Blue chip or second tier?

An article by Andrew Main, The Australian January 18, 2014 entitled ‘Selfies’ accused of distorting decisions on dividends, capital quotes a critical Credit Suisse Australia report by equity strategist Hasan Tevfik and analyst Damian Boey.

http://www.theaustralian.comm.au/business/wealth/selfies-accused-of-distorting-decisions-on-dividends

The accusation was made that:

SMSFs (Self Managed Super Funds) are retarding investments, employment and growth in Australia.

They state that SMSFs own 16% of the equity market or $220 billion, and allege that approximately $2 billion is added each quarter into the blue-chip, high-dividend paying sector, favoured by SMSFs.

The accusation that ‘Selfies’,  or SMSFs, are responsible for distorting capital allocation in favour of dividends instead of the re-investment of capital, is a serious one that is not yet substantiated by any corporate complaint of which I am aware.

The appeal of Blue-chip investments

It is not just SMSFs that favour Large Cap stocks. Retail investors by and large prefer the security of investing in large well-known stocks. Most Listed Investment Companies (LICs) predominantly invest in such stocks.

Retirees and those saving for their retirement have a vested interest in safeguarding their money from loss in unprofitable enterprises. Such unsubstantiated allegations are insensitive to the needs of those no longer in the work-forces.

SMSF Strategies

Super fund trustees are required to prepare a written investment strategy that minimizes risk, and ensures that the funds are used to meet the retirement income of the beneficiaries.

An over-riding concern is how vulnerable the fund will be in a down-turn of the equity markets. The Global Financial Crisis (GFC) is fresh in our minds, and we have the charts to compare the relative performance of the 20 largest cap Australian stocks of the ASX with the second tier stocks comprising the XSO or Small Ordinaries Index for guidance as to the wisdom of the preferred strategy for SMSFs.

Performance of The Australian 50 Index (XAF) since the GFC

This is an index of large cap stocks that are domiciled in Australia.

From this weekly chart:

  • the highest value reached the week of 21/11/07 was 6661.2
  • the low point in the week ending 13/03/09 was 3117.3
  • this represented a decline of 53% over a period of about 16 months
  • although the market for the largest cap stocks quickly rebounded to 50% by mid October 2009, the recovery stalled and a second leg decline resulted in the Fibonacci retracement retreating to the 23.6% Fibonacci level.
  • most recently the Fibonacci retracement is at 61.8%
53% decline. Rebound > 61.8$ Fibonacci

53% decline.
Rebound > 61.8$ Fibonacci

Performance of the Small Ordinaries Index (XSO) since the GFC

The ASX Small Ordinaries Index comprises second-tier stocks by market capitalisation. Stocks within the ASX 100 Index are excluded from the ASX 300 Index (XKO).

64.5% decline Recovery stalled at 64.5%

64.5% decline
Recovery stalled at 64.5%

 

Observations based on this weekly chart:

  • The index high was 4176.5 reached the week of 2/11/07
  • the GFC low was 1482.7 on the 13/03/09
  • the decline in the index was 64.5%
  • it took until 19/02/10 for the index to rebound to the 50% Fibonacci level, 4 months longer than for the XAF
  • since then the index has waned appreciably to be at the 23.6% Fibonacci level now.

In summary

These findings confirm the belief that large caps stocks, despite the poor performance of the banks in the GFC were marginally (18%) less affected in a market crash than second-tier stocks.

Furthermore recovery has been much weaker in this group with the index still struggling at the 23.6% level.

Opinions

This negative may be a distinct positive going forwards however, as investors look for stocks that have missed out so far in the recovery process and are willing to find opportunities when the big-cap stocks falter.

SMSFs should not be impugned for embracing strategies that advantage them.

The onus of proof that these strategies are harmful is back on Credit Suisse Australia.



Categories: Investment, Superannuation, Technical Analysis, Trading opinion

Tags: , ,

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