Why boring stocks have boomed

Often found behind a simple figure is a complex story. Over the 2015/16 financial year the S&P/ASX 300 Accumulation Index returned a measly 0.88%. But this unimpressive number tells us nothing about the undercurrents that have influenced it. Some sectors rose by as much as a quarter while others fell by almost as much.

Understanding the reasons for this are revealing. The following chart provides return and risk comparisons over the past year1 for some of the key Australian share market sectors that constitute the Index.

1 Year Performance of ASX300 Sectors

*Please note this chart is intended to highlight the different returns from different investments that have different capital growth and income profiles. In addition, different investments have different risk profiles which are not illustrated in this graph.

**300 Banks is a sub-sector of the financials sector.

Let’s start with the laggards. Australia’s banking sector, dominated by the big four banks and accounting for almost a quarter of the overall Index, fell 10.4%. One can make an educated guess at the reasons for the tumble: concerns over a cooling residential property market, especially apartments, and potentially more capital raisings on the way.

The second biggest component of the Index at 14.4% – the metals and mining sector – fell a little but it was the energy sector that was really hammered, down 21.8%. With oil down 19.4% and coal down 23.5% in Australian dollar terms over the past year, resources and energy stocks like BHP Billiton, Rio Tinto, Origin Energy and Woodside were hard hit, falling 27.4%, 9.6%, 42.2% and 17.4% respectively. The outlook for sub-par global growth does little to enhance the prospects for this sector over the medium term.

So where were the winners? In a year laced with caution and driven by the search for yield, the AREIT and Utilities sectors fired, up 24.6% and 24.4% respectively. It’s a measure of the unique times that high yield, defensive sectors drove unexpected levels of capital growth from assets that traditionally provide most of their returns through income. That’s telling. When companies like Scentre, Transurban and GPT – companies tailor-made for income investors – deliver total returns of 38.2%, 34.6% and 32.2% respectively, providing higher returns with lower levels of risk, you know something unusual is going on.

So, what is it? Well, there’s been a major shift in investor sentiment. With Australian 10-year government bonds yielding just 1.981% and one-year term deposit rates mustering just 2.35%, investors are looking for the most stable, defensive stocks they can find with a yield that beats these measly figures. As a result, anything that meets these criteria has been bid up.

How does APN’s Australian and Asian REIT Fund fit into this picture? The table has the details.

Yield Comparison (figures as at 19/07/16)

 

Asset/ASX300 Sector Yield

No. of

Stocks

Market

Cap ($b)

Index

Weight

APN Asian REIT Fund 6.95% 38 n/a n/a
300 Banks 5.97% 9 $391 24.0%
APN AREIT Fund 5.50% 32 n/a n/a
300 Utilities sector 4.88% 8 $42 2.7%
300 Index 4.35% 299 $1,630 100%
300 AREIT sector 4.35% 28 $130 8.9%
300 Energy 2.47% 15 $69 4.2%
Comm Bank 1-yr Term Deposit 2.35% n/a% n/a n/a
300 Metals & Mining 1.97% 29 $165 10.12%
Australian 10-yr Govt Bonds 1.93% n/a n/a n/a

Source: APN, CommBank, Bloomberg, IRESS

*Please note that this table is a summary only, intended to highlight the different yields from different investments that have different capital growth and income profiles. In addition, different investments have different risk profiles which are not illustrated in this graph.

While both funds currently offer income yields at more than twice what investors can get from a one-year term deposit, there’s another consideration. Strong and sustainable yields are becoming increasingly hard to come by. That 5.97% yield available from ASX 300 banks comes with a host of additional risks that many income investors aren’t prepared to accept.

This is what makes APN’s funds stand out in jittery, worrisome markets. There aren’t many investments that deliver regular cash flow at yields above 5.5% with the kind of stability and low volatility income investors want at a time like this. That’s the bigger story behind the ASX 300 return of just 0.88% last financial year. Boring is now fashionable. 

This article has been prepared by APN Funds Management Limited (ACN 080 674 479, AFSL No. 237500) for general information purposes only and without taking your objectives, financial situation or needs into account. You should consider these matters and read the product disclosure statement (PDS) for each of the funds described in this article in its entirety before you make an investment decision. The PDS contains important information about risks, costs and fees associated with an investment in the relevant fund. For a copy of the PDS and more details about a fund and its performance click here. To receive further updates and insights from the APN team, sign up for Review, our monthly email newsletter.

  1. Figures to 30 June 2016 – Source Bloomberg