The Big Four banks and Telstra have been the must-have stocks for self-managed super fund (SMSF) trustees this year. But given their run-up in prices and a shift in market dynamics, are they stocks you should be buying?
To find out, Peter Switzer spoke to one of the best known fund managers in Australia – Peter Morgan – a former fund manager at Perpetual and founder of 452 Capital.
So what are his thoughts on the Big Four banks – Commonwealth Bank, National Australia Bank, Westpac and ANZ? Well, put it this way: he doesn’t own any!
“Over the last 12-18 months we’ve had this flight to quality looking for yield in a low interest rate environment,” Morgan says. “Now the important thing if you want to play the dividend game is to remember that you have to have earnings before you get dividends, so if you’re paying out 100% of your earnings, or paying out 120% of your earnings, there is a risk that that return won’t be there going forward.”
He says for every $10 of capital in banks, there’s roughly another $90 of debt or gearing, making them highly leveraged to an economy that’s quite strong. And while they’ve done a great job of surviving the financial crisis, investors always need to remember that they are highly leveraged.
“I still remember [in the 1990s] – and I’m not saying we’re going back to that – Westpac was out the back door; it was broke, ANZ was broke and the dividends went from 40-50 cents a share and there was big capital raising,” Morgan says. “Now I’m not saying that’s going to occur again, but just don’t forget that banks are highly leveraged animals and the dividend is not necessarily the first thing you should be looking at.”
Telstra
So what about Telstra?
“I think the big issue over time is going to be whether the NBN actually turns out to be a success or not. But it’s had a good run. I don’t think you need to panic, but I wouldn’t be running out …,” he says trailing off, adding, “I haven’t got any Telstra myself.”
So what’s he investing in?
These days he quite likes to play with the small and mid caps and one small company he likes is Chalmers (CHR). But before you run out and buy it, he warns that this company may be a five-year story in the making, so don’t to expect any short-term run-up in its stock price.
Chalmers is a Victorian-based company that operates in road transport, warehousing, repairs and sales.
“The balance sheet is in order,” Morgan says. “Like all transport companies in the economy, it’s doing it tough at the moment. Now I own it, and I’m not saying it’s going to turn out alright, but intrinsically in your eyes, you can see that the accounts are saying that it’s worth $4.42; hard assets; you can buy it for $2.60.”
Playing this market
Morgan says that while he’s always looking for opportunities in the market, he’s been selling a lot of shares over the past month or two. Even so, he says you have to use volatile markets to look for opportunities to make money.
“Having said that, you’re only going to get seven out of 10 right if you’re doing a very, very good job. You always get the three wrong, and you’ll probably get more than that wrong.”
But in order to get those seven right, he says there are three things he’s learned that have kept him in good stead. He says a company should have:
- good and sensible management;
- a healthy balance sheet with not a lot of debt; and
- an attractive valuation.
He says if you look for these things in a company, you’ll be ahead in getting those seven out of 10 stock picks right.
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