Income Report / Income Report: Are we too heavily exposed to property? (ABP, SGP, GMA, CSR, ANZ)

By Market Matters 25 September 19

Income Report: Are we too heavily exposed to property? (ABP, SGP, GMA, CSR, ANZ)

Market Matters Income Report 25th September 2019

The market is trading down around lunchtime, although it has rallied from the morning lows. Softer economic data in the US, growing talk of impeachment proceedings for Donald Trump while the UK political situation is also in a shambles the main catalysts. These negative influences are being offset by low interest rates which is being supportive of stocks, however that will only last for so long. As we suggested this morning, from a simple risk / reward perspective our major view as October approaches remains intact with the next 5% move in stocks more likely on the downside hence we are positioned relatively defensively across our portfolios, including the income portfolio after a strong run of late.

On the market today, the IT stocks are leading the way thanks to a +14% move in AfterPay (APT) following a big upgrade from Goldman Sachs who increased their price target +58% to $42.90,  clearly a bullish view, while on the flipside, the resource stocks are on the nose, trading down more than 1% at time of writing.

Overall, the ASX 200 is currently trading down -23pts or -0.35% to 6725.

ASX 200 Chart

The Income Portfolio was up +0.82% in the week with Genworth  (GMA) doing the heavy lifting by adding 5.95% in the 5 sessions. CSR & Perpetual (PPT) contributed positively, adding more than 3.5% each while no dividends were paid. The portfolio is now up +3.28% financial year to date, versus its absolute return benchmark of +1.17%. Since inception the portfolio is up +20.43% vs the benchmark of +12.09%, which equates to 8.72% pa since inception with significantly less volatility than the underlying equity market.   

For those interested in investing for income in a low rate environment, Market Matters manages the investments for the Market Matters Active Income portfolio offered under Praemium SMA. The portfolio is based on the MM Income Portfolio. The SMA has now passed its first anniversary and performance has remained sound, the August update can be viewed – Here. September has been another strong month adding +3.45% to yesterday’s close.

Do we have too much exposure to property?

It’s always important to regularly circle back around and revisit original goals or objectives of whatever we’re doing -  this is really important when thinking about a portfolio.  Often portfolios can become a collected bunch of stocks accumulated over the years that sit in a list – it’s not a portfolio but a congregation of positions.

In terms of the objectives set out for the MM Income Portfolio,  there are three things we want to achieve:

1.    Regular & high income

2.    The opportunity for upside, but with reduced downside

3.    A medium risk profile

We achieve these objectives by portfolio composition, having a portion in Hybrids & other income securities that pay regular income with lower volatility while actively positioning in high yield stocks that also have a good chance of capital growth. It’s a fairly simple approach however as we often say, the K.I.S.S principle works best.

The 3rd point above about risk is an  important one, risk comes in a lot of shapes and sizes from risks that are known knowns to those that aren’t – macro risk, company risk, concentration risk and the list goes on. Managing risk means constantly thinking about things critically, something we spend a lot of time doing at MM. In today’s note we’ll look a specific risk that we’ve considered recently in the MM Income Portfolio, being whether or not we have too much exposure to property.    

The income portfolio is currently split  57% towards Equities & 40% towards Income Securities, with a small cash position on the side which we’re comfortable with. Cash is difficult to hold in this portfolio simply because its offers no real income benefits.  Of the equities component, we have 23% in Financials including banks,  7% in Resources, 20% in Industrials and 7% in Property. At 7%, the property allocation is lower than the ASX 200 index (7.5%), however we’re not about index replication and that weighting provides no insight into our broader exposures to trends within the property sector.

MM income positions influenced by property prices/activity:

Property stocks: Abacus (ABP) 4% & Stockland (SGP) 3%

Industrial Stocks: CSR (4%)

Banks: ANZ 7.5% & NAB 7.5%

Bank Hybrids (excluding Macquarie): CBAPG 5%, CBAPF 5%, NABPF 5%

Financials: GMA (4%) = 4%

Aggregate property exposure = 45%

1 Property Stocks

Abacus is more heavily exposed to office and now has a greater emphasis on self-storage, while Stockland is a more diversified property company that encompasses areas that are at the pointy end of the property spectrum.

MM remain bullish on both positions

Stockland (SGP) Chart

2 Industrial Stocks

CSR produces building materials, so construction activity has a large influence on the demand for their products. Construction activity is influenced by availability of credit, property price trends and demand. As it stands, building approvals are weak which is the reason some brokers have remained negative on CSR, however we’re starting to see the availability of credit improve and that should flow through to better approvals data in the coming months.  

Our original price target for this holding was ~$4.50 and for now we see no reason to amend that view.

MM are sellers of CSR ~$4.50, if achieved it would be a +35% profit

CSR Chart

3 Banks & Bank Hybrids

Bank earnings are primarily driven by the demand and availability of credit. Demand needs to come from customers  who are optimistic about property, while supply has a number of influences, regulation being a significant  one at the moment. While bank earnings are linked to the health of the property market, the risk lies in a deterioration of credit quality and right now there is no real sign of this.

MM remains bullish the local banks for income and remain comfortable with a 15% equity weighting, in addition to a 15% weighting to bank Hybrids.     

ANZ Chart

Hybrids are slightly different, and recent buying in our view is justified. Hybrids are more exposed to how risky or not a bank is, not so much the strength of earnings growth. Since the GFC, banks have become safer,  forced to hold ever increasing amounts of regulatory capital which makes hybrids safer investments and as a consequence, yields have compressed.

MM remain holders of Hybrids however we are not buyers of recent strength.

4 Financials

Mortgage insurer Genworth (GMA) should be at the pointy end of any discussion on property exposed stocks. GMA provides mortgage insurance to stretched borrowers and has been a very strong performer in the MM Income Portfolio. GMA is quiet unique - generally weakness in property prices would imply more of a drain on GMA as banks tap insurance policies on defaults, however that hasn’t been the case. Lower lending volumes largely due to tougher lending standards has meant lower demand for mortgage insurance. That in turn has reduced their requirement for capital so higher dividends and share buy-backs have become the norm.

We remain bullish GMA currently sitting on a ~45% profit

Genworth (GMA) Chart

Conclusion

We are looking to reduce property exposed positions over time, however we see now rush just yet
CSR is approaching our ~$4.50 target, where we would take a +35% profit.

James & the Market Matters Team

Disclosure

Market Matters may hold stocks mentioned in this report. Subscribers can view a full list of holdings on the website by clicking here. Positions are updated each Friday, or after the session when positions are traded.

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