The only way to withstand a cycle

Given the unprecedented low level of interest rates in 2019, we believe the one thing investors cannot ignore in 2020 is stock selection based on fundamental value.

Over the past few years, we’ve seen a massive rise in passive, or index-linked, investment. By their nature, index/passive strategies do not use qualitative factors, such as fundamentals, to select securities for their portfolios. 

Money flows to shares with the largest index weightings, regardless of the quality of a given company’s business model and, in many cases, regardless of whether the company has any prospects of turning a profit in our lifetime.

The more money that flows into these strategies, the more that certain sectors of the market resemble a bubble – leaving investors highly exposed in the event of a downturn.

Given that ultra-low interest rates are forcing savers further along the risk curve – by increasing their allocation to shares, for example – we believe the only prudent way to ensure people, especially those in their later years, do not take on undue risk is an active, research-led, fundamental approach to stock-picking.

We look for a number of characteristics in any stock we consider for one of our portfolios including:

• Competitive advantage, 
• Capable management, 
• Recurring earnings and 
• Quality at a reasonable price.

In the large-cap segment of the Australian sharemarket, we seek out good-quality industrials trading on attractive valuations that we believe are well-positioned over the next 3-5 years. 

Three stocks that pass the filters

CSL, Tabcorp and Telstra are a few examples of companies with proven business models, a track record of earnings growth over the longer term, strong competitive advantages in their industries and a history of growing dividends.

In 40 years of funds management, this is the only approach I’ve found that preserves capital, grows income and, importantly, withstands market cycles. 

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This wire is part of the ‘One thing investors can’t ignore in 2020’ series. To download the full ebook please click here.

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