Investment
committee outlook
4th Quarter 2014
“The committee works because everyone has the same
ethics and mindset of thinking through the eyes of our
clients, it’s a very rewarding experience.“
- Patrick Broughton, Investment Committee Chairman
Investment Approach
Overweight
Our committee approach to investing widens
the number of people that are thinking about
opportunities and the real risks involved for our
clients. We are there to critically assess the
investment decisions impacting our clients at
every stage of their investment life cycle.
US residential property: Select US property
markets remain attractively priced offering good
rental yields and potential for capital gains.
Currency considerations, the strengthening US
economic recovery and a demographically driven
trend towards urbanisation give us continued
confidence in this market.
Currently, we invest approximately $5 billion
across major asset classes for our clients, who
include our friends and family:
• Australian shares
• Cash, fixed interest and hybrids
•Asian, emerging market, European
and US shares
•Gold
• Commodities/resources • Property and infrastructure
• Private investments.
We know the way we position your assets in
your portfolio is a key driver of long term wealth
creation and capital security. That’s why we
account for current and future investment market
changes and align our advice with your risk profile
and your investment goals.
Investment committee outlook 4th Quarter 2014
Australian commercial property: The differential
between the RBA cash rate and yields for select
Australian commercial property markets remains
of value to us. Quality assets, particularly regional
retail centre properties with a bias towards nondiscretionary spending, provide reasonable yields
on a risk return basis and also have potential for
long-term growth. However we note that in some
sectors (such as CBD office properties) prices
have become expensive.
Asia and emerging market shares: We continue
to believe there is a good case for investing in Asian
and emerging markets. Volatility and exposure
to geopolitical risks cannot be ignored. However
stronger economic growth profiles than developed
markets, demographic drivers such as growing
middle classes and generally reasonable valuations
underpin the long term investment proposition.
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US Private investments: We continue to have
confidence that the US economy is strong
and growing. One of our preferred ways to
take advantage of this is via small cap private
companies. These tend to trade at valuations
substantially lower than their listed peers.
Companies purchased at sensible values in
segments of the US economy that will most
benefit from employment growth and cheap
energy – healthcare, education, transport,
business services, manufacturing – we think
will outperform in the coming years.
Neutral
Income investments: Overall the outlook
for Australian rates remains weak, driven
by a faltering economy. We believe the
risk-return balance for investing in many
fixed interest instruments is not particularly
attractive given the very low level yields
available in this market and artificial risk
taking behaviour being fostered by central
banks (particularly the Fed, ECB, and BOJ).
Australian shares: Our medium-term outlook is
neutral for Australian equities at current market
valuation levels. We note faltering outlook for
the Australian economy is keeping interest rates
low. This is supporting stocks with good dividend
generating capacities. While Australian equities
should retain their weighting in our portfolios, our
preference is to have exposure with a greater
proportion of LICs and managed funds and a
lesser proportion of passive index funds – we
are looking for value rather than broad exposure.
Volatility and valuation remain strongly influenced
by sentiment in other markets, especially China.
Gold: The portfolio effect of gold as financial
insurance, inflation hedge and currency
protection continues to be of value to us.
However we note that in this low interest
rate environment some income focussed
funds may find it less attractive to hold this
asset for its insurance value as a physical
holding in gold does not generate income.
Investment committee outlook 4th Quarter 2014
Commodities/resources: Fundamental drivers
such as urbanisation and industrialisation in the
emerging markets remain the underpinning
of demand growth in the long term. We also
remain of the view that natural resources provide
important diversification benefits and an inflation
hedge. Bulk commodity markets, particularly
iron ore, are under pressure as growth in China
tempers and years of capital investment has led
to an increase in production, putting pressure
on prices. Oil markets are also under pressure
following OPEC’s decision in November 2014 not
to cut production in a market with excess supply
following a boom in shale oil production from
North America. Capital investment cutbacks in
response to lower prices have been swift and this
market may rebalance in the medium term. In the
short term, oil importers, agriculture producers and
consumers should benefit from lower oil prices.
Infrastructure: This has potential attraction as a
long-duration income asset, though listed funds
offer limited appeal. We have a preference for
social rather than commercial infrastructure.
Underweight
US, UK & European shares: The growth outlook
in Europe has stalled. Employment outlook is poor
and there is increasing divergence (economic
and political) between Germany and its eurozone
partners leading to increased political tensions. UK
continues to perform well although we expect the
fractious political environment to cloud that outlook
as we run in to UK elections. The US economy
is tracking well, however we consider valuations
stretched. Overall we still feel that equity valuations
in UK, Europe and the United States remain less
attractive relative to Asian and emerging markets.
Australian residential property: The outlook
for residential property is mixed. On one
hand the continued low rate environment and
international demand support prices in some
centres, on the other, regulatory intervention
(limiting growth in lending on investment
properties), a turbulent political environment
(possible impact of the Murray report, possible
action on negative gearing), and a weak
economic outlook may act to dampen demand.
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Finding opportunities for clients
over the years
With the onset of the global financial crisis,
the Investment Committee recommended
clients make significant adjustments to their
portfolios. In September 2007, the Committee
recommended physical exposure to gold through
the exchange traded fund GOLD. Over the
years that followed the value of the investment
appreciated by over 75%. In December that year,
following the collapse of Centro Properties Group,
the Investment Committee recommended clients
exit all listed property and infrastructure stocks.
This recommendation saved our clients from the
worst of the falls in this sector.
In June of 2008, the committee recommended
clients gain exposure to corporate bonds, and
over the years that followed, through the worst
of the financial crisis, these bonds returned
our clients in the range of 8% to 10% on an
annualised basis.
In recent years, the Investment Committee has
continued to search for investments that provide
the best risk-adjusted returns. From 2011 to
2013, it highlighted that the high Australian dollar
provided an excellent opportunity for investors
to purchase international assets cheaply. This
included US property, Asia and emerging markets
and US private equity.
In recent times, as interest rates have fallen
and equity markets have risen, the Investment
Committee has identified select areas of
Australian commercial property as an excellent
opportunity for clients to achieve improved
income returns, while at the same time providing
opportunity for capital growth.
Find out more about the members of our
Investment Committee.
Disclaimer: This article should not be considered personal financial advice and any advice or information contained within it should be considered
general in nature. The article has been prepared by Dixon Advisory & Superannuation Services Limited without taking into account your personal
objectives, financial situations or needs. The information and advice contained in the article may not be appropriate to your individual needs,
therefore you should seek personal financial advice before making any financial or investment decisions. Where the article refers to a particular
financial product, you should obtain a copy of the relevant product disclosure statement or offer document before making any decision in relation
to the product. In any event, contact your Investment Advisor to discuss before taking any action.
Investment committee outlook 4th Quarter 2014
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