From Jonathan Bayes, Investment Consultant, Bentleys Wealth Advisors.

 www.bentleyswealth.com.au

We drifted again this week and there wasn’t a huge amount to discuss in terms of news-flow or themes, which makes for any easy summary to write.

I’ll cover a couple of simple observations that I think are worthy and will keep it to that.

IOOF (IFL) – a table-thumping BUY.

At <$8.00, IFL is undoubtedly our preferred income-paying equity at this present time, more so than any bank, telecom or grocer.

If you have the ability to do so, you should be adding to your holdings here. In fact we did this in our models recently, and we now have a 6-7% weight amongst our equity portfolio making it our second largest holding.

IFL is back to a 2-year low and has underperformed by over -30% year-to-date. Short sellers are all over the stock too in spite of its rock-bottom valuation and comfortable operating performance, which makes it ripe to bounce on the absence of negative news.

For the simple investors such as myself, IFL now trades under 12x current year earnings and has a 7.5% fully-franked income stream, which will only grow as the full cost synergy benefits are achieved following the purchase of ANZ’s Onepath business in 2017.

In 2021, IFL is likely on less than 10x P/E and a 9% fully-franked dividend yield.

Ignore the Royal Commission noise and back the best cost-cutting managerial team in the country.

Blue-chips – a quick observation on investor behavior

A few weeks ago in the midst of the our most recent bout of political deck-chair shuffling, I wrote a note pointing to the serious ramifications for Australian investors, particularly retirees, in the event of a change in Federal Government to Labor next year.

This week Citigroup published a note along similar lines, suggesting that Labor plans to curtail the redemption of excess franking credits could cut the share prices of Australian banks by between 5% and 10%.

Citigroup quite correctly identified that by ending franking credit refunds, after-tax returns to local tax-effected investors would diminish the demand for these securities by retirement and pre-retiree investors in favour of other assets such as international shares and alternate income generative assets such as infrastructure and property.

In addition to this, I posited the view that a change in government has the very real potential to change the way in which retirement portfolios are constructed here in Australia, since the attraction of franked income streams as the preferred source of portfolio returns would be diminished relative to capital growth.

This is just one further reason to raise your international equity holdings in my mind, but a good reason doesn’t necessarily mean people ‘do what they should’.

Since our tactical shift to a more conservative stance in March this year our recommended major bank holdings for a ‘balanced’ investor are about 5% of a total portfolio. Across all of our client portfolios, the big-4 banks still comprise 10% of total holdings, meaning client portfolios are still holding too much compared to our reasoned view.

You can lead a horse to water.

With an emerging group of new Australian equity opportunities on the horizon, its important investors look to free up cash from their substantial overweight positions in major banks, Woolworths (WOW), Wesfarmers (WES), Telstra (TLS) and Woodside (WPL). Its fine to own these things, certainly TLS remains in our recommended portfolios, but it’s vital to ensure weights are appropriate.

I am entirely confident that we will find better use for investor money than major Australian banks, WES, WOW, WPL and even potentially TLS in the coming 12 months.

Australian interest rates and currency observation

This month the nominal interest rate differential between Australian and United States government bonds has widened to its greatest spread since 1984. By this I mean that Australian 5-year bonds are paying investors around 2.15% per annum where in the US the same tenure government bond is paying just under 2.90%.

With the significant discount on Australian bond yields, it makes Australia a less attractive destination for global income investors and this will surely continue to pressure the Australian Dollar further into the 60c to 70c range.

The reasons for the widening relate in large part to the growth differential between the two economies, with the US economy straining at the leash and Australia’s economy doing nicely, but still hamstrung by household debt and the prospect of a change in government.

Anyways, it was a quiet week, so no need for me to drone on.

If your portfolio is entirely Australian blue-chip shares and hybrid securities, let’s re-start that conversation.

Thursday 5pm values

	Index	Change	%
All Ordinaries	6240	-28	-0.4%
S&P / ASX 200	6129	-31	-0.5%
Property Trust Index	1460	+6	+0.4%
Utilities Index	7562	-162	-2.1%
Financials Index	6062	-60	-1.0%
Materials Index	11278	+49	+0.4%
Energy Index	11946	+376	+3.2%

 

Thursday Closing Values

	Index	Change	%
U.S. S&P 500	2889	+!1	+0.4%
London’s FTSE	7313	-6	-0.1%
Japan’s Nikkei	22605	+117	+0.5%
Hang Seng	263455	-630	-2.3%
China’s Shanghai	2656	-36	-1.3%

 

Key Dates: Australian Companies

 

Mon 17th September	Div Ex Date –Cochlear (COH) Div Pay Date – CBAPC, CBAPE, CBAPF, CBAPG, Computershare (CPU), NABPB, SUNPE, SUNPF, SUNPG, MQGPB, MQGPC
Tue 18th September	N/A
Wed 19th September	N/A
Thu 20th September	Div Ex Date – Crown Resorts (CWN), WBCPG Div Pay Date – ANZPG, ANZPH, NABPA, NABPE, Rio Tinto (RIO), Woodside (WPL)
Fri 21st September	Div Pay Date – AGL Energy (AGL), APN Outdoor (APO)