Question: I have a question for you around Adelaide & Bendigo Bank (BEN). Being Australia’s fifth largest retail bank and without the need to raise additional capital (like the Big 4), this stock is significantly under-performing the broader financial index and its peer, the Bank of Queensland.
I am not sure if BEN is in your portfolio but my entry price during the second half of 2015 was $12. I watch your show and read your weekly articles and I know you are bullish on Australian banks and the index as a whole but should I be cutting some losses here or do you see it recover over $10?
Answer (by Peter Switzer): The brokers have a consensus target price of $9.94 on BEN. While the bank’s recent result exceeded forecasts, they didn’t like either the quality or lack of business momentum. Most brokers thought one-off factors boosted the result.
Personally, I prefer the major banks to the minor banks, and more so since the completion of their capital raisings. Hence, BEN, Bank of Queensland (BOQ) or Suncorp (SUN) are not in our portfolios.
Yes, I like the financials – but I prefer others such as CBA or Westpac, and if you believe NAB may get its act together, the latter. Will BEN get back to $10? Over time, probably. In the short to medium term, I think you will get better price appreciation from one of the major banks.
Question: In the philosophy of investment, the mantra appears that it is all about asset allocation, not investment selection. I am a devotee of that philosophy, but unsure in the implementation of it.
I seek to rebalance every three months. Given I hold a portfolio of 20 stocks, what do I sell? Do I cut my losses on those that have shown the greater losses? Do I take my profits on those that have shown the greatest profits?
Answer (by Paul Rickard): There are no doubt there are some really good books on this subject, and perhaps that is where you should start. I see it as an art rather than a science, so I don’t think I can offer a prescriptive approach. Normally, you won’t consider profits or losses in any rebalancing – how much you have paid for something won’t have any impact on what it may be worth in the future.
Normally, the approach is something like this:
a) compare your actual asset class weighting with what you want it to be – and identify asset classes that you want to change;
b) With regard’s to Australian equities, compare your asset weighting by sector with what you would ideally like to have in each sector. Do you have the biases you want? Identify those sectors where you want to increase or decrease exposure; and
c) Now look at the individual stocks within those sectors. Identify the stocks that you may wish to increase, or those that you want to decrease exposure. Take action.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
