Like a number of fund managers, Selector Fund Management is looking for buying opportunities in the wake of last year’s Australian equity market sell-off. But in its latest investor newsletter it cautions that some stocks are cheap for a reason. It details three companies on its ‘where not to go’ list.
The Selector High Conviction Equity Fund was one of the few Australian share funds that delivered a positive return last year. It was ranked second in the Mercer performance survey of long-only funds, with a return of 5.5 per cent for the 12 months to the end of December.
The fund has produced an average return of 12.2 per cent a year over the past three years, which is well above the median return of 6.9 per cent a year for the 93 managers in the Mercer survey, and almost twice the return of the S&P/ASX 200 index over the same period.
However, its portfolio was swept up in the general sell-off during the December quarter, falling 13.6 per cent over the three months.
In its newsletter, Selector says: “In the current market setting, where a broad-based sell-off has unfolded, taking advantage of individual investment opportunities has merit.”
But it is clear about companies that do not make the grade: AMP, BHP Billiton and Caltex Australia.
Selector says: “AMP has consistently fallen short of investor expectations. It has a very long track record of delivering poor returns
“Where some investors now see value in a weakened share price, we simply take the opposite view and avoid.”
It says the sale of AMP’s life insurance business is a case in point. “Investors are questioning if fair value has been extracted and are now threatening to call an extraordinary general meeting to spill the bard.
“Shareholders who are calling the deal ‘stupid’, ‘value destroying’, ‘terrible’ and a ‘brain explosion’ are all likely to be right in their assessment but what is even more puzzling is why they are there in the first place.
“How many bad deals do you have to do and how bad a track record do you need before you realise the low share piece is telling you all you need to know?”
Selector is unimpressed by BHP Billiton’s decision to return US$10.8 billion to shareholders, saying shareholders need to maintain a bit of perspective on the company.
Its main concern is that BHP spent around US$40 billion building a shale oil business in the United States and then sold it at a loss of around US$20 billion.
“While the decision to return funds to shareholders may be viewed in a positive light, it probably speaks more to the pressure to return what little capital remains. This is not the first time BHP has dropped significant capital on ill-conceived resources projects, an aspect that shareholders should consider before popping the champagne corks.”
Selector is praising of Caltex for being able to reduce its exposure to the low-performing oil refinery business by moving into retail.
However, it was alarmed when the company reversed its decision to cut its dividend payout ratio in the face of a shareholder backlash last year. Selector is sceptical about the benefits of shareholder activism, when it leads to short-term thinks, and in this case it says Caltex management’s change of tack on dividends “is not a good sign and is reflective of the pressures powerful voices can have on a company’s direction.”
On the positive side Selector says a number of companies in its portfolio reported earnings or provided updates during the December quarter which demonstrated that they are continuing to execute to a long-term business plan, “pursuing leadership in their respective fields through consistent reinvestment, often at the expense of short-term profitability.”
These include Fisher & Paykel Healthcare, Technology One, OFX Group, Aristocrat Leisure, Jumbo Interactive, CSL, Flight Centre, Altium and Nearmap.