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Michael McCarthy
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+ About Michael McCarthy
Michael McCarthy is chief market strategist for CMC Markets in Australia. He has over 30 years of experience in financial markets – specialising in equity trading and trader education.

Stock in the spotlight: Going for Platinum

Wednesday, April 26, 2017

By Michael McCarthy

Share markets around the world are at or near post-GFC highs. Finding good value in shares is a tougher-than-usual ask. However, there are still opportunities for investors. “Fallen angels” are one such source of potential value, and a celebrated value investor may, in itself, represent good value.

Active mangers (stock pickers) are under pressure at the moment. Current market conditions have favoured momentum and growth strategies. In a seeming contradiction, defensive investors have performed on the back of strong dividend yields. Generally speaking, active returns are lagging index returns, putting them at the bottom of the fund manager pile.

Platinum Asset Management (PTM) has had a poor run. To some extent, this is driven by the tougher environment for value investors. Sticking to its bottom up, individual company based approach demonstrates their discipline, but has hurt returns. In 2016, profits fell 6% and funds under management dropped more than 15% as investors shied away.

Clearly, the returns generated by different investing styles are cyclical. At some stage, value investors will return to the top of the heap. Investors committed to buying high-quality businesses at lower share prices are likely looking at PTM right now.

Note the action at $4.85 (green line).Repeated bounces of this level make it an important support. It may also mean longer-term investors are conducting “back-foot” buying campaigns. Chartists refer to this as a basing pattern, and it supports the idea that the share price has found a low.

At current levels, PTM is trading on a PE ratio of around 16:1, well down from the highs around 26:1. The dividend yield (including franking) above 9% is also an attractive proposition. In my view, this value manager is good value.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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Climbing the wall of worry: 3 events that could derail the market

Wednesday, April 19, 2017

By Michael McCarthy

The Australian share market is threatening the ceiling. Recent positive moves put the 200 index at the highest point since the devastating sell down of 2008. Positive fundamental factors are somewhat balanced by extensive event risk over 2017. The direction of the market over the coming months will be determined by investor reactions at this crucial level. And events scheduled over the rest of April could determine that reaction.

The all-time high for the Australia 200 index occurred on November 1, 2007 at 6,852. The post GFC-low occurred on March 9, 2009 at 3,121. It took the next six years to recover to levels a shade below 6,000, spending almost six weeks between March and May 2015 attempting to penetrate that level before falling away. Now, the index is back at 6,000 (give or take) and investors are faced with the same challenge. Are the recent gains sustainable? Can the market trade higher, or will it pull back once more?

The RBA board again reflected on the improvement in the international outlook at its most recent meeting. Stabilising growth rates in China, an accelerating US economy, expansion in Europe and signs of traction in the Japanese economy are positives for the local economy, and therefore shares. So far, so good.

However, there are significant events over the course of the year that could derail a modestly positive outlook. Three occur before the end of April.

US reporting season

The US reporting season represents a particular threat. Recent outperformance over US shares by the Australian bourse is a long-awaited positive. But local investors should not become complacent. If the US market sneezes, Australian investors will catch a cold.

The problem with the US reporting season revolves around lofty expectations. According to Bloomberg, the consensus forecast across the top 500 companies is earnings growth of 9%. Although this is lower than previous estimates closer to 12%, it is high compared to the two quarters of negative earnings reported last year. Admittedly, the US economy is in a sweet spot. Growth is accelerating, but interest rates are still historically low and wages (read corporate costs) are contained.

Nevertheless, the big miss on March non-farm payrolls (98,000, forecast 180,000) suggests potential downside risk. A number of economists were unconcerned, explaining that weather factors played a role. If weather affected jobs growth, it may also weigh on company profits. Although the season kicked off last week with J.P. Morgan and Citigroup, the likes of Johnson & Johnson and Yahoo this week may provide a better guide to the overall economic outlook. If US investors are spooked by what they see, a slide in share market sentiment may infect all regions.

