Schroders stays hot on commodities, cooler on tech and defensives

Glenn Freeman  |  01/05/2017Text size  Decrease  Increase  |  
email_fwd

Glenn Freeman: I'm Glenn Freeman for Morningstar and I'm joined today by Martin Conlon, head of Australian equities with Schroders Investment Management.

Martin, thanks for joining us today.

Martin Conlon: Thanks for having us, Glenn.

Freeman: We're discussing your Australian Equities Fund today, which last month won the Morningstar Fund Manager of the Year Award for its category. What's the role of Australian equities within an investment portfolio?

Conlon: I think probably taking it back to simple building blocks, equities are always for me an important part of any portfolio just on the basis that companies provide the cash flows that provide the returns on just about all investments.

Australian equities clearly just need to be viewed in terms of like any other equity around the world. A business that makes money and is profitable and generates returns over time, that's how investors make money.

Yes, there are some issues there on the diversification in the Australian market and the dominance which banks, et cetera, obviously have in that index courtesy of their profitability over time. But on the positive side, I think, things like franking the extra tax benefits that domestic investors get will still mean that domestic equities will and always should be a fairly significant part of any Australian investor's portfolio.

Freeman: Active management is something that Morningstar measures on a regular basis. How active is your fund and what's your view on the debate around the level of active share in managed funds?

Conlon: I think it's a really good question. But the way we tend to look at it is that you don't want to just be active for the sake of being active. It's got to make sense.

And there will be times that the large companies being large elements of the profit within the Australian economy are undervalued and perhaps they might be the best investments and that means sometimes you want to gravitate towards the index or the bigger constituents in the index. Sometimes you want to gravitate away.

You don't just necessarily want to say, I'm always going to be underweight those big stocks and overweight the smaller end of the market, which is how a lot of people get their active share.

You want to let that outcome fall out rather than be a premeditated outcome. And certainly, with a lot of the trend towards ex-20 funds, et cetera, that has happened over the recent times, we think a lot of money has shifted out of the larger end of the market and towards the smaller end.

And if anything, at the moment, you might be in a situation where most of the overvaluation is actually at the small end.

Freeman: And Martin, which type of retail investor will find most value in your Australian shares fund?

Conlon: It's a bit of everything, but honestly, for us, it's far more about the mentality of the investor and the ability for them to match their timeframe with ours, because we are long-term investors.

We tend to have pretty low turnover. We're looking at making money in the medium to long-term. And that sometimes means that you're prepared to depart a lot from the index and people will have to stomach some volatility versus the index.

Unfortunately, we tend to measure risk relative to the index as the risk list position. That to us is sometimes a bit of a crazy thing to do. But from our perspective, the most important thing is to say, if you want to make money, you got to make sure that your timeframe is focused on investing in a business because it's going to make money in the long run, not because you're speculating and trying to punt, if you like, better than the next fund in the short run.

Freeman: Just finally, what areas of the Australian market are you most bullish on and are there any parts that you think investors should be cautious about?

Conlon: We still probably tend towards finding the most value in resource stocks. Obviously, they've been through significant ups and downs over the last four or five years.

But we often look at it and say, Australia is where it is because we've got good low-cost resources that have made the country money for a long period of time. Yes, commodity prices will always be volatile.

But actually, these are very good long-duration businesses that tend to make good money and as long as you're prepared to take the rough with the smooth, then the long-run outcomes we think will be pretty reasonable. And in terms of where valuations sit, that tends to be where we still find the most value.

At the other end of the spectrum, with very low interest rates and an environment where people still have a reasonably avaricious for yield, then we found a situation where a lot of defensive assets that provide income are trading at elevated valuations.

Sectors like healthcare, albeit that they might have reasonable demographic tailwinds, et cetera, are trading at very aggressive valuations and there is a fair amount of speculation in technology, things like that.

So, we think you got to be a little bit balanced. Risk appetites are pretty high. Speculation is running high in the equity market. It's running high in the property market. That to us says that the opportunity and the time to take risk, an aggressive level of risk is probably not now and you better off looking to more fundamentally-based cash flows that are at more attractive valuations.

Freeman: Thanks very much for your time today, Martin.

Conlon: No worries. Thanks Glenn.

