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Four experts' top ideas
This article appeared in the January 2013 ASX Investor Update email newsletter. To subscribe to this newsletter please register with the MyASX section or visit the About MyASX page for past editions and more details.
Elizabeth Moran (pictured) and other commentators suggest strategies for a happier new year.
ASX Investor Update asked four investment commentators to name their top ideas for 2013, across shares, commodities, fixed income, and listed investment companies. Here are their views:
(Editor's note: do not read the ideas below as securities recommendations. Do further research of your own or talk to your financial adviser before acting on themes in this story).
1. Elizabeth Moran (pictured), director of education and fixed-income research, Fiig Securities
Risk assets, such as shares, rallied during the second half of 2012 as investors sought high yields to compensate for low rates on term deposits and cash. In 2013 it is going to be harder to access high yield without significant risk. I implore investors to understand fully the risks they are taking before they invest.
My current favoured investments are inflation-linked bonds (ILBs), where the capital and the interest payment are directly linked to the Consumer Price Index, which protects investors (particularly those near or in retirement) against a spike in inflation. These bonds offer a unique direct hedge and while inflation is low, offer a very good buying opportunity. Some trade at a discount to current value. I do think we are in a period of "low rates for longer" where shares and property generally underperform.
ILBs pay interest at CPI plus a margin, and Sydney Airport and Envestra both issue ILBs with margins that range from 4.2 to 4.5 per cent. These margins are attractive in their own right in a low interest rate environment. However, coupled with inflation of 2.5 per cent (mid-point of the RBA target range), they offer excellent returns for investment-grade risk.
(Editor's note: investors can also consider several ASX-listed interest-rate securities for exposure to fixed and floating rate returns).
2. Dr Tony Rumble, Head of Portfolio Construction, BetaShares
With continued market uncertainty apparently here to stay, 2013 may be another year of low investment returns. Volatility may also return, perhaps unexpectedly. Look for investments with strong yields, as well as ways to strengthen the portfolio against market shocks. Two strategies/products to consider are:
Income from shares
Last year's ASX/University of Sydney research explored whether investors can generate additional income from a share portfolio by selling away some of the upside share price potential of the portfolio, using options. Using real share and option data between 2006 and 2011, the study showed the potential for such an "equity income" strategy to substantially boost the yield of a share portfolio. Because such strategies can be hard to implement for many investors, the new BetaShares Aus Top 20 Equity Max Fund (ASX code: YMAX) is a low-cost way to implement an equity income strategy, using the ASX top 20 shares as the underlying asset.
Historically, the link between quantitative easing (a form of monetary policy used in the US and UK to stimulate economies) and the price of gold has been marked; as the value of the US dollar has declined, the price of gold has generally risen. Central banks are buying gold for stability, because gold has traditionally had low correlation (a weaker relationship) with other assets. The BetaShares gold bullion ETF (ASX code QAU), which is backed by physical gold, provides "pure" exposure to the performance of the US-dollar price of gold bullion, as it also hedges the foreign exchange risk for Australian investors.
3. Toni Case, TheBull.com.au
Conditions could be ripe for a comeback for Listed Investment Companies (LICs). With a combined market capitalisation of $17.6 billion, the 53 LICs listed on ASX provided investors with a solid average 15.8 per cent return over the year to November 2012 - compared to a 9 per cent return from the S&P/ASX 200 index over the same period. Currently, 32 per cent of the sector trades at a premium to net tangible assets (NTA). It has been an abrupt turnaround: just seven months ago the sector was under stress with 88 per cent of LICs trading for less than what their shares were worth.
LICs may appeal to investors who are returning to the equities market but are cautiously optimistic. Now the heat has come out of the resources boom, for investors keen on yield and looking more broadly for ways to boost portfolio returns, LICs fit the bill quite nicely. Many of our largest LICs distribute fully franked dividends and are not heavily exposed to the resources sector. They are also extremely diversified (some hold shares in as many as 120 companies), which suits a more conservative investor re-entering the market after the GFC.
Investors are not limited to LICs that target Australian blue chips; there are LICs that buy US shares as well as those in Asia and emerging markets. Investors should also watch for new LIC listings in 2013.
4. Nathan Bell, head of research, Intelligent Investor
It may be boring, but most long-term investors should have a core holding in Woolworths, arguably Australia's best business. I don't expect rapid earnings or dividend growth, because the company is mature and Coles is a far superior competitor these days. But on a grossed-up dividend yield above 6 per cent you don't need much growth to earn a decent return. A total return (capital gains plus dividends) of 8 per cent or more is a very respectable goal in an environment of low interest rates.
Computershare's earnings are also currently depressed, because of a dearth of corporate activity, but it should be a large beneficiary when fears of a global economic implosion recede and businesses start spending their cash on acquisitions to increase market share and grow earnings. The 3.3 per cent (60 per cent franked) dividend yield also is not bad for what I still regard as a very well-managed growth company.
ASX Investment talks feature some of the market's best commentators, and are a great way to stay in touch with market trends.
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