No place for set-and-forget asset allocation

Glenn Freeman  |  04/10/2016Text size  Decrease  Increase  |  
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Glenn Freeman: I'm Glenn Freeman for Morningstar and I'm joined today by Shane Oliver, Chief Economist and Head of Investment Strategy for AMP Capital.

Shane, thanks for joining us.

Dr. Shane Oliver: My pleasure. Glad to be here.

Freeman: Shane, what's your assessment of Australian-listed companies' performance given that fiscal 2016 has now ended?

Oliver: Overall, I thought the reporting season was okay. I mean, it wasn't going to be a great year because, don't forget, resources companies have been hit by a massive blow from the fall in commodity prices.

So that really dragged down the resources part of the market and of course, that flowed on to the rest of the market. So, overall, profits were down about 8 per cent. But just bear in mind, there was a 47 per cent-odd slump in resources sector profit, so that's what really dragged things down.

But if you sort of look in the details, they weren't too bad. You can see the median company actually saw a profit growth of around 4 or 5 per cent. 62 per cent of companies actually saw their profits rise from a year ago.

And…over 50 per cent of companies, when they reported their results, actually saw their share price outperform the market on the day of release. In other words, the market took the results reasonably well.

And I think the other thing is that this has sort of set a base for a bounce back in profits as we go through the current financial year.

So, I think that's the really important thing from this. There wasn't a lot of disappointment. And if anything, there was a slight upgrade to earnings, particularly for resources stocks and as they go from being a big negative to being a positive that should drag overall profit growth of listed companies over the next 12 months up to around 8 per cent after the falls of the last year.

Freeman: And were any of these sector results particularly surprising for you?

Oliver: There were a couple of sector results that did surprise me. The resources perhaps were one of them. We had been used to resources companies surprising on the downside, but you saw a few key companies there actually surprise on the upside and that's why you saw upgrades to earnings expectation for the resources sector.

BHP, Rio, Fortescue even, results there I thought were a lot better than feed and probably better than I was expecting.

The other area of surprise was what's often called discretionary retail. These are retail companies focused on discretionary spending items as opposed to consumer staples like supermarkets.

And the discretionary retailer saw pretty good results and a part of that was driven by a great company JB Hi-Fi doing well, continuing to do well, but part of it generally, I think, was consumer spending coming back.

We have seen reasonable growth in consumer spending over the last 12 months, albeit still a very competitive environment, lots of weakness in terms of pricing power. But in terms of volumes, those seem to be coming through and that's helping retailers.

Freeman: Now, Shane, especially in the SMSF sector, we hear a lot about an over-allocation to Australian shares. Is this something that you see as a problem?

Oliver: Well, there are positives and minuses with an allocation to Australian shares. I think the reality is that Australian shares do provide a good cash flow and you get the franking credits.

So, you're always going to buy. So, if you've got your investment portfolio and you're an Australian-based investor and you get access to those franking credits, you're going to have a bias towards Australian shares.

The trouble is I think that some SMSF investors do attack a little too far and you end up with a situation of having too many of your eggs in just one basket. And if we go through a period like the last five or six years where Australian shares underperformed, say, global shares then that can actually be a negative for your wealth. Even though you get an income flow, you're not getting the capital growth that global shares offer you.

So, I think, yeah, there is a bit of a problem there, that I wouldn't go the full hog and say, well, I only have 1 per cent or 2 per cent in Australian shares, like if you're a Martian, that's probably all you'd have in Australian shares.

So, I still have a decent bias towards Australian shares, but look, I think it would make sense for investors to have a bit more internationally given the sectoral exposure you get internationally, particularly IT stocks, consumer stocks and so on that you don't have in Australian, the growth potential globally and also the diversification benefits.

You often find that when Australian shares were underperforming global shares were doing better and that helps protect your portfolio. And likewise, when you go global depending on how you do it, you get exposure to foreign currency. And just as the Aussie dollar is going down over the last few years, foreign currency is going up in value and that also helps your portfolio.

Freeman: Now, just further to that last question. Do you believe that Australian SMSF investors are active enough in their asset allocation approaches?

Oliver: So, on one hand, you can say that the old set-and-forget approach that we had through the '80s and the '90s where you could just put some money down as an investment and most things did pretty well through that period, apart from occasional setbacks, because we saw a very favourable environment economically and also financially. The tide was rising. All boats were being pulled up. You didn't have to put a lot of effort into trying to get the cycle right.

Now, we're going through an environment which is a lot more constrained, a lot more volatile and therefore, there is a case to employ a more active approach to asset allocation. The problem is for individual investors, it's very hard to get that right because you're bombarded with information.

There's multiples of information flowing at these days that wasn't around in the '80s or in the '90s and that can be very confusing and can throw investors off.

So, I think they have a choice here. Either you adopt the set-and-forget approach, but you've got to bear in mind you're going to hit more volatility and lower returns than you got in the past; or you go down the path of saying 'I'm going to do this myself but I'm going to put the effort in'.

'I am going to make sure I get the right information flows and I get a process to help me through that,' and you've got to be aware here, you do have to put a lot effort in, or alternatively, you invest in vehicles that might help you do that, funds which do a bit of asset allocation as part of that process.

Freeman: And just lastly, you've spoken about the likelihood of a residential property slowdown in our capital cities. Should SMSF trustees rebalance their portfolios away from direct property?

Oliver: I think now is not the time to be heavily investing in or exposed to residential property, but it depends on which city you're in. I think the reality is, in Sydney and Melbourne we're seeing fantastic gains over the last four years, 40 per cent, 50 per cent gains in Sydney, a little bit less in Melbourne.

So that's going to come to an end. The cycle doesn't keep going up forever. Sooner or later you're going to get a bit of a downswing. And you're not getting a lot of rental growth through. Rental yields on average are pushing down below 3%. So, that's not a positive either.

And in the meantime, you've got this massive construction cycle. You look over the horizon in Sydney and Melbourne and to a lesser degree, Brisbane and Perth, you see cranes all over the place and that's going to put downwards pressure on apartment prices over the next few years.

So, I'd be a bit cautious about the residential property markets, particularly in Sydney and Melbourne. I'd focus more if I was intent on having an investment property in those cities, I'd focus on areas where you don't have lots of cranes, so you don't have a lot of supply really.

But you've got to really do your homework now. It's not as easy as it was, say, four years ago. And I'd probably be looking – if I was going to allocate more money, I've been looking at cities which have been underperforming in recent years.

I'd prefer Brisbane over Sydney, for example, because Brisbane has been lagging. At some point in time, you might say, well, let's allocate some money to Perth or Darwin which have been seeing price falls. So, value is starting to emerge there. I think it's got a little bit further to go though, so I won't rush in right now, but over the next couple of years, worth looking at.

But I think the property asset class which is probably a better bet at the moment is commercial property.

Commercial property has been doing well, but it's been lagging what you've been seeing in, say, Sydney and Melbourne and it doesn't have the potential oversupply problems.

And by commercial I mean office, retail, industrial sort of properties. So, I think if I was an SMSF investor, I'd be focusing on commercial and I'd be focusing on cities which haven't had the huge gains and where there isn't a big supply if you are going down the residential property path.

Freeman: Shane, thanks very much for your time.

Oliver: It's been my pleasure. Great to be here.

Freeman: I'm Glenn Freeman for Morningstar. Thanks for watching.

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