It’s an age old question – where to invest now? In different market conditions, different investments look more attractive, whether it is equities, bonds, property, alternatives and cash – the question many are asking is where should money go in 2014 and beyond.
In the current global investment landscape, mixed economic signals suggest a perfect storm may be brewing. Global equities are at all-time highs. Interest rates are at all-time lows, meaning bond prices are also at all-time highs.
With the Australian share market representing only a small percentage of the world’s markets, a sensible approach for a truly diversified portfolio is to look for global exposure.
The holy grail for most investors is a portfolio that generates a sustainable and growing yield from their investments, without a high degree of volatility, that will support their investment objectives and increase in value over time.
They key to achieving this sustainable and growing shareholder yield is to invest in companies globally that have a proven history of generating free cash flow and allocating it for the benefit of shareholders, primarily in the form of cash dividends, share repurchases and debt reduction.
Dividends often signal that a company’s management is confident in its prospects and disciplined with regard to capital allocation. And a dividend is a payment, rather than a promise to eventually pay; the proverbial bird-in-the-hand. But blindly chasing dividends is a poor strategy, as not all dividend-paying companies are worthy investments. Many dividend-oriented funds were heavily invested in financials heading into the crisis in 2008 because of their relatively high yields. They overlooked the lack of transparency in how those yields were generated. Hence, investors need to know the source of funding or dividends. The only way to be sure is to determine how much free cash a company generates.
While many investors in global funds look for a regional specific focus, getting the company right matters more than geography or sector. Consequently, stock selection should be the main influence on the portfolio’s weight in different regions and sectors.
There are good opportunities globally in a diverse array of sectors, from telecommunications, utilities, consumer staples and industrials. Many companies in these areas emphasise returning cash to shareholders as part of their capital allocation policies.
Compare this to the situation with technology companies, for instance, that have historically tended to emphasise reinvestment over dividends, particularly the smaller companies. That said, this situation is slowing changing, and while technology opportunities are still relatively small, we envisage that they may grow over time.
Although a staple of many Australian investors’ portfolios, global financial exposure is not an area where there is a lot of opportunity in at this time. However, this too could change as financials rebuild.
Grant Samuel has invited two global investment experts to provide advisers with insights into global equity, and global fixed income markets, to help you answer the question: where to invest now? Click here: http://www.grantsamuel.com.au/funds-management/overview for more information on the GSFM Global Investment Lunch Series to be held in early August.
Damien McIntyre is director and head of distribution with Grant Samuel Funds Management and the distributor of the Grant Samuel Epoch Global Equity Shareholder Yield Fund in Australia.
