Safe. A small word that means so much. But it’s often absent from the investment world lexicon. That’s because no stock meets the strict definition of safety; investing money is an inherently risky activity.
Of course, this risk sits on a spectrum, with some types of investing, asset classes and companies more risky than others. Considerations of risk are key to the role of professional investors, who constantly walk the line between generating meaningful returns for clients and the ever-present risk of losing some of that money.
This aspect of investing rarely receives more focus than during times like these, with the looming threat of recession amid high inflation and geopolitical tensions in several global regions. For stock investors, this must be overlaid with the higher interest rate environment – which, for all its negative implications, also means term deposits are more appealing than they’ve been in years.
So, as part of Livewire's Outlook Series for 2024, James Marlay and Ally Selby challenged 12 of Australia’s most successful investors to each name one company that brings that “sleep at night” assurance so many of us are seeking right now.
In many cases, their responses yielded well-known stalwarts of the investment world, including names in listed property, infrastructure and materials. But a couple of smaller companies, including those in technology, were also in the mix.
Our featured fund managers include (in order of appearance):
Matthew Kidman, Centennial Asset Management
Matthew Haupt, Wilson Asset Management
Emma Fisher, Airlie Funds Management
Chris Stott, 1851 Capital
Joel Fleming, Yarra Capital Management
Vihari Ross, Antipodes
Marc Whittaker, IML
Francyne Mu, Franklin Templeton
Bob Desmond, Claremont Global
Daniel Sullivan, Janus Henderson
Mary Manning, Alphinity Investment Management
Dr Philipp Hofflin, Lazard Asset Management
Note: The information provided is not intended to be a recommendation. Please do your own research and seek advice from a professional before making any investment decisions. Past performance is not a reliable indicator of future returns.
You can watch the video by clicking the player, listen to the podcast, or read an edited transcript below. These interviews were filmed on Tuesday, 12 December 2023.
Other ways to listen:
Ally Selby: Hello and welcome to Livewire's Outlook Series for 2024. I'm Ally Selby.
James Marlay: And I'm James Marlay. And as the father of two young boys, I can tell you it's been a long time since I've had a good night's sleep.
Ally Selby: So, in this video, we'll be asking 12 fund managers to name the stocks that are so boring, so reliable, that'll even put Jimmy to sleep.
James Marlay: What's a stock that's stable or reliable to help investors sleep well at night?
Matthew Kidman: Yeah. I was talking to someone earlier about sleeping. I always wake up in the middle of the night anyway.
James Marlay: Take it or leave it.
Matthew Kidman: That's right. So if it's going to make me sleep better I'm glad we talked about it. It's a nice therapy session. But I would say this is an unusual one for us, it's a big cap. But I think it can be leveraged into a rising market and I think as the year goes on, the consumer will recover too and that is Wesfarmers. It's got several assets but its main asset is Bunnings. And I think by the time we get to the back end of '24, the calendar year, we'll be talking about residential dwellings and the rate of build in Australia increasing. We've hit bottom or against your bottom and Bunnings is a good leverage. Well run, number one in its industry, all that kind of stuff.
Matthew Haupt: It's either between Telstra and Woolworths (ASX: WOW). They're the two that I always fall back on.
James Marlay: That'll put you to sleep.
Matthew Haupt: Exactly. I think Telstra looks like an incredibly safe company, actually experiencing growth for the first time in a long period post the unwind of the NBN. So for me, that looks like a great sleep-at-night company and should be yielding better than term deposits next year.
Emma Fisher: Even telling you about this stock is going to put people to sleep so it's a very sleep-at-night stock. It's very boring, its Waypoint REIT. They own over 400 service stations. They own the land up and down the East Coast Metropolitan service stations. Their anchor tenant is Viva Energy (ASX: VEA) which is also listed. So it's nearly 7% dividend yield. It's trading at a 20% discount to NTA and this is proper NTA, proper property backing, not office, where people are too scared to properly devalue it. Proper NTA so you're going to get 7%. So sleep at night with respect to that. You also get upside if we are closer to the end than the start of the interest rate rise cycle. Then, the REIT sector is going to fly and Waypoint will go with it. It's boring, but boring can be beautiful over time.
Chris Stott: One I'd call out here is Centuria Industrial REIT. This is a space that we're typically not big investors in but we're probably the most overweight in the REIT space since the GFC. We're seeing enormous value right now, companies trading at 20, 40% discounts to NTA. It's the largest pure-play industrial REIT listed on the ASX, capped at $2 billion. It's trading at about a 20% discount to NTA, yielding just over 5%. So we believe that when you compare that to, say, cash in the bank, you're getting a superior return on your distribution. Plus, you've got the NTA upside, we believe, over the next few years as the interest rate environment continues to normalise and we think that the overall REIT space can certainly be a big outperformer in 2024 for that reason.
