The Australian financial market search for yield has often led to a compromise in the risk/reward proposition, introducing “unintended risk”, which has on occasions led to the gradual erosion of wealth over time or capital losses over shorter periods,” says Rob Thompson, Head of Distribution for PM CAPITAL.
“The reality is that the strong focus on yield is distorting asset prices,” said Mr Thompson.
“On many occasions the elements of yield are overvalued or receive too much focus at the expense of other important fundamentals that deserve greater consideration,” he said.
“Heuristic simplification – the assumption that current circumstances will continue into the future – has become a powerful guiding force amongst local investors due to the strength of the Australian economy and resilience of the local Australian financial markets over the last 10-15 years.”
“While the current fundamentals – slowing in demand for natural resources and subdued consumer sentiment – point to a changing backdrop for Australian corporate earnings, dividend policy has broadly remained unchanged,” he said.
“Many companies continue to inflate payout ratios beyond perhaps what they would be under other circumstances, driven by the desire to pacify yield hungry investors.”
“The undoubtable benefits of regular cash-flow from investment securities should be considered in the context of the overall risk/reward proposition and appropriate asset allocation.”
Mr Thompson said that despite the extensive discussion of Australian investor reticence to deploy capital globally in recent years there has been little change in their outlook.
Statistics from the ATO show that SMSF’s only have around 1% of capital allocated to offshore assets.
“The key drivers are clearly natural “home-market bias” along with the generous dividend policy of many local companies and relatively higher term deposit rates (until recently) at play,” said Mr Thompson.
“Many Australian investors are aware that local shares have provided better returns than US shares over the last 10 – 15 years, yet few would be aware that the S&P500 (US sharemarket index) has outperformed the All Ordinaries (Australian sharemarket index) by 7% p.a. over the last 5 years (January 2014).
“The fundamentals have broadly been ignored as conservatism biases extrapolate that US shares are a “bad investment” based on the last 10-15 years.
Mr Thompson said the returns from the S&P500 in recent times have been impressive, and it has also been delivered against the backdrop of improving balance sheets and fundamentals relative to Australia.
“We expect this improving trend to continue over the medium term,” said Mr Thompson.
“There are very clear diversification benefits and compelling valuation opportunities available off-shore for Australian investors,” he said. “There may also be an opportunity to minimise the risk of another yield trap.”
“While yield has its place, a myopic focus on yield can lead to poor investment outcomes, if other factors are not considered.”
“It is important to look beyond any cognitive bias and remain focused on the fundamentals of the risk/reward proposition.”
About PM CAPITAL
PM CAPITAL is a Sydney based specialist equity and income fund manager for private
clients, financial advisers and institutional investors. The firm is wholly owned by its staff who are substantial unitholders in the same funds offered to clients. It is focused on achieving absolute after-tax returns. Each fund holds a concentrated number of positions of intensively researched companies trading below their long term intrinsic value.
Unit holders in the PM CAPITAL Global Companies Fund since inception (28 October 1998) have over 210% more capital than if they had invested in the MSCI World Index, with a total return of 283% net of fees (as at 31 January 2015). Past performance is not indicative of future performance.
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