Where should your managed fund or super fund manager be investing now?
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When it comes to shares many managers have beaten the averages over the last few years by buying up exactly what most small investors have been buying - shares in companies that pay high dividends.
With interest rates on bank deposits at record lows shares in the big banks, Telstra and a handful of other stocks that consistently pay more than 5 per cent dividend fully franked have been keenly sought after.
Investors have been seeking bond substitutes. Some fund managers believe bank shares will increasingly look like bonds, or fixed deposits, paying high income with low growth and relative stability.
Property trusts are also seen as bond substitutes.
They pay 6 to 9 per cent income but growth is likely to be low with commercial rent increases tied to a low inflation rate. Infrastructure assets such as pipelines and toll roads also pay high incomes but have growth indexed to a low CPI.
Tim Samway, managing director at Hyperion Asset Management, says that earnings (or profit) growth, high or low, is what drives share prices long term.
He says the major banks are priced assuming their earnings will grow at 9 per cent per annum. He believes they will be lucky to make 5 per cent.
Samway says to be part of the real growth story over the next 10 years we need to avoid the major dividend payers and seek companies that can generate real profit growth. Their more quickly increasing profits will mean higher prices, capital preservation and higher future dividends.
Hyperion say growth in the economy overall is strongly influenced by demographics. The more working-age people relative to those who aren’t, the better. This measure will be quite weak over the next 10 years so growth won’t be widespread among companies, they say.
One way to identify growth stocks is to find those favoured by the current demographic patterns. Hyperion says a good example is Ramsay Health Care.
The company has been very successful in developing new private hospitals equipped with the latest treatment technology. This not only increases its bed numbers but also helps attract the best doctors and they refer the patients.
The internet is a driver of above average profit growth for some companies. One dominating its market is REA Group, owner of realestate.com.au. Eighty-two percent of people looking to buy a house start searching online, and 70 per cent use realestate.com.au exclusively.
Another fund manager that is avoiding high income stocks is Platinum Funds Management.
They specialise in international shares rather than Australian. One of their favoured stocks is Samsung. It now sells more mobile phones than Apple. Its shares trade at just eight times earnings. That’s much cheaper than most Australian companies. Platinum also like some past winners.
Toyota is a company that has the ability to innovate and adjust to the needs of the market they say. Together Samsung and Toyota are equal in size to the big four banks in Australia yet they make 60 per cent more profit.
China is also a happy hunting ground for Platinum. One of their favourites is China Mobile, the country’s biggest mobile phone company. It has 600 million customers and trades at just nine times annual profits.
Platinum attempts to predict what each business will look like in three to five years time - market share, turnover, profit margins, and what its shares should be worth.
This analysis has certainly brought strong success so far with average returns around 13 per cent per annum over nearly 20 years. Of course there are many theories about choosing investments, and many different criteria used.
Seeking companies that are growing makes sense.