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Tuesday, 10 July 2018
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Stocks You Have To Hold

BHP is currently 8.2% of the ASX 300 index with RIO representing 6.2%. In other words, 14.4% of the most common benchmark is in two resources stocks. They are up 18.1% and 10.1% in the last three months of the financial year. Basically, if you didn’t hold resources over the last three months and really the year, you underperformed. Over the last year BHP has been up 37.7% and RIO up 24.4%.

The CBA is now 6.3% of the ASX 300, with Westpac 4.8%, ANZ 4.0% and NAB 3.6%. Between the four of them, they account for 18.8% of the ASX 300. Against the ASX 300 up 10.4% in the last year, the CBA is down 7.3%, Westpac down 2.6%, ANZ +1.7% and NAB -6.0%. One of the biggest issues for fund managers at the moment is whether to go overweight banks again. In the last month the CBA is up 9.7%, Westpac up 7.9%, ANZ up 9.2% and NAB up 6.2%. That compares to BHP down 0.6% in the last month and RIO down 6.6%.

This is possibly one of the biggest debates for all fund managers, what do I do with my resource and bank weightings in the next year. Last year you had to be underweight banks and overweight resources. In the early stages of this financial year those trends have reversed.

As I wrote yesterday the “chicken” fund manager would negate the issue by going index weighted in both sectors. Or at least in those six stocks. For active fund managers like us that would be a big call that would require us to tie up a third of our funds - 14.4% (big two resources stocks) plus 18.8% (big four banks) in six stocks.

We would then have 66% of our funds available to create some outperformance.

Clearly the big institutions appear to have started the process, buying banks back and shaving resources holdings. The main debate is whether to get back into banks. I think the recent rally suggests that you should at least think about it. We are fully weighted (overweight) in the Marcus Today Income SMA but have no holdings in the Marcus Today SMA. I reserve the right to add a bank sector weighting to ensure our relative performance and maybe even make some money and collect the CBA dividend which is around the corner. But I can’t help feeling we can pick more exciting growth stocks than banks, just because they are 18.8% of the benchmark doesn’t mean we need to hold them.

For your interest, the other large stocks you had to hold in the ASX 300 benchmark over the last few months include CSL +23.6% in the last three months, Wesfarmers +19.2%, Macquarie +21.7%, Woodside +21%, Woolworths +14.5%, ResMed +27.7% and Aristocrat Leisure +38%.

A BIT OF HINDSIGHT

Here is a table of the best performing stocks in the ASX 300 over the last year. This is a now useless bit of hindsight but the average performance from these 20 stocks was +154.4%.

The problem is if you take out the loss makers, the average PE was 106x, the average yield was 1.2%. None of them scream "value". They have performed because of the voting machine, not the weighing machine. Value is scarce. What you can say of a positive nature is that the average return on equity was 25.8x and the average earnings growth was over 100%. There is no risk without reward - when PE and yield desert you, the most significant factor in common, for good performing stocks, has been a high return on equity and high earnings growth.

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