An article in the Australian Financial Review last week suggested Australian super-fund investors are losing faith in blue chips.
“In the biggest change in investment intentions since the global financial crisis, 55 per cent of do-it-yourself scheme trustees said they intended to invest in blue chips over the next 12 months, down from 65 per cent who had that intention a year ago.”
And it’s not just retail investors. One of the country’s largest and oldest listed investment companies, AFIC, is switching from blue chips to mid-cap growth stocks.
That is not surprising. Last financial year, the biggest 20 stocks under-performed the wider market by the largest margin since 1989. If you owned the market-capitalisation weighted index, your return for the 2016 financial year was close to zero. An index that owned one share in every stock in the ASX 300 would have returned almost 10%.
Investors, professional and DIY alike, have a tendency to base their decision making on the rear view mirror. In case you need a reminder of how that tends to work out, refer back to my article International Ship has Already Sailed from July last year and then take a look at the returns from international funds in the subsequent 12 months (mostly negative).
Is the same mistake being made today? Are people deserting blue chip stocks at the worst possible time?
Probably. Lots of small and mid-cap stocks are starting to look relatively expensive. And people are certainly forgetting one of the key benefits of owning these big defensive companies. When the economy hits the skids, these stocks are the safe haven to which everyone flocks. When unemployment is rising and discretionary spending gets slashed, people keep buying groceries and keep paying their phone bills.
That is easy to forget after 23 years without a recession. And it’s easy to feel like you are missing out when small cap investors are posting double digit returns. But these stocks are called staples for a reason, and there will come a day when investors appreciate it.
Sometimes zero ain’t bad !
It had to happen sooner or later: I absolutely and wholeheartedly disagree with this post Steve.
“Blue Chip” is an umbrella that covers a wide gamut of stocks. Whilst the headline ratios for the big fellas do indeed look pretty attractive, and I’d even agree that the big two miners and grocers along with Woodside are looking cheap (perhaps even CSL too), there are plenty of value-traps at the bigger end of town right now.
In fact, I’d say that the remaining fourteen stocks in the ASX20, as a group are going to cause a helluva lot of people a helluva lot of pain over the coming years.
Telstra is looking expensive (Gaurav’s recent report on it at TII was one of his best pieces of analysis) and the big financials that dominate the ASX20 are a hubristic house of cards teetering on a gigantic property bubble. Brambles’ valuation doesn’t offer sufficient protection against the risk of a rise in global protectionism despite alarming warning signs in the British and US political scenes. Nor does it allow for a general slowdown in the consumption of cross border goods as boomers slow down the pace of their lives.
That leaves the two retail property giants, who are trading at premiums to NTAs that are in turn being artificially inflated by unsustainable interest rates in addition to sharing many of the same risks as the financials and Brambles.
Oops, forgot to mention Transurban, which looks very expensive as well.
How do you reconcile this article with the post by Daniel Mueller on https://foragerfunds.com/bristlemouth/its-hard-to-get-excited-about-the-top-10/ ?
1. We often have differences of opinion
2. I’m not excited about them either – hardly screaming value. We still don’t own a blue chip in the portfolio (unless you count S32).
My point is that people are losing sight of some of the benefits. A well diversified portfolio of large companies with entrenched competitive advantages is meant to protect, not excite, and people are piling headlong into small caps at a time when they look mostly expensive to me.
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Interesting that Motley Fool uses Forager blog to push their buys on CSL and TLS. I assume this is not Forager’s view.
http://www.msn.com/en-au/money/markets/2-blue-chip-stocks-to-buy-and-hold-forever/ar-BBvImjn?li=AA54Gb&ocid=spartanntp
Thanks Matt. You are correct. That is not our view.