3 stocks to fight the portfolio scaries (and the mistakes that have haunted fund managers in 2022)
Just a few short years ago, this anonymous writer couldn't bear to watch scary movies. Now, I can't get enough of them. I think that's because, when it comes down to it, we've lived through so much insanity since 2020 that thrillers no longer have the same impact.
However, markets this year have been scary. For the first time in decades, the ghosts and ghouls of the investment world have resurrected to haunt global markets - inflation, rising rates, and a war led by a ruthless dictator.
As a result, indices around the world have been painted in a blood red, with investors (and rightly so) catching a case of the portfolio scaries, moving towards defensives or worse, cashing in their holdings as stocks plummet.
In it, our fundies share the biggest portfolio changes they have made this year, the positions that have come back to haunt them, as well as some ghost-busting stocks that can help blow off those cobwebs in your portfolio over the months ahead.
Note: This episode was filmed on Wednesday 26 October 2022. You can watch the video, listen to the podcast, or read an edited transcript below.
Ally Selby: Hello and welcome to Livewire Markets. I'm Ally Selby, and today in the spirit of Halloween we've got a little bit of a spooky special for you. We're going to learn how investors like you can chase away the portfolio scaries, as well as some of the stocks that have come back to haunt fund managers this year.
Of course, it wouldn't be an episode of Buy Hold Sell without a stock idea, so we're also going to be learning about two ghost-busting stocks for the year ahead. Today we are joined by Dr. Don Hamson from Plato Investment Management and Alastair MacLeod from Wheelhouse Partners.
Thanks so much for joining me, gents, and for sitting through that very long intro today. First up, it's obviously been a really difficult, if not a scary year for markets. Don, I'd love to know, what's the biggest change you've made to your portfolio this year?
The biggest changes to portfolios this year
Don Hamson: Well, we started the year pretty light on coal, but we love them now. So we've actually moved overweight energy stocks in general, because clearly, they're beneficiaries from Ukraine and the war, but in fact, there's been a shortage of oil even before that war. So, that's been a big move in our portfolios.
Ally Selby: How about you Al? What major change have you made this year?
Alastair MacLeod: It seems like everything's falling, whether it's bond markets or equities, but the one thing that has been going up is market volatility. And both of our strategies can use that dynamic to generate additional income. So the underlying portfolio has remained the same, but definitely, the income generation and the return from that have certainly increased during that period.
Stocks that have come back to haunt fund managers
Ally Selby: Okay. We here at Livewire love to admit when we get it wrong. Is there a stock that's come back to haunt you over the past 12 months?
Alastair MacLeod: That's happened more in our global fund this year. We really look for quality businesses and found a semiconductor business called ASML (NASDAQ: ASML) that manufactures really high-end semiconductor equipment. They've got a 95% market share, what can go wrong? But sometimes with these businesses, litigation or legislation can really impair them. And this year with the US deciding that they weren't going to allow semiconductor imports into China, it was one of the reasons that really counted against that stock. You have to learn to manage that with position sizing and ride it through. And that's where we are with that one.
Ally Selby: Have you sold out of that position?
Alastair MacLeod: No, we reduced the position size from two to one. They're still quite small, but you really need to try to minimise that idiosyncratic risk within position sizing and that's what we've done with ASML.
Ally Selby: Okay. Over to you Don. I know this one was hard for you. What's a position that's haunted you this year?
Don Hamson: Well, here's one that's only just recently happened and it's Medibank Private (ASX: MPL). It obviously has been in a trading halt with the data issues and leakages - the same thing at Optus. And we thought we had it in the portfolio for all the right reasons. And that just goes to show that you can do all the analysis under the sun, but then suddenly if you have a data leak like this, that's not something you would expect. You would expect they probably have insurance, but they come out and get that big hit. So that's why you need to be cautious and you need to have diversification. Don't put all your eggs in one basket, but spread them around.
Ally Selby: What's the plan with Medibank then? Are you going to sell down that position, what are you going to do?
Don Hamson: We are reassessing given it has come off a long way and the immediate costs don't look that high. We think the market probably has overreacted, but clearly, it's going to be bad for sentiment going forward.
How to deal with falling positions
Ally Selby: Okay. I want one piece of advice for investors. Obviously, a lot of people have suffered from falling positions in their portfolios this year. What would you recommend they do?
Don Hamson: Well, the first thing is I'd say is it actually hasn't been all that scary, the market's only fallen ...
Ally Selby: Maybe for you.
Don Hamson: Yeah.
Ally Selby: For me, it's been very scary.
