Dogs of the ASX

One of the reasons why this strategy persists is that institutional investors often report the contents of their portfolios to asset consultants as part of their annual reviews. This process incentivises fund managers to sell the "dogs" in their portfolio towards the end of the year, as part of "window dressing" their portfolio before being evaluated. For example, in early 2019 fund managers with IOOF in their portfolios would have been facing some pretty stern questioning from asset consultants about why they owned the troubled financial services company in their portfolio, as owning it might suggest that the fund manager's investment process was faulty. IOOF’s share price recovered by 59% throughout 2019 to be one of the top-performing stocks on the ASX.

Here retail investors can have an advantage over institutional investors, picking up companies whose share prices have been under pressure late in the year that could see a rebound when the selling pressure stops in January and February. Furthermore, retail investors can afford to take a longer-term view on the investment merits of a particular company that may have hit a speed bump.

Last Year's Dogs in 2019

Over the past year, the Dogs from 2018 returned 27%, significantly outperforming the ASX 200 index’s return of 23%. Underperformance from AMP, Challenger and Boral was outweighed by recoveries in the share prices James Hardie, Lend Lease, IOOF and BlueScope Steel. The common theme in the reversal of performance in 2018’s “Dogs of the ASX” is an improvement in the company-specific issue that has been weighing on the share price. James Hardie benefited from both a recovery in the US housing market and falling raw material costs; Financial Services company IOOF rebounded as the company merely stabilised the ship after falling -47% in 2018, and Lend Lease had a solid 2019 after progressing its troubled engineering business towards a sale and demonstrating the underlying strength of its global residential developments.

Looking at the list of the underperformers for 2019 in the ASX 100, the key themes impacting their share prices are falling coal prices, interest rates, and a slowing domestic housing market. In seeking to identify which among these Dogs of 2019 will shine in 2020, history suggests that it will be those companies whose falling share price was due to company-specific problems, rather than industry-wide issues such as a falling coal price. Therefore in 2020, we see that construction company CIMIC and financial services Link Admin are the most likely to stage a recovery, either due to a takeover bid in the case of CIMIC or a Brexit-led recovery in Link’s financial administration business.