Joel Fleming: Yeah. Don't buy micro caps to sleep at night, that's for sure. But I would say a company like Ridley Corporation. It's a great compounding business. They've got some fantastic assets. They're continuing to optimise those assets and we think that's a stock that is growing its earnings well, it's paying a good dividend yield, and it's something that would just continue to compound through time.
Ally Selby: Is there one stock that you think can help investors rest easy at night, better than a term deposit or leaving their cash in the bank?
Vihari Ross: So I think it is probably a bit of a cheeky question. We're trying to invest in stocks and I would say stocks are going to generally have more volatility, obviously, than term deposits. But I think what you're really asking about is defensiveness. And I think one of the things that can really protect you, as a stock market investor, is valuation. So if you are able to buy something, don't overpay for something, then that does provide you some safety in your ability to sleep at night.
Instead of buying a term deposit at a bank, how about you buy a bank like ING? That's a stock that's trading on five and a half times forward multiple. It's got an 8% dividend yield for the next few years and they're actually overcapitalized to the tune of 15%. This means over the next two years, they're likely to pay shareholders back 45% on their capital base. That's well in excess of that 5% term deposit. And again, that valuation being really discounted, it's going to give you that downtime protection as well.
James Marlay: Mark, what's the one stock that you think can help investors sleep well at night in 2024?
Marc Whittaker: In the spirit of Christmas, I've got two stocks for you. The first one is EVT Limited which is an operator of hotels and cinemas across Australia and New Zealand. It has a significant property backing on the balance sheet and it's trading below that value. So from a valuation point of view, it looks very compelling. Essentially, you’re getting the operating earnings of the business for free, which we think is very attractive. It's on a grossed-up dividend yield close to 6% as well, which we think is quite attractive.
And Charter Hall Retail REIT is another one that I think is really interesting, from a safe pair of hands point of view, trading at a 30% discount to its asset backing or book value. It has a dividend yield of over 7% grossed up which, again, is very attractive in this market and a very strong resilient group of tenants and retail neighbourhood assets in the portfolio as well, which we think are very attractive.
Francyne Mu: I think Synopsys is a company that will allow you to sleep well at night. It provides EDA tools and electronic design automation tools for semiconductor companies. The beauty of the name is that actually it's tied to R&D spend, so you don't have the cyclical nature, but companies that are actually in the manufacturing of semiconductors. I think it's great because with AI, you need more complex chips and Synopsys is at the heart of that.
Bob Desmond: It's one we've spoken about before, it'd be Visa, I think. The business has reset since COVID. It's just had its annual result. It's guiding next year to low double-digit revenue growth. It's got fantastic margins in the mid-60s, terrific cash flow, good secular growth, and its multiples are not particularly demanding. Around 25 times forward earnings so that's probably, I think, our sleep easy at night stock at the moment.
Daniel Sullivan: We tend to like companies that are controlling their own destiny. So if they're doing something that's beyond those macro factors, that's a good thing. So one we quite like is De Grey Mining and they've found over 10 million ounces of gold in Western Australia and that's being developed and it'll be quite profitable when they get to it. And that's the asset that major gold companies will be coveting and hopefully, should lead to a takeover at some stage, although we don't invest for that reason. But it's that quality of asset that people will want it. They're managing to layer up their optionality, by leases that are concurrent with other lithium players so they've just announced, "Hey look, we might be lithium as well." So we might get some optionality at that lithium exploration as well.
Mary Manning: Microsoft. So I did some analysis on this. If you look at 1-year, 3-year, 5-year, 10-year, 20-year, and 30-year annualised returns for Microsoft, they're all above 5%. So, it is very rare that if you are a buy-and-hold investor that you would generate less than 5% over the long term by holding Microsoft. Microsoft, from a stock specific perspective, it's one of the biggest holdings in our portfolio. It's in an earnings upgrade cycle, extremely high quality, fortress balance sheet, high ROE, and one of the best management teams in the world. So I'd hold Microsoft over a term deposit any day.
Dr Philipp Hofflin: No stock is better or safer than a term deposit. But let me just mention two in our portfolio that perhaps get vaguely close, one of them we like is Atlas Arteria. It's got a forward dividend yield of about 7% and it's not going to grow that very much and there are some risks around the French tax rate and all that sort of thing but it's a very safe stock. It's a concession to toll road operator, right?
And another one in our portfolio is Aurizon, which is the Queensland Rail business. It's got a forward yield of about 6% odd and it can grow that. And again, it's a mostly regulated business. So if there is any economic turbulence, these stocks are going to be safe.
Ally Selby: Both of those are better than a TD right now.
Philipp Hofflin: They're better than TD in terms of yield but they are not risk-free. No stocks ever are, Ally.
This article was first published on Livewire Markets.
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