Investment Matters - August 2024

Important Update

I am excited to share some significant news about the future direction of our practice. As part of my ongoing commitment to providing your with the best financial advice, I am in the process of obtaining my own Australian Financial Services License (AFSL) under the new business name Cornerstone Wealth Advisers.
While this represents a major step forward for me professionally, I want to assure you that for you, it will be business as usual.

Why This Change?

The primary driver behind this transition is the impending retirement of the current license holder. In preparation for this change, I am establishing my own license to ensure that I can continue to deliver the same level of service and adherence to our investment philosophy that you have come to expect. My investment processes and philosophies closely align with those of the current license holder. However, should the license be acquired by an institution, there is a risk that I could be compelled to adopt new processes and utilise their preferred platforms and products, which does not align with my approach.

By securing my own AFSL, I can maintain the independence and flexibility needed to manage your