The French election

The first round of voting in the French election occurs on April 23. The leading candidate, Le Pen, and the fastest riser, Melenchon, are both seeking a referendum on France’s membership of the EU. A Frexit is a much greater market concern than Brexit. France is in monetary union, and is the second largest economy in the EU. A departure is an existential threat to the Union.

Naturally, should either the hard left or the hard right gain ascendancy in the four runner field, investors are likely to dump shares and ask questions later. 

The announcement of a snap UK election in June merely adds to the uncertainty. However, given the fact of Brexit, the threats here loom largest for the UK, rather than the global economy.

CPI data

Finally, there is the Australian CPI data released on April 26. At the moment, analysts are divided on the direction of interest rates. Some expect further cuts in the second half of this year, some are looking for rises. The shockingly low read on inflation for Q2 2016 was a dominating factor in the RBA rate cut of August. Market thinking around this read on Q1 inflation is a continuation of the recent uptrend and an 1.5% annualised rate of inflation.

A number well below the forecast will bring immediate calls for further rate cuts, and could be supportive of share prices. On the other hand, an annual rate approaching 2% would take cuts off the table, and could batter the market.

None of these risks are a given, and of course, developments over the second half of April could see further gains for shares. A sustained move over the 6,000 index level would be a strongly positive event.

However, it’s clear risks are rising. The Australian volatility index has lifted from all-time lows below 8% three weeks ago. While still not at historically high levels, this sort of move is usually due to one or both of two factors - increased demand for portfolio insurance, or professional traders bracing themselves. Either way, Australian investors should take note.

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A beef with P/E ratios

Wednesday, April 12, 2017

By Michael McCarthy

Price to earnings ratios (P/E Ratios) can be misleading. Usually, they look at the next 12 months’ earnings only. If a company is in the midst of a strategic transformation that will deliver benefits beyond the one year window, the P/E may look much worse than the real prospects of the company. This brings us to the Australian Agricultural Company (AAC).

AAC’s shift is driven by a desire to turn from price taking to price making. Traditionally, larger agricultural producers tended towards commodity production, seeking scale to drive higher profitability. However, producers of commoditised goods are at the mercy of the market. If they refuse the market price, any other producer of the same goods can, and will, take their market share.

On the other hand, producers of niche and premium products have much more control over the prices they charge. This is the philosophy underpinning AAC’s investment in its beef herd and the creation of the premium Westholme and Wylarah brands in October last year. At its November results announcement, AAC claimed the largest Wagyu herd in the world.

Naturally, these products speak directly to the “pure food” thematic that global investors seek in NZ and Australian food producers – from Manuka honey to infant milk formula. Yet, the disruption of the ban on beef exports to Indonesia started a long period of underperformance. The silver lining is that this ultimately led to the new approach to AAC’s product range.

The increase in price swings on the long-term chart point to market interest in this strategy. The current P/E for AAC is around 31 times. However, Bloomberg consensus estimates of 2019 earnings suggest at current share price levels a P/E closer to 17 times, and in 2020, a mouth-watering 8 times. Tactically, investors may attempt to pick up AAC close to the $1.60 support, with a back-up plan to jump on board on any move above $1.75.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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Going for growth

Tuesday, April 04, 2017

By Michael McCarthy

The Australian share market burst through previous highs last week. The strength of the market took many by surprise, including this writer. In one of those market ironies, the strength is at least partly a result of defensive positioning, leading to a melt-up where investors scrambled to top up their portfolios. Investors pondering what to buy could turn to the energy sector despite highly volatile oil prices.

Defensive share portfolios are a fact of post-GFC life. Healthcare stocks are popular for their assured income streams as populations age and governments pay the bills. More assured income streams also make utility and property stocks desirable. Dividend yield stocks such as banks and telcos are over-represented in portfolios as they allow investors to receive income as they ride-out any market storms. 

