Good Alpha Returns
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Monday 30 November 2020 Good alpha returns Yes there can be some bad years for stocks but in a week’s time we’ll be able to test the stock market ‘rule of thumb’ that shares will return around 10% a year over a 10-year period. In my article today I prove this fact: smart stock-picking or reliance on great fund managers will give you good alpha returns. Like me, Paul (Rickard) invests for the long term, but from time to time he’ll toss out the odd mistake, take a bit of profit and trim exposures. In his article today, he tells you about two stocks he’s selling and two he’s looking to buy. Sincerely, Peter Switzer Inside this Issue 02 FACT: Smart stock-picking or reliance on great fund managers gives good alpha returns Good alpha returns by Peter Switzer 04 2 buys + 2 sells 2 buys + 2 sells by Paul Rickard 08 A2 Milk & 4 other infant formula stocks 2 Milk and 4 other infant formula stocks FACT: Smart by James Dunn 11 Buy, Hold, Sell, What the Brokers Say stock-picking or 9 upgrades, 12 downgrades reliance on great fund by Rudi Filapek-Vandyck managers gives good 13 My “HOT” stocks My “HOT” stocks alpha returns by Maureen Jordan by Peter Switzer 02 Important information: 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. For this reason, any individual should, before Switzer Super Report is published by Switzer Financial Group Pty Ltd AFSL No. 286 531 acting, consider the appropriateness of the information, having regard to the Level 4, 10 Spring Street, Sydney, NSW, 2000 individual's objectives, financial situation and needs and, if necessary, seek T: 1300 794 893 F: (02) 9222 1456 appropriate professional advice. FACT: Smart stock-picking or reliance on great fund managers gives good alpha returns by Peter Switzer In a week’s time we’ll be able to test the stock 1. Chinese growth slowed and the SSE market ‘rule of thumb’ that shares will return around Compositefell 43% in just over two months 10% a year over a 10-year period. The IOZ exchange between June 2015 and August 2015. This traded fund from iShares, which tracks the ASX/S&P worried Wall Street. 200, has been operating since 10 December 2010 so 2. The yuan was devalued. This also spooked I thought I’d test this out because I often make Wall Street. reference to the expected return for having faith in 3. Commodity prices slumped as the world’s stocks. most important economy for global growth slowed. IOZ 4. The threat of a ‘Grexit’ was still a possibility. 5. The Brexit referendum! 6. In September 2015, the Coalition swapped Tony Abbott as PM for Malcolm Turnbull. 7. The double dissolution 2016 election wasn’t a plus, with the Government reduced to a one-seat majority. Did I say it was a ‘crap’, year? (Excusez-moi, It wasn’t a great year to kick off, as the chart shows. encore!) The kick-off price was around $20. By 30 September 2011, it was down to $16.90. You can probably blame This changed and it was helped by Donald Trump the end of the mining boom as one reason but winning the December 2016 election. political instability with Labor was no help, nor was our dollar, which hit $US1.08 in May! By August 2018, IOZ was back to $26. Then Donald met Xi Jinping and trade and tariffs trumped the stock Also not helping was the fact that the US lost its market party. However, by late 2018, trade talks had AAA-credit rating. And over this time, the S&P 500 raised positivity and Trump had hogtied the Fed dropped close to 16%. As we can’t resist playing Chair, Jerome Powell, to cut interest rates. And the ‘follow the leader’, this was bad news for IOZ stock market took off. investors as well. There was a 25% gain from 28 December 2018 to 21 Then it was a nice climb to around $26 by March February 2020, with the unit price at $29.18. But the 2015.However, the optimism didn’t last. Between Coronavirus brought us back to earth and IOZ fell to March 2015 and February 2016, IOZ fell to $20. That $20.14 — a 30% fall! was a 30% fall! Since then it has rebounded to $27.09, which is a Excuse my French but this was a crap year or so, 34% comeback. But remember this: when you fall partly created by dumb politicians. Here were the 30%, you need a 44% comeback to get you back to negatives that took money off stock market players: where you started before the crash. Monday 30 November 2020 02 OK, that’s the story. As you can see, it was and lower exposure to a manager that has a bad trot complicated with everything from Brexit to Donald after being crash hot. Trump to question marks over China’s ability to keep growing and then the damn virus! Important: This content has been prepared without taking account of the objectives, financial situation or Anyone who slammed a million into IOZ over that needs of any particular individual. It does not time has seen their capital go up and down, but it has constitute formal advice. Consider the grown by 34% or 3.4% on average over the decade. appropriateness of the information in regard to your circumstances. Let’s be conservative with the income paid by IOZ, but it has generally (until this year) paid over 4.2%. So the count is now 7.6% (3.4% + 4.2%). If we allow 1.4% for franking credits, we end up with a payoff per year of 9.0% (grossed up). This isn’t a bad result for an investment product that’s had to deal with so many curve balls and undoubtedly makes a decent case for all ETFs out there that give you the entire S&P/ASX 200 Index. While this is OK for a core return, remember there can be some bad years for stocks generally, as the IOZ chart above shows. That’s why smart stock-picking or reliance on great fund managers can give you some good alpha returns. I know I’m conflicted pointing to the performance of WCM because a company I have a share in brought this US fund manager to the ASX. However its return over the past 11 years shows what an above average fund manager can do. This was data from October 30 but you can see what a very good fund manager can do. Looking for best of breed (especially when wanting to invest overseas) is a pretty good strategy. If you want to go down the fund manager path, you should think about creating a fund of funds (maybe two or three or even more) so you have diversification Monday 30 November 2020 03 2 buys + 2 sells by Paul Rickard I am not a huge believer in overly active portfolio management. For my core portfolio, I invest for the long term, so I don’t carry expectations that I can “buy at the bottom” or “sell at the top”. Time in the market, rather than timing, is the key driver. But re-balancing and re-weighting, throwing out the dogs (or mistakes) and occasionally, taking a bit of profit and trimming exposures, are strategies I do employ. It is with regard to the latter strategy that I am suggesting a couple of portfolio trimmings. While I still like the companies, I think they have run too hard and Source: nabtrade it is time to lock in a profit and moderately reduce the exposure. Down the track and at a better price, I will Short seller Blue Orca Capital accused Seek’s 61% look to re-invest. owned Chinese employment jobsite, Zhaopin, of creating fake job advertisements and fake CVs to I have also nominated two that have “cheapened” boost traffic. It also said that there were accounting (mainly due to the “rotation trade”) and are irregularities. Seek issued a statement strongly candidates to develop or increase exposure to. refuting the allegations. It agreed that Zhaopin was an industry leader (not necessarily the leader), saying Here are two to sell and two possible replacements. that “Zhaopin led on many key metrics, but not all”. 1. Seek (SEK) – reduce Friday’s ASIC data showed that there was still a meaningful short position in Seek, with 4.85% of its Seek closed on Friday at $26.06, just shy of its 52 ordinary shares sold short. week high of $26.50. It is 10% higher than its pre Covid-19 high set on 17 February, and 230% higher Seek says it is continuing to invest in Zhaopin and than its market meltdown low of $11.23 on 23 March. three structural themes – online education, Human Importantly, it has more than fully recovered the loss Resources as SaaS, and contingent labour . it suffered when it came under attack from a foreign short seller in late October – it has risen by 31% from CEO Andrew Bassat delivered an upbeat assessment the low on November 2. of the Group’s prospects at the recent AGM on 19 November, saying that “revenue is well above the Seek (SEK) – last 12 months assumptions underlying the illustrative assumptions provided in August”. They have now guided for FY21 for revenue to be in the order of $1,600m, EBITDA of $400m and NPAT of $50m.