Argo Investments, Australia’s second largest listed investment company (LIC), reckons some market valuations are becoming stretched and this has seen the company becoming more cautious in its investment selection.
The company’s annual meeting in Adelaide yesterday was told that Argo has been investing carefully since the end of the 2016-17 financial year.
Chairman Ian Martin told the meeting "market valuations across the board look reasonably stretched, investment risk now appears to be somewhat elevated. Central banks in the US and Europe in particular, now face particularly difficult juggling acts as they adjust monetary policy, and in Australia, the combination of high debt, a real estate market at or near a tipping point, low wages growth and fiscal drag, is potentially challenging to say the least.”
“(We)“ are particularly cautious in our approach, building up our cash balances somewhat recently and we have become even more choosy with our stock selection. Mr Martin told shareholders.
And he was supported by CEO Jason Beddow
He said that since balance date the company had spent around $50 million further investments.
"We have added to our CBL Corporation and oOh!media positions, with other major purchases in Event Hospitality & Entertainment, Monash IVF Group, Primary Healthcare, Tabcorp Holdings and Telstra Corporation. Overall, the portfolio currently has 99 holdings,’ he said. He pointed that Event Hospitality & Entertainment (EVT) had changed its name from Amalgamated Holdings.
"They operate 142 cinemas under the Event and Greater Union brands and 54 hotels, under the Rydges, Atura and QT brands, with a new Atura Hotel being built at Adelaide airport. Roughly half of its earnings come from Cinema operations in Australia, New Zealand and Germany and the other half from hotels and property in Australia and New Zealand. Event also operates Thredbo Alpine Resort in New South Wales. We believe cinema remains a core entertainment option for people, enhanced by premium offerings such as Gold Class and blockbuster films that are still best viewed on a big screen,” Mr Beddow said.
During the 2017 financial year, the major purchases in the portfolio were: Boral, CBL Corporation, CSL, Estia Health, QANTM Intellectual Property – a new holding, Rural Funds Group, Tabcorp Holdings, Tassal Group and Vocus Group.
Overall, we increased our holding in 26 existing stocks and added 5 new holdings to the portfolio, with the other four being oOh!media, Speedcast International, Murray River Organics and Motorcycle Holdings.
Major sales were: Asciano (takeover), ASX, Australian United Investment Co., Downer EDI, DUET Group (takeover), Milton Corporation and Rio Tinto.
"Our internal forecasts for the next two years show a compound dividend growth from the current Argo portfolio of just under 5%. As we look forward over the next few years for the increasingly elusive combination of quality companies who are providing earnings and dividend growth at reasonable value, we are encouraged by the outlook for a number of the companies in our portfolio.
He said that in 2016-17 "Argo’s underweight position in the materials sector, and more particularly the smaller and mid-size resource companies, hampered our performance relative to the broader market. This portfolio positioning reflects Argo’s preference for companies that can generate growing dividend income, and does occasionally result in underperformance when mining stocks are in favour.”
"When comparing Argo’s 20 largest equity investments, based on market values at 30 September 2017, to this time last year, Westpac Banking Corporation and Australia & New Zealand Banking Group remain our two largest holdings.
"There are two new additions to the top 20, being Origin Energy which has recovered somewhat with an improvement in the oil price and domestic energy markets, and Computershare which has significant leverage to increasing interest rates on its short term cash balances, particularly in the US.
"They replace Transurban Group and Brambles. The top 20 stocks still make up approximately 60% of the overall portfolio, though similar to recent years as seen in our purchases, there has been a more meaningful bias towards making investments outside of our top 20,” Mr Beddow added.