The reverse is also true. Investors are generally underweight more growth exposed stocks, such as miners and industrials. Many investors weigh the potentially higher returns from these sectors against the higher risk, and opt for safety. However, this ignores another investment risk – under performance. Whether tilted too far to defensive stocks, or heavily overweight cash, investors without growth exposures will lag their peers in an accelerating growth environment.

Some investors are well advanced in a portfolio rotation to growth. They saw the low points of 2016 as the bottom of the commodity cycle and bought resource shares. While many resource stocks are well off their lows, there is still potential upside, especially if commodity prices keep tracking the global economy higher.

This brings us to the energy sector. Oil and its derivatives power the world. Despite the rise of renewable energy sources - and the desire to move to a carbon dioxide reduced environment - there are no viable replacements for cool and coal so far. The one form that can compete, nuclear energy, is politically unpalatable.

After the high volatility of Q1 2016, oil prices have recovered. The charts show a price range for WTI crude, with major support around $42 a barrel and resistance at the recent highs around $56. There are fundamental factors supporting this range. Above $50 a barrel, US shale producers spring into action. Below $45, many producers are unprofitable and OPEC gathers support for limiting supply. While there is an element of elasticity to these reactions, they are likely to contain oil prices for some time.

This top side limit is sowing the seeds for the next oil boom. Major investment in exploration and drilling is unlikely while this perception remains. Large US inventories and desperate national producers mean this is probably years away, but it will surprise markets when/if it occurs. 

Perhaps more important is the potential for LNG. Gas is cleaner to burn and much cheaper to produce than most other energy forms (coal is the cheapest and dirtiest). It’s why, in my opinion, gas is the answer in a carbon-constrained world. And it's why I favour Oil Search and Woodside in the Australian energy sector.

 

This chart tracks the performance of Oilsearch, Woodside and Santos over the past eighteen months. The background is the oil price. Over the period, the price of oil is up 20%, yet the performance of these three key energy stocks is wildly disparate. Oilsearch is up 16%, Woodside is close to flat and Santos is down 26%. 

This difference in performance is partly attributable to individual company factors. An investor’s choice between these three could reflect different investment approaches. Some may argue that Santos is a value proposition, given it’s under performance. However, I prefer Oil Search as I see it as a higher-quality play. Woodside is also one of my favoured picks, but may face risks from politicians looking to plug budget deficits.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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Stock Spotlight - Healthscope (HSO)

Tuesday, March 28, 2017

Healthscope (HSO) is unusual in its sector. Healthcare stocks are generally well supported, with top quality companies like CSL, Cochlear and Ramsay enjoying status as core holdings in many portfolios. In contrast, HSO is trading near its all-time lows.

The reason is a fall in earnings as an ambitious building program is rolled out. Earnings and profits fell at the last half year report, again unusual for the sector. Interest costs and depreciation both rose, reflecting the capital expenditure. However, a number of these projects are due to come online this year.

This sees analysts estimating long term growth at around 20%. At current levels the Price to Earnings ratio is around 20x giving a juicy PE/G ratio close to one. There are significant risks here, not least management’s ability to deliver large construction projects on budget and on time. In my view the share price close to the low of $2.12 makes this a risk worth taking.

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The triple top: Is the market set to slide?

Tuesday, March 21, 2017

By Michael McCarthy

Things look good. Markets are up, and the medium- to long-term economic outlook continues to improve. There’s proof in central bank activity. However, the short-term direction for share prices is less positive. Fundamental factors and technical indicators are pointing to a possible market pull back and opportunity for investors.

Both the US Federal Reserve and the People’s Bank of China are obviously confident enough in the underlying strength of their economies to tighten monetary policy. The US is lifting rates, and in China borrowing is tougher. Recent growth and activity data is positive and trending upward. Strength in these two nations is enough to shift the global view.

