Investment Portfolio Highlights
We construct our own portfolio with a focus on a mix of strong dividend shares and growth companies where there is a clear path to expanding revenues, earnings and dividends 2018 and beyond. We look to have income immediately while maintain favorable growth upside.
We have scoured the ASX and came up with our list of best shares to buy based on the above criteria. Short term tactical portfolio allocation has been leaning heavily back to resources and energy. This is partly due to underperformance of the sector where relative value can be found vs broader defensive sectors and derisking of some specific producers where majority of the capital expenditure risk has been eliminated and production is the ramp up phase.
Key disclosure: companies listed below does not take into account individuals own risk parameters and are not recommendations. The list below are sample of our top ideas in our investment portfolio and exclude the international equity portfolio.
Top 10 Australian Shares to Buy
The list below are some of our best share ideas ranked from largest to smallest position in our portfolio. Note this list is not inclusive of our investment positions but just some of the best companies to invest in Australia.
Origin – One of our largest position in the portfolio and best performing shares so far in the last 12 months. The long term secular story of China’s demand for clean energy, particularly LNG is really coming to fruition. China is now the worlds second largest importer of LNG. We have added more of to our initial position as we see the recovery in the oil price in sight. The completion of LNG export facilities and ramping up LNG export will further derisk the balance sheet. The overlay of the investment thesis is the secular shift from coal to gas in emerging market and make us think this is a hot stock for 2018.
Rio Tinto – diversified global commodity exposure. Looking positive especially since the bounce back of iron ore prices. Rio is the lowest iron ore cost producer globally and Pillbra blend trades at a premium to the benchmark. It also has a large degree of Copper exposure which we see favorable fundamentals in the medium term. Balance sheet looking good given strong cashflow. Need to maintain cost discipline going forward as commodity prices bounce back. Potential dividend and share buyback in 2018.
The market Australian dollar to US dollar forecast is relatively staid given the recovery in commodity prices but this could pose a minor headwind to Rio.
Woolworths – Driven by domestic staple consumption (laggard so far in the portfolio). While we are questioning the long term position in the portfolio given the current headwind. The new CEO need to implement much needed changes in turning around comparable same store sales growth. The recent sale of service stations has helped the balance sheet. The strong industry position with Coles is challenged by Aldi and Costco.
There is a lot of things WOW management need to deal with including recovering the trust of shoppers, catch up to Coles on comparable sales and fend off Aldi in South Australia and Western Australia.
We have added more for a short term bounce but keeping a eye closely on this position. It provides a decent dividend stream while we wait.
Challenger Financial – Leveraging growth in superannuation sector and demographics with almost monopoly position in annuities. Challenger is a play in the changing demographics where increase number of retirees is increasing the addressable market for its primary product, annuities. Most recent earnings reinforce the growth story, annuities firing at all cylinders and funds management business showing strong AUM growth.
We have reduced half of our initial position given the run up in the share price and given its large ownership of in commercial property in Australia. We are bullish on interest rates and any rise in rates will pose a headwind for the Challenger’s investment portfolio.
G8 Education – GEM is a childcare industry roll up. GEM key agent institutionalizing the sector and last 12 month it has been consolidating its recent acquisition. Key catalyst for the company will the on ramp of the Federal Government child care payment reform will improve revenue certainty for the sector going forward. The management turnover and the earnings downgrade cappped its performance in 2017 however we think the worst is over for 2018.
QBE – QBE is one of our new positions in our 2018 equity portfolio. The Global Property and casualty insurance has struggled since the GFC where it dealt with legacy issues. On the insurance side, the issues relating to integration of numerous acquisitions and decision on what market it really wants to be in is finally over. We see investment income recovering given the rising interest rate environment where the majority of its fixed income investment resides. The rise in the US 10 year rate will support investment income going forward.
Woodside – play on energy with mature LNG production, leveraged to LNG spot prices rather than long term contracts and manageable add on growth pipeline. A slow mover and long term hold in our portfolio.
Lend lease – global construction management and development with a top tier real estate funds management platform. Business strategy focus on urban renewal projects (Barangaroo and Darling Square) and key gate way cities in the US playing off the US economic recovery. Australia residential settlement risk overplayed by market. 1H 2016 results shows residential settlement risk is non existent.
Current strategy is working. The business is spending large amount of cash to get the development off the ground. Major increase in earnings from 2018 onwards.
TPG Telecom – We added this position recently to play off the telecom sector shift from traditional copper to NBN network. TPG’s construction of a competing fiber network is expected to be a competitive advantage but a significant capital requirements. It is one of our high risk share position due to stretched balance sheet but given relative valuation and growth profile, we see return positive on a risk adjusted basis.
Crown – tourism and Macau gaming recovery. We sold our position in 2016 prior to the China arresting the employees in China and subsequent selloff. We are keeping a close eye on this and eventually will be a good entry point again. Macau looking more positive by the month, especially with the turnaround growth in gaming revenue in take. CWN benefit from continue weakness of AUD.
Important to note that diversification is one the key tenants of portfolio management. Australian market usually represented by large caps in the ASX 200 or the broader market All Ord Index has traditionally has been heavily dominated by resources, banks and in the near future the energy sector. There are a number of reasons to have a globally diversified portfolio, namely the best shares to buy or investment opportunities are not always listed on the ASX, diversify beyond the 3 dominant sectors on the ASX, attractive valuation and growth prospects.
The list above covers the Australian portion of our investment portfolio only.
NextDC – Benefit from shift to cloud computing and move IT spending to capital light structure
Sandfire Resources – high risk play on copper with upside risk on price recovery. Removed in early 2016 due to small cap nature and refocus portfolio on large cap diversified miners. Still key commodity miner on watch list.
ANZ – Attractive valuation verses peers and broader regional exposure. While cautious on the banking sector we would add ANZ on any major sell off. We reserve the right to change our mind if the sell off is driven by bank weakness. Moved to watchlist since we have become bearish on Australia housing. Australia housing market, especially Brisbane is slowing materially while it will take time for the Melbourne and Sydney market to absorb the existing supply coming to market.
Mirvac – Similar to Lend Lease where the market has over stated settlement risk in 2016/17. Commercial real estate portfolio ensure steady income flow while residential develop provide upside surprise. Interesting development pipeline along with low gearing make the stock attractive for us. Had a position for trade on the share price bounce back. Since then just monitoring since Property trust forecast to under perform in 2018.
IEM ETF – macro thesis on emerging market recovery. Emerging market has outperformed developed market in 2016. Looks very positive but more attractive single name from above for asset allocation.