- No changes to Conservative Portfolio
- Added to five existing holdings in Moderate & Aggressive portfolios
- Changes bring allocations closer to targets
As we do every quarter, the Super Advisor investment committee reviewed the model portfolios during the preparation of the September 2016 quarterly report. The quarterly report will be published shortly but we wanted to let members know of the changes made to the model portfolios after quarter end.
The committee decided to maintain their target asset allocations but noted that the portfolios continue to stray some way from their targets in some classes. In particular, all three portfolios remained overweight Cash and Debt Securities (Australia) while underweight Australian shares at 30 September 2015.
Despite this, no changes were made to the Conservative Portfolio as the investment committee remains comfortable with its current allocations compared to its targets. The committee will nevertheless continue to monitor the portfolio and make changes should its allocations veer too far from its target allocations.
The investment committee has decided to use some of the excess cash in both the Moderate and Aggressive portfolios to increase holdings in Australian shares. As such, we added to our existing holdings in ASX (ASX), Carsales (CAR), Computershare (CPU), IOOF Holdings (IFL) and Perpetual (PPT) in these two portfolios.
Let’s take a closer look at these companies.
In recent months investors have been concerned about the potential loss of ASX’s clearing monopoly, but any change would only affect 7% of revenue (or 13% including settlement, which is less likely to be opened up to competition). Investors also appear to be underestimating the ability of ASX to use its market position to go after other areas of growth. For example, despite competition from Chi-X, cash market trading revenues continue to grow thanks in large part to its high-margin ‘dark pool’ ASX Centre Point, helped by a range of new trading options. Another is its over-the-counter derivatives business, which has grown from next to nothing to about $100bn a month of traded value.
These and no doubt other opportunities in future should more than make up for any loss of the ASX’s clearing monopoly. With high returns on capital (other than in ASX Clear), a PER of 20 and a 4.5% fully franked dividend yield, we’ve added to ASX in both the Moderate and Aggressive portfolios.
Since discussing Carsales in the article reviewing last quarter’s portfolio changes, the company has released its 2015 result. As our colleagues at Intelligent Investor noted, the result was weaker than expected due to a slowing in both revenue growth (excluding the impact from the acquisition of car finance website Stratton) and profit growth. This is because the company is investing heavily both in its domestic businesses – to improve its cost structure – and its less mature international businesses. This investment will likely also depress net profit in 2016. This appears to be a temporary slowdown, however, and the market’s reaction to this news has given us the opportunity to increase our holdings in this great business.
Computershare is suffering from the strength of the US dollar – which reduces the value of non-US earnings translated into US dollars (its reporting currency) – and continued low interest rates, which reduces the revenue it earns on cash it holds on behalf of clients (and their shareholders). As such, investors responded to a weak 2015 resultby pushing its shares down 10% on the day and ultimately 17% before the company responded by announcing a share buyback of up to 2.5% of its then market capitalisation. This suggests management believes its shares are cheap and so do we.
Computershare maintains a strong position in some attractive markets which we expect over the long term to show some respectable growth. Priced at around 14x forward earnings, this is a cheap but high-quality stock.
Also discussed in the article reviewing last quarter’s portfolio changes, IOOF holdings has since released the findings of the PwC compliance review along with its 2015 result. While PwC found no major problems the firm did recommend some process improvements, which IOOF has accepted and will implement.
Despite a proposed class action announced by Maurice Blackburn, we continue to believe this issue will blow over. In the interim its shares remain good value, so we’ve also topped up our holdings in the Moderate and Aggressive portfolios.
Gyrations in the Australian stock market will naturally affect Perpetual’s funds under management (FUM) and the performance of its funds will at times be below-average. Yet this fund manager should continue to benefit from the long-term growth in the value of the stock market while its long term record across a range of funds remains exemplary.
While it may not grow much in 2016, it is well placed in a growing industry and is targeting overseas equities, fixed income and multi-asset strategies for its next leg of FUM growth. What’s more, it shouldn’t have to invest much to obtain that growth and so most of its earnings will flow through as free cash, enabling a payout ratio of around 90%. With a forward PE ratio of 16 and a fully franked dividend yield of around 5.4%, Perpetual looks cheap for a quality fund manager.