The boring and the beautiful: How to find quality investments
Think of all the acronyms that were born out of the 2020-22 retail trader influx - BTD (buy the dip), FOMO (fear of missing out), and HODL (hold on for dear life). Then, there's the one that expanded long beyond the 20-something investors - TINA.
For many years, equities provided returns that were simply best in class. The acronym has become a mantra for market bulls, arguing that yields have been so low for so long that bonds were hardly worth owning as an asset class. At one point, there were whole notes titled TINA (Morgan Stanley) or had references to the acronym (TINA Turning from Bank of America).
But the game has well and truly changed.
The Australian 10-year yield is now at its highest level since September 2014. The safe-haven US Dollar index is at multi-year highs. Even that rise is coming at the expense of the normally even safer Japanese Yen (now tracking at 20-year lows as of writing.)
We recently sat down with Anthony Golowenko from MLC Asset Management to discuss whether the end of TINA is nigh. Plus, we take a look at the role of alternatives in your portfolio. Finally, he names one company that exhibits all the traits of a quality investment.
You can watch the video below or access our edited transcript.
LW: Does TINA (there is no alternative) still apply to equity markets?
Anthony Golowenko: Thinking about TINA and that environment of lower for longer forever... we think that time has passed. And what it means for equities - it's still constructive. We want to focus really on those cash flows and strong cash flows within our portfolios. And that delivers growth over time. Specifically, to the equity component and beyond that, well, there's a world of opportunities opening up.
Whether that's credit markets or whether that's alternatives as part of a portfolio that can both have components to provide offence, such as equities and Australian equities. And those that are more defensive, as I mentioned, insurance-related and now fixed income and credit.
There is a world of opportunities, so let's get out and explore them.
LW: What place do alternatives have in a diversified portfolio?
Anthony Golowenko: Certainly within our managed accounts program, we have real return inflation plus - and quite a reasonable sleeve within that is in the alternative space. So this is primarily around, as I mentioned, private debt, financing opportunities, and a credit market that's gone from a tailwind being ample liquidity in the system to more of a headwind. Those opportunities we see as continuing to become more fruitful and relevant in portfolios.
LW: Where are you seeing the biggest opportunities and pitfalls in this market?
Anthony Golowenko: I think that pitfalls are probably easier. This isn't rocket science. Running down a hill with a tailwind at your back, plentiful credit environment, and credit conditions... long-duration exposures, hypergrowth, winner takes all (stocks) ... that's really been challenged in that changing dynamic.
Our portfolios naturally don't have a lot of that exposure.
The opportunities and where we're thinking about, I think portfolio construction and high quality, and you might roll your eyes and think it's a little bit boring, but Amcor is a global business. Amcor is a business with clear price pressures. They have a supply chain staffing issue and still integrating. So that business is robust and resilient, and I think increasingly valuable in this environment.
LW: How do you identify quality in this environment?
Anthony Golowenko: In a nutshell, and very simply, cash flow.
In this environment, cash flow - the ability to sustain a business, to deliver strong earnings, and maintain margins is really valuable. And thinking about those small and midcaps, founder lead businesses, real skin in the game and high ownership. And refreshingly in the large caps, such as NAB you've seen Ross McEwan come in and have a real focus to turn that business around.
So in a nutshell, cash flows, the ability to maintain earnings and maintain margins, and that genuine as opposed to perhaps apparent quality in that analogy of all things are getting a bit tougher now. That's the way we think about our portfolio construction.
LW: How much cash are you holding in portfolios – and could it increase?
Anthony Golowenko: Within our managed account program, we've seen that cash level increase slightly. I think it's more relevant within our fixed income and our broader fixed income programme. Earlier in the year, we allocated away from all maturities in both domestic and global and we put that into a little bit more global credit and domestically short duration and cash enhanced.
Now some of those in RMBS (residential mortgage backed securities) are less liquid, but the pure cash enhanced one has increased slightly. And we're doing that where we see stronger yield opportunities, a stronger risk-return opportunity, less duration, and I guess, less buffering in this recalibration period.
MLC Asset Management's portfolios combine their best thinking on asset allocation with a disciplined investment process - developed over 35 years - that optimises returns and reduces risk. For further information, please visit their website.
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Hans is a content editor at Livewire. He is the lead writer of Charts and Caffeine and created Signal or Noise. He graduated with an economics and journalism double degree from Macquarie University.