Even the president of the European Central Bank is leaking hints that the era of accommodation is coming to an end. Given the amount of event risk this year in Europe alone (Brexit, major elections, etc) this is an expression of high confidence. Much better manufacturing and services indices that speak to an ongoing economic expansion underpin the confidence.

However, one plus one does not always equal two. An improving outlook does not necessarily mean a higher share market – at least in the short term. The reason is straightforward. Stock prices accord to the future, not the present. As the numbers late last year started to show stabilisation in China and an accelerating improvement in the US, share markets around the globe reacted. 

The rise reflected optimism that arguably included benefits from new US policies. These potentially stimulatory moves are still in the offing, and US markets in particular appear to carry little risk premium for potentially economically damaging mooted trade barriers.

This means we have a US S&P 500 index trading above historical norms, around 20 times earnings. In Australia, the index P/E ratio is less stretched at approximately 16-17 times, but not cheap. And the seasonal positivity associated with the October to April period is coming to an end.

Now, take a look at the technical picture:

The index has approached levels just above 5800 on three occasions this year. On each occasion, it has failed to break through. The initial double-top formation could now evolve to a triple top, with the three peaks already in place.

Naturally, if this is a triple top the index may fall substantially, with targets at 5500, 5150 and 4850. This is my base case – the scenario I think most likely. It’s why I’m a buyer of index put options, which increase in value as the market falls. 

How will the market prove me wrong? There are two scenarios. The first is if the market climbs the wall of my personal worry, bursting through the recent high at 5832. A daily close above that point is bullish, and negates the triple top formation. That sort of action would see traders looking for a test of 6000 in fairly short order.

Secondly, the market may trade sideways, maintaining the current lower volatilities. A narrow range between 5600 and 5832 would mean little in the way of overall opportunities, making portfolio construction almost purely a stock-pickers’ game. In my view, this is the least likely scenario.

The Australian volatility index (AVIX) hit an all-time low last week. Confidence or complacency are riding high. Periods of low volatility don’t last for ever, and can come to end in a step-change for markets. A possible source of a sudden shift in market thinking is the bond market. A recent rally back in bonds and gold suggest not all is well. If rising interest rates spark a rout in US bonds, the sentiment impact could be strongly negative.

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Are shares at risk of a pullback?

Tuesday, March 14, 2017

By Michael McCarthy

The Australian share market could be facing a significant pull back. While fundamental economic conditions continue to improve, there is growing evidence that market pricing has run ahead, and will need to correct itself. How do I know? The chart.

It seems amazing that market participants still fall into the “fundamental analysis versus technical analysis” trap. After all, they are not mutually exclusive. When trying to solve a puzzle as complex as the market, why wouldn’t an investor use all the tools available? 

Charts can give hints and warnings of possible price moves as, or even before, the fundamental factors become apparent. Possible is a key word here. No indicator (or fundamental factor) has a 100% record in forecasting market moves. If an investor accepts the idea that the price of any share is simply a mass expression of opinion, it’s easy to understand the difficulty in forecasting. Crowd behaviour can be as beautiful as a ballet, as brutal as a riot. And crowds and markets can flit from one to the other very quickly.

At the moment, the chart of the Australia 200 index is flashing a warning:

An experienced investor or trader may pick up this chart and shout “sell” immediately”. Let’s work through the process.

Starting at the beginning, this is a daily candlestick chart. Each of the (pink or blue) candles represents one day’s trading. A blue candle means the day closed higher than the opening. A pink candle is a down day. For most of 2016, and into this year, the index is in an uptrend – signified by the purple line that touches the ongoing series of higher daily lows. 

The green line at 5580 is a point where the index has found support and resistance previously – and is therefore more likely to do so again. The break through that level signalled potential for further gains. So far, so good.

However, the problem occurs when I run CMC’s pattern recognition scanner for “double tops”. The thinking was to identify market indices in the US that were clearly signalling a pullback. Instead, the Australia 200 index showed the orange double top signifier – the extended “M” shape you can see on several peaks in the chart.

