2011, far ahead of the rest of the market. In short, the high-yield stocks have been driving market performance.
But the growing question on many investors' minds is whether a rally built on a search for yield is sustainable.
In recent weeks, a growing number of experts have been raising doubts. Branwhite says the yield-induced rally is now "maturing" and it may be time to look at "growth" stocks, such as BHP.
Greg Perry, a former Colonial First State fund manager who was regarded as the best stock-picker in the 1990s, also describes the search for yield as "very mature".
What do they mean by mature? Basically, they are concerned that stocks have become too expensive. If investors are simply pushing up share prices because they are looking for yield, there are risks of bubbles forming.
The Commonwealth Bank, for instance, has been trading at a price of about 15 times current earnings, which analysts say is close to its highest ever level. With little in the way of credit growth, sceptics believe the bank is overpriced.
Even the $87 billion Future Fund, one of the biggest investors in the country, last week warned against chasing yield purely for its own sake.
Frequently Asked Questions about this Article…
The article explains the “Y factor” as yield — the search for income from dividends and interest. When interest rates and bond returns fall, investors pile into high-dividend or high-yield stocks (like banks, Telstra, utilities and listed property trusts), pushing those share prices much higher and turning them into market winners.
According to the article, central banks slashed interest rates and pumped money into the system, lowering returns on government bonds. That forced investors such as pension and super funds to seek higher returns in equities, creating a rush for yield that lifted share prices despite a weak economic backdrop.
The piece highlights high-yield sectors such as banks, telecommunications (for example Telstra), listed property trusts and utilities. A Macquarie strategist’s high-yield index of these stocks rose about 50% since mid‑2011 and outperformed the rest of the market.
The article notes the typical managed super fund holds about half its assets in shares, so the surge in share prices lifted returns — about a 15% return for the typical super fund in the first 10 months of that financial year — driven in part by the yield-driven rally.
Experts quoted in the article express caution: Macquarie’s Tanya Branwhite says the yield-induced rally is “maturing,” and Greg Perry calls the search for yield “very mature.” There are concerns that chasing yield has pushed valuations high and could create bubble risk, so sustainability is questioned.
The article points to the Commonwealth Bank trading at about 15 times current earnings — near its highest levels — and notes critics say with little credit growth the bank may be overpriced, illustrating valuation concerns in bank stocks.
The article reports experts suggesting it may be time to look at growth stocks such as BHP as the yield rally matures. That reflects a view that valuations in some high-yield names are high, so reallocating toward growth is something experts are flagging — not specific personal financial advice.
The article’s clear takeaway is to pay attention to what’s driving the market and whether it’s sustainable. With central-bank stimulus lowering bond yields and prompting a search for dividend income, investors should be aware of valuation risks — a point reinforced by warnings from big investors like the $87 billion Future Fund against chasing yield for its own sake.
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