Don Hamson: Well, it depends. If you're in growth stocks, it's been very scary. If you've been in stocks with good fundamentals and paying good strong dividends, they actually haven't fallen that far.
In fact, our fund, from the end of September, year to the end of September only fell 1.6%. When you add in dividends and you add in franking credits, because we do for retirees, I think a lot of people just look at the price moves and yes the market's down over 10%, but you get dividends and you get franking credits and that's made it.
But what's the one piece of advice? It's very hard to time markets and after they've fallen, it's probably not the right time to sell.
There's an old saying, it's time in the market versus timing the market. It is extremely hard to time the market.
And what's going to be the signal for you to get back in? And you might get out, but then markets will rally very significantly once they think things are better and interest rates have stopped rising. So I think you're better off with the time in the market rather than trying to time it.
Ally Selby: Okay. Over to you, Al. Is there a piece of advice that you'd have for readers right now?
Alastair MacLeod: I agree with Don, exactly what you're saying. I think people who are feeling pain, trying to understand from a behavioural finance perspective, why does it feel so much more painful when markets are down, versus an equivalent move up?
Now, there are a lot of excellent books which describe the physiological and psychological feelings that you go through. Though as professional investors you deal with that.
Try to understand why you feel that way so you can stick to your financial plan, which ideally was crafted well and designed for the long term. And you want to be invested in equities. It's one of the longest, the highest returning asset classes, but it will be volatile and there will be ups and downs along the way.
Sectors and styles to keep portfolios afloat
Ally Selby: As you mentioned, it has been super volatile this year. Are there any sectors or types of stocks that you think can really keep investors' portfolios afloat during this period?
Alastair MacLeod: I think if you look at the drawdown so far it's been more acute offshore than here, but it's really been a derating market with higher interest rates. It's really been a compression in that multiple, which has been driving the market lower, to date.
I think from this point onwards as we move more into an earnings downgrade cycle, quality businesses that have much more stable earnings should be much better placed to weather an earnings downgrade cycle than they have been year to date.
Year-to-date, quality has underperformed a little bit, but if you look back three cycles, typically when industrial production goes below 50% and we move into a contraction market - those stable margins, those good balance sheets, that flight to quality does happen. And I think if we do move into a second leg down, then quality businesses will be much better positioned going forward.
Ally Selby: Over to you Don, Al's backing quality, is there a sector or type of company that you think can outperform right now?
Don Hamson: Well, I mentioned at the start that we liked energy stocks and coal stocks in particular. So, we think there's some good money to be made there. Now, clearly, it's good money being made out of a bad circumstance, but I can't see this Russian crisis being solved immediately. Australia's well placed with our gas producers and coal producers and there's been a lack of investment in that sector for many years. So, I see the short to medium-term outlook for that sector to be very strong.
Stocks to fight off the scaries
Ally Selby: Okay. I'm really excited about this. I was hoping you could bring along a stock that could help investors fight the portfolio scaries over the next few months. What have you brought for us?
Don Hamson: Well, it has to be a coal stock for those people who can invest in coal, which is Whitehaven (ASX: WHC). There are certain investors who don't want to invest in those dirty stocks, if you like, in which case I'd say Computershare (ASX: CPU) because it benefits from rising interest rates. But if you are not concerned about energy and emissions, then coal stocks look really good and Whitehaven's at the top of the box for us.
Ally Selby: Okay. Over to you Al, what's your ghost-busting stock for the year ahead?
Alastair MacLeod: I think the scariest stock on the ASX is probably InvoCare (ASX: IVC) because their business is funerals and the death rate is growth for these guys. So, if you look back over the last two years since COVID, the mortality rate really fell, because people weren't getting out and about because the flu season was very mild.
But unfortunately, like death and taxes, the law of averages catches up. So, we did have quite a bad flu season this year. And again, looking forward, that average mortality rate or death rate euphemistically for a business like InvoCare is actually good for revenue growth.
So, I think for this business, if we do go into an economic slowdown or an economic contraction, their drivers are quite different from the rest of the market from an economic perspective. And you've got that, secular, structural tailwind of the mortality rate to really support it through that.
Ally Selby: Well, that's definitely an interesting idea. I hope you enjoyed that episode as much as I did. If you did, why not give it a like? Remember to subscribe to our YouTube channel. We're adding so much great content every week.
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Buy Hold Sell is a weekly video series exclusive to Livewire. In each episode two fund managers give their views 'Buy, Hold or Sell' on five ASX listed companies. Not recommendations, please read the disclaimer and seek advice where appropriate.