FY-17: It’s a wrap
For FY-17, clients that were invested for the full year will have enjoyed a return on their equity portfolio of around +21.0% (before fees), versus the market (All Ordinaries Accumulation index) at +13.1%. Pleasingly, our clients' happiness extends to other asset allocations as well.
Please note that your total return will depend on your individual allocation to each asset sector. More information will be provided in your personal Investment Review that will be available in early August.
For the past three years, the equity portfolio has returned +13.5% p.a. versus the market's +6.8% p.a. and over 17 years, +11.8% p.a. versus the market's +7.8% p.a.
A significant anniversary
As the financial year drew to a close, it is worth noting it is the 10 year anniversary of the beginning of the 2007/2008 credit crisis (or GFC). Whilst the market did not actually find its top until October 2007, the events that led to it began in June 2007 - the first cracks in the credit market appeared.
Whilst there are many points of interest worth considering and highlighting regarding this period (both in its lead up and conclusion) the ultimate one is that we have delivered equity returns of +7.5%p.a. since that Jun-07 high (the market has done +3.5%p.a.). Whilst below our long term average, it demonstrates the importance of taking a long term view of investing, and being patient.
Further, the real lessons from the 2017 financial year- a year where the market returned +13.1% - is that no one can lay claim to knowing the short-term future or direction of markets. Many wise and respectable people have called this an “era” of low returns. With a one-year return of +13.1%, and a five-year return of +11.6%p.a., it would seem that this is not necessarily the case. It may be that the sense of impending doom the market has expressed for many years is well founded, and it may not.
Investing and “investing”
What is very apparent, more so than ever, is that these feelings are firmly getting in the way of sensible, old-fashioned long duration investment decision making. Many people are now far removed from the actual physical investments they are making and therefore fail to exercise common sense.
This is best seen in the growth of formulaic programme trading, and, at the other extreme, sector/theme/passive and beta investing (i.e. I just want the xyz market return). Suggesting to most “investors” today that they should simply buy good businesses that can grow over time, at sensible prices, seems like the words of a lunatic to many market participants. It is seen as simply not smart enough … or too expensive.
Ultimately this is an excellent state of affairs for an active and independent investor. It should mean that we will continue to see (as we are) many strong investment ideas that can deliver excellent returns - for those that are patient enough to wait for them.
What investment will we remember?
In this regard, FY-17 will probably be remembered best by us as the year that Emeco “turned around” (its share price rose +238.7%). Emeco is a perfect example where thorough analysis and understanding, combined with patience and flexibility, created opportunity. It has been a labour (but perhaps not of love) for most clients and observers. But ultimately it is a good example of what good old-fashioned discipline and common sense can achieve if matched with an appropriate time frame. The best times for Emeco now appear in its windshield, not its rear view mirror.
Portfolio positioning as we wrap up FY-17
With this style in mind, we note that our portfolio continues to offer good returns over the medium term, as the companies we own will see their profits (and therefore dividends) rise, and they remain inexpensive. The market of course will go up and down (and push the prices of our companies up and down too). If they go up too high, we will sell them (and look for other opportunities; if there are none our cash holdings will build, as it has done for the past two years now). When they go too low, we will look to buy more of them. Over the past 17 years, this has worked well, through many market cycles and conditions.
Currently the portfolio has 24.0% cash and a defensive bias. We are, however, still finding some places to invest. We expect the cash level to stabilise around here, as the portfolio resettles. The portfolio remains inexpensive (at 10.0x PE) with good growth (+7.0% earnings growth p.a. for the next three years), and reasonable dividends (at 4.0% p.a.). Broadly speaking, with this construction we would expect that we will deliver fairly similar growth in the next 3 years as we have in the last 17 - albeit it won’t be linear, as usual.