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

Video Archive...

Did lack of transparency cause the financial crisis?
19/09/2017  Ten years after the collapse of Northern Rock, Andy Agathangelou tells Emma Wall that greater transparency in financial services could ward off a second global financial crisis.
Are we facing another Global Financial Crisis?
19/09/2017  Ten years on from the collapse of Northern Rock, Dan Kemp tells Emma Wall how there are echoes of the crisis in markets today.
Wild ride in FY17 and more to come - part 2
13/09/2017  Morningstar's Peter Warnes discusses how you may want to position your portfolio in FY18, as geopolitical storms continue to rage and safe-haven assets feel the effects.
Wild ride in FY17 and more to come - part 1
12/09/2017  Cost-out remained a dominant theme for large-cap Australian companies in FY17, and looking ahead to FY18, they should be clearer on cap-ex, says Peter Warnes, Morningstar’s head of equities research – Australasia.
Deeper demand driving these pooled investments
31/08/2017  Listed investment trusts are beginning to take off in Australia, but exactly what are they and how do they differ from listed investment companies and managed funds?
Upbeat Woolies result tempered by Big W
30/08/2017  Woolworths' category-topping FY17 result driven by surprisingly strong sales, even as sector faces tougher times ahead, explains Morningstar's Johannes Faul.
Coke Amatil 1H17 result leaves margin of safety
28/08/2017  A challenged earnings announcement from Coca-Cola's Australian-listed business was largely expected, but downside is already priced in and improvements are expected in FY18.
How slashed Telstra dividend affects our outlook
23/08/2017  Brian Han remains reasonably positive on the telco giant even after some disappointments in the FY17 earnings announcement.
Earnings season FY17 mixed bag so far
18/08/2017  Aside from a few high-profile earnings guidance misses, large-cap stocks are doing okay as FY17 reporting season passes halfway, says AMP chief economist Shane Oliver.
Rio Tinto posts mixed result for 1H17
10/08/2017  An interim result of US$3.9 billion in net profits after tax for one of the world's largest mining companies was positive but slightly weaker than expected, even alongside a record dividend, explains Morningstar's Mat Hodge.
Kerr Neilson on why global investment exposure is key
07/08/2017  There are two types of investors, regardless of market noise, imputation credits, diversification approaches and market indices, says the managing director of Platinum Asset Management.
Finding fixed income opportunities in new paradigm
02/08/2017  Slowing economic growth in the US and parts of Europe emphasises the need to carefully select credit opportunities, says Vincent Reinhart, chief economist, Standish Mellon Asset Management.
Telstra won't be blown away by headwinds
17/07/2017  While it faces what Morningstar equity analyst Brian Han describes as a whirlwind of negatives, he suggests investors shouldn’t hang up on Telstra.
The home-truths of investing
12/07/2017  Look for companies that sit outside the cycle; heed the lessons of history; and remember the power of compounding, says Bennelong's Neale Goldston-Morris.
Self-managed super is not Do-it-yourself
03/07/2017  There are a few common pitfalls in running a self-managed super fund that mean trustees shouldn't go it alone entirely, says BT Financial Group's head of financial literacy, Bryan Ashenden.
Investing to protect on the downside
30/06/2017  There are investment strategies you can adopt to mitigate volatility-linked fear and uncertainty in markets, explains Roy Maslen, chief investment officer – Australian equities, AllianceBernstein.
Don’t overdo benchmark consideration
28/06/2017  Being benchmark agnostic is the most effective approach to fixed income investing, according to Anujeet Sareen, portfolio manager, Brandywine Global.
Factor-based investing using ETFs
26/06/2017  Investors should consider style-exposures--such as value, defensive or yield-- they would like in their portfolios, explains Jonathan Shead, head of portfolio strategists – Asia Pacific, State Street Global Advisors
Volatility plays to active manager strengths
--  The climate of political volatility in the US holds important implications for investors and the funds they invest in, particularly around Donald Trump's ability to pass legislation through Congress, says Pimco's Libby Cantrill.
Is the FTSE 100 Facing Another Market Crash?
16/06/2017  Ten years on from the pre-crisis FTSE 100 high, Morningstar UK's Emma Wall examines how UK stocks have fared