Because no signal is fool proof, traders often look for confirmation. Often, this is another unrelated indicator that is pointing in the same direction. At the bottom of the chart is the MACD (moving average convergence divergence) which is a multi-use indicator. There are two lines to the MACD. The black line leads, and the red lags. Signals occur when they cross – sell when black crosses from above, buy when black crosses from below. 

However, there is more to the MACD. Where the cross occurs relative to the middle “zero line” is important. A sell signal above the line is considered more powerful, as is a cross upward below the zero line.

Now back to the chart. The MACD is threatening to cross upward, usually good news. However, the lines are above the zero line, and a touch and fall away is as good as a cross from above. In other words, a couple of negative days trading and it’s likely the short term traders will start heavily selling the index.

Keeping perspective, a 5% pullback to around 5500 would leave the longer term uptrend intact. A normal and healthy pull back that creates a base for further gains. On the other hand, chart signals can be as wrong as any expert. In trading above the recent high at 5832 would negate the double top and shift the balance of probabilities to more immediate gains for the market

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Gold for Australia: stocks to watch

Tuesday, March 07, 2017

By Michael McCarthy

Australian listed gold stocks are notoriously volatile. One explanation is that many day traders use them as a proxy for trading the yellow metal. The larger volumes and bigger daily ranges are both a product of trader participation, and a cause of that participation. In a year where event risk is elevated, investors may consider adding gold stocks to the portfolio as a hedge against market disruption.

The all-time highs of the US markets appear to reflect optimism that the new administration will both stimulate and support economic growth. Many of the measures foreshadowed will do exactly that. Corporate tax cuts are one example. However, other policies could have a negative impact. Any moves that curtail trade are likely to hurt the country enacting them, as well as the countries targeted. 

At a PE of 20, the US markets can be compared to an overinflated balloon, and no-one can say with certainty whether the balloon will slowly deflate, or pop. Policy announcements that lower growth forecasts could do either.

Heightened political risk is an issue in Europe as well. Elections in the Netherlands take place next week. French voters will go the polls in the next two months, and German officials face a ballot in September. The rise of populist parties means ambitious would-be politicians may be tempted by policies with strong electoral appeal, regardless of known potential economic consequences.

Given the potential for politics to roil markets, gold is on the radar. Some may prefer to trade gold directly, using instruments such as CFDs. Others may prefer to buy coins or bullion. The appeal of assets that can be held in the hand is well established. 

Investors with significant portfolios could turn to listed gold mining and producing stocks, while staying out of the junior explorer space. There is a risk that even gold producing stocks may not rally if there's a market meltdown and spot gold prices rocket higher. There are no guarantees. 

Bearing in mind the risks, two stocks are high on my list. Newcrest (NCM) is the largest listed gold stock on the ASX. With market capitalisation around $16 billion and operations in Australia, Africa and across the Asia Pacific region, some may see it as the safer play:

Given the volatility of the sector, a good entry level is more important than usual. My plan is to wait for a move back to the zone between $16.35 and $18.00.

One stock that reported better prospects is Northern Star (NST). An all in cost of production between $1000 and $1050 make it profitable at current prices, and the company said it's on track to produce 485,000 to 515,000 ounces this year. Some analysts expect the production to come in at the top of that range:

Once again, I’m cautious on entry. I’d prefer to see NST somewhere between $2.97 and $3.50 before stepping up to the plate.

My view is that the most probable scenario is the modestly positive economic prospects will see markets higher by the end of the year. Further, a strengthening US economy will bring Fed rate rises, a stronger USD and therefore, a lower spot gold price. It may seem strange to buy stocks and hope to lose. But that’s exactly where I’m at with gold stocks. I’m adding these to my list “just in case”, not because I like the outlook. If there are no market disruptions my portfolio overall should prosper, and if something does come from left field, my gold stocks will help.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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Reporting season: the good, the bad and the ugly

Wednesday, March 01, 2017

By Michael McCarthy

Solid sales growth and a bounce back in overall profit are two key takeaways from the company reports released over February. However, there was enormous variability between companies and sectors and some very strong market moves – up and down – following individual company results. 

