A good bottoms-up approach makes timing inconsequential

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Now that we have a moment to review the outcomes of what has been an incredibly busy reporting season, it’s interesting to see how the dust settles on the investing landscape. One thing that comes to mind is how different things are compared with a year ago.

Stocks such as Commonwealth Bank of Australia, Insurance Group of Australia, Suncorp and QBE Insurance delivered strong results this reporting season, in contrast to the doom and gloom hanging over the banking and insurance industries a year ago.

Unfortunately, many investors had panicked and sold their holdings in these companies, spooked by talk of falling margins, increased competition and the potential for increased insurance claims. But what many commentators either didn’t notice or chose to ignore, was that despite their well-identified earnings growth challenges, they were all paying an above-market yield derived from stable earnings that appeared sustainable into the future. This implied that for income-seeking investors, irrespective of the volatility, these stocks were perfect.

I was often asked about our opinion on bank and insurance stocks and it seemed I was alone upbeat voice amid a wave of negative sentiment.

Our belief was not borne from some top-down, broad-brush view of a sector. It was from a bottom-up perspective. For an income-seeking investor who prized quality companies that could continue to pay a high dividend through the cycle, bank and insurance stocks met the brief. They still do.

Applying a bottom-up approach can often help identify gems in unexpected sectors and we have recently added health insurer nib to our Stock Doctor star growth portfolio.

Insurance companies, it is worth pointing out here, are not just income stories. nib has successfully expanded its New Zealand and international inbound business, improved investment returns and is achieving good traction from its white label products such as Qantas Assure. It is also soon to launch a Suncorp product.

It is our view that investors don’t need to try to time their entry into a sector by catching the right wave within a cycle.

All that is required is an understanding of your investment objective and the ability to identify, through a bottom-up stock picking framework, quality stocks that meet this objective.

Should a stock continue to meet your objective, irrespective of which side of the cycle you are on, then simply roll with it. Trying to time your entry/exit on a quality business that meets your investment objective can only lead to disappointment, as was proven in the case of bank and insurance stocks for income investors who sold over the past two years.

That’s not to say the cycle won’t turn in the future. Of course it will. But as investors, we have no control over it. All we can control is holding a portfolio of great businesses that aligns with our objective and have a strategy in place to help you decide when changes must be made. Irrespective of what the experts may be advocating.

Published Wednesday 15 March 2017
www.afr.com | The Australian Financial Review

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