Is it time to return your clients to shares

Published in, April 2012 by Jackie Pearson 

Is now the time to get your clients thinking about returning to a higher weighting in shares? 

Will the Australian market, which has been lagging for five years, start gaining some ground?

Financial advisers know there is no short, simple answer to these questions.

Australian share market specialists say it all depends on your investment style and approach.

Hamish Carlisle, a portfolio manager and analyst for Merlon Capital, said taking a “value” approach when re-entering the market can reap substantial rewards.

“We’ve done research that shows returns on the 30 highest yielding names on the ASX would’ve grown at 4% above the ASX 100 Index from 1994 to 2010,” Carlisle said.

“We don’t focus on an index when we start to build a portfolio; we take no regard of what the index weight would be of a stock when building a portfolio. BHP, for example is 12% of the index but pays very low dividends.” 

Merlon spreads its portfolio over 30 or 40 stocks that pay consistently high dividend yields.

It has a team dedicated to looking at the underlying health of companies to ensure dividend yields are sustainable.

“Our view is the Australian market is under-valued and shares offer superior yields in comparison with other asset classes – 10% including franking credits compared to 4% for some term deposits or government bonds,” he said.

The clincher for advisers is to choose stocks based on whether their current share prices reflect long-term structural pressures or are just part of the usual market cycle.

“The market tends to over-extrapolate short-term trends.

Some stocks, for example Fairfax, are facing long-term pressures but the ASX, which we own, is facing short-term market pressures and has good prospects when you take a three-year view,” said Carlisle.

The Commonwealth Government’s commitment to returning a surplus in next month’s federal budget may provide short-term pressures for some struggling industrial companies who are asking for fiscal stimulus from Canberra.

However, Carlisle said, the Australian economy remains strong enough to be insulated from any “dire scenarios”.

“Taking a three-year view, there is the capacity to relax interest rates and move the budget into deficit,” he said.

Dale Gillham, founder of Wealth Within, which is the responsible entity of its own managed investment scheme, said he judges the market on fundamentals and long-term trends.

“When everybody is moving to cash like they are now, it is time to get in the share market, get set for the next five or 10 years.

To me it’s about looking at what has happened in the past and relaying that to the future.

“If you look at our market over the past 100 years we’ve had many little meltdowns that don’t last more than four or five years.

Everyone is moving to cash in droves at the moment.

Most equity fund managers are reporting being down 45% or 50% on funds under management,” he said.

“If the average person in the street thinks they need to be in cash, then it’s time to be in shares.”

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