How to make the most of investing today.

Published 28th April 2023

Last night I gave Rowan (not his real name) a lift home after attending a capital raising presentation together. Even though I had only known him for an hour or two, it is not unusual for me to freely offer lifts to newly formed acquaintances - you never know what you could learn on the ride home. As we headed down Victoria Street, I discovered he has had a varied career; working with the Eureka Report was one such component. He posed an interesting question to me after I told him I was heading home to work on this article: “Why do you think the Eureka Report was so successful?” “Easy” I said, “they had trusted authors in Alan Kohler, Robert Gottliebsen and Stephen Bartholomeusz. People liked watching Alan on the TV and the natural flow on was for them to read his newsletter” A defiant “WRONG!!” was his reply.

The reason they were so successful, in my learned passengers view, was because “they showed people how to make the most of today”. There are many commentators and journalists (note my deliberate use of italics) who report what they see today and how good (or bad) they think it will be tomorrow. You are then left to your own devices to wade through all of the white noise and self-assess the complicated world of geo-politics, economic data points and a supremely intricate (sometimes deliberately so) financial system with links and dependencies you only see when the tide recedes.

While this was not necessarily a ‘light bulb’ moment, it has shaped this article. I could easily write about all the issues that keep me awake at night when considering your investments. But the odd poor sleep is part of the role I assume, and to which I am also grateful to accept. My other role is looking for the positive; to the spaces where we can generate a suitable risk adjusted return. As Mike Hawkins says “There is always a bull market, it just changes asset classes”.

When I am looking at the investing universe, I can see some attractive investments from a risk/return perspective. Many are not sexy, and will not make you a quick return; but that is not the game we are in.

In April 2022, a 6-month TD was trading at 0.25% and the RBA cash rate was 0.10%. Fast forward less than 12 months - the RBA cash rate is 3.60% and the most attractive TD is at 4.30%. Just to highlight this further, for a $250,000 investment you are receiving $5,062 more or 17.2 times the income – in less than 12 MONTHS! Cash is now providing a return that is commensurate with many share dividends (less franking) and you are taking infinitely less risk. As I said, it will not change your life overnight, but that is not the game we are in.

Company dividends will come under pressure over the next 1 to 2 years as the economy continues to slow. This shouldn’t surprise anyone. However, companies that have a history of sustainable free cash flow, sustainable dividend pay-out ratios and a sustainable market position will continue to pay a sustainable dividend (I hope you can see the importance of ‘sustainability’ in this phase of the market). You may not receive a large capital appreciation, but the metrics above will be attractive to most investors, helping to put a floor under the share price.

Many CPI linked businesses can lift prices as inflation increases. They can deliver in a slow and steady manner over time. Companies with world leading business models and strong pricing power (pass on cost increases without hollowing out of their customer base) also assist with making the most of investing today. Again, they may have modest capital growth, but if they have a sustainable dividend and some capital growth then your minimum return target has a chance of being met.

The above are some examples of our Investment Ethos no 3 – Maximise income generation from each asset class. By following the highest yielding asset class through the cycle, you are following where the value and risk adjusted returns have historically been – Quantitative Easing did distort this somewhat over the 2010’s.

So how are we making the most out of your investments today?

Ensuring maximum flexibility within your defensive holdings:

·??????Retain a healthy level of cash to take advantage of any mispricing;

·??????18 months to two years of pension payments to ensure you are not a forced seller of growth assets should the market fall when you need the cash – we normally hold 12 months’ worth of cash;

·??????Using TD’s to obtain the best risk-free return we have seen in many years – I would have given my right leg for a 4.3% TD over the last 2 years (government guarantee of $250K allows this to be risk free).

Ensuring we are building a sufficiently defensive portfolio to navigate whatever gets thrown at us:

·??????Global facing world leading Australian equities that we believe will provide a better total return (capital growth and income) than the market;

·??????Companies that have a history of paying a sustainable dividend;

·??????Staying invested for the long term and waiting for the risk/reward set up that allows us to take advantage of fear sensibly and prudently.

Using the tools at our disposal to minimize the volatility in the value of your portfolio:

·??????Australian Government bonds are now in positive territory for 12 months after being down by 10% in the middle of 2022. They also had half the fall of global equities;

·??????Using Alternative strategies such as Long/Short and Absolute return funds to smooth out the market movements;

·??????Keeping a ‘glass half full’ mindset to find the next pocket that we can get a suitable risk adjusted long term return.

While we can’t predict what will happen tomorrow, we deliberately set our course of action to build robust portfolios specifically tailored to your needs. These are currently designed so they can:

·??????Rise if Central Banks and Governments keep bailing us out (US banks and Credit Suisse) and provide us with more Quantitative Easing.

·??????Provide flexibility, should the economy contract on the back of higher interest rates

·??????Provide stability, should inflation remain elevated and sticky a lot longer than the smartest people in the room currently predict.

As you are aware from experience with your advisors, we are building flexible portfolios with a long term, glass half full investment ethos. In times like these the greatest way to make the most of today is having enough flexibility (thought process and portfolio design) to capitalize on the mistakes of tomorrow.