A feature for investors is increased dividends, particularly from commodity stocks. The top 200 stocks will pay $72 billion in dividends for the half year. The strength of mining earnings is remarkable, but other sectors showed increases as well, including healthcare, consumer services, financials and energy. This could see upgrades from analysts over the coming weeks.

So here’s my take on this reporting season. The following judgments are my opinions only. This is not a comprehensive look at all stocks, but merely those with results that caught my eye. I’ll start with the good, then move on to the bad and the ugly.

The Good 

There were a number of stand-out reports:

Bluescope Steel (BSL) shone. An 80% increase in net profit driven by a 200% lift in underlying earnings helped. Shareholders will receive a 33% larger dividend, and the management outlook for the second half of the year will show a 50% improvement over H2 2016. Which is just as well, given BSL’s share price doubled over the last nine months. Clouds remain over the long term outlook for the industry, but on valuation BSL looks cheap, trading at 10-11 times earnings versus the market average closer to 19-20 times.

Northern Star (NST) – the gold miner reported a 61% lift in net profit on lower costs and higher production. Not a fan of gold stocks generally, but the heightened risks of market disruption in 2017 may be a good argument for holding some gold exposures as a hedge against hard times. This is my pick in the sector.

While we’re in the resource space both BHP and Beach Petroleum (BPT) also reported strongly.

Cochlear (COH) and CSL both, once again, demonstrated why so many investors hold these top quality Australian companies as core investments. Serum sales surged at CSL, and Cochlear’s expanded product range drove earnings. Lofty valuations make it hard to bite the bullet and buy, and some investors will prefer to wait for a (relatively rare) pull back.

Selected retail stocks did very well. JB Hi-Fi (JBH - NPAT  + 16% and FY forecast +31-35%) and Harvey Norman (HVN – NPAT + 39%) justified strong share prices, with sector-beating results. Both presented strong evidence that they are superior retailers. Similarly, Nick Scali (NCK) grew H1 profits by 45%. The other eye-catcher is Super Retail Group (SUL), taking the prize with a 66% lift in half-year profit.

The problem with many of the stocks that reported so strongly is their share prices. These earnings turnarounds were heavily foreshadowed, and with the exception of BHP and BPT, most of the above are trading at, or near multi-year highs.

I’m looking for an earnings turnaround in a company with a bombed out share price and a valuation argument. Vocus Group (VOC) was hit hard last year, and saw several senior departures. Despite margin concerns as customers transition to the NBN, the company reported a 95% lift in H1 profit. The forward PE is around 12-13 times, and the share price is much closer to lows than highs. Additionally, there are a number of merger/takeover deals in the sector. This is the most likely addition to my portfolio as a result of reporting.

The bad and the ugly

There are a number of stocks that are at bombed out levels that may tempt investors. Bellamys (BAL) and Slater and Gordon (SGH) may be among them. However, in my view, neither showed signs of arresting share price slides that may be terminal. I struggle to make a bargain case here.

Post-result trading in APN Media and Fairfax (FXJ) were among the more curious market reactions. Both reported profit increases, a welcome relief to shareholders. The problem is that both saw the long established slide in sales revenue continue, raising questions about sustainability of profit and long-term prospects.

The most startling miss in my view is Brambles (BXB). The global logistics group saw profits slip 14%, despite exposure to the uptick in US economic activity. This provokes doubts about the strong rally in US shares – clearly not all companies are benefitting.

Seven Group (SVW) wrote down various costs and its SWM holdings, taking an underlying NPAT of 104 million into negative territory. While management talked up their portfolio of holdings, in my view the prospects for its main businesses remain constrained territory. Interestingly, SVW is trading near four-year highs. Possibly one for the short sellers to examine.

Rounding out the bad and the ugly is Iluka. It reported a $224 million loss and cut its final dividend. Write downs were a significant part of the loss, but underlying operations also delivered red ink. The best management could say about mineral sands markets was they saw signs of a fragile recovery. Not a buyer.

ImportantThis content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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Factors affecting portfolio performance

Tuesday, February 21, 2017

By Michael McCarthy

How do you build your investment portfolio? I’m not asking about the mechanics of the process, or the adviser you work with. What’s your philosophy? What sort of activities will give your portfolio higher returns over the long run?

There’s no single, right answer to this question. Our individual needs, goals and experience mean that personal characteristics such as risk appetites and investing time frame must come into consideration. Nonetheless, there are a number of key choices that all investors face.

1. Asset allocation

Many studies and academic papers over the years wrestled with an important investment question. Which decisions most affect portfolio returns? Although there is still room to argue, many come to the conclusion that asset allocation is the most influential. That is, it’s not the individual share, deposit or property chosen, but how the portfolio is split among these asset classes. The first decision investors should make is how they will divide their investments among shares, property, bonds, cash and other asset classes such as commodities and collectibles. 

A generally accepted principle is the longer the investor time frame, the more risk. Truly long-term investors have the ability to wait out market storms and potentially capture higher returns. 

In asset allocation this means a greater weighting towards shares. Investors with shorter time frames and lower risk appetites are likely to favour more capital stable investments like cash and bonds. 

2. Portfolio selection

Once investors have guidelines for asset classes it’s time to think about individual investments in each asset class. Although I invest in both, I’ll leave the property and bond markets to those engaged full-time. 

Cash is the ultimate capital stable investment but it carries a significant and often ignored risk. Underperformance. Receiving 1-3% returns when others are earning 5-20% is devastating to wealth over the longer term. 

3. This brings us to share portfolios.

Naturally, most investors look to buy high-quality stocks cheaply, while taking advantage of the risk reducing power of diversification. Seems straight forward, BUT, we don’t all agree on what constitutes high quality, and the only way to be sure of buying at low points is with hindsight. 

In broad terms, an important differentiator is whether investors build their portfolios from the bottom up, or the top down. Building from the bottom up usually means identifying stocks that are cheap or undervalued, and buying them with a view to long-term appreciation. Conversely, top down investors decide the type and style of portfolio they believe best suited to conditions, then seek individual stocks that meet the criteria.

Neither style is right or wrong. Investors with a distinct investment profile will probably maintain a style over the longer term. Other more adaptable investors will adjust their style to the conditions. Both approaches involve risk. Investors who never change may be caught in extended periods of underperformance, where their investment preferences remain out of fashion. Investors who change too regularly face increased cost and exposure to whip-sawing.

Identifying the appropriate stocks is made easier by the proliferation of tools available to individual investors. Almost all top tier online brokers offer their clients software that will scan the market for stocks that fit investors’ criteria.

Fundamental scanners can be set to find stocks with multiple parameters. A bottom up investor may search for stocks with a market capitalisation above $100 million, a dividend yield higher than 5% and a P/E ratio below 12. A top down investor may seek a stock in a particular sector that has upwardly revised earnings and positive price momentum. Whatever the investment style, a fundamental scanner can vastly reduce the search time.

Similarly, some investors use a technical analysis scanner to identify opportunities. One investment use of a chart scanner is to scan for more reliable patterns on longer term chart. A search for double bottoms and reverse head and shoulders formations on weekly charts can identify stocks breaking upward from lower trading ranges, potentially alerting investors at the early stages of a rally.

Investors face many choices. One involves technology. An investor can rail against the rise of algorithmic trading, or chooses to embrace the new world. In the age of a technological arms race, staying up to date with the latest tool scan be as important as staying up to date on the market.

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Canberra puts a Buy on shares

Market volatility and dividend floors

Dusting off the portfolio

Market routs, corrections and sell offs

Share market falls and CBA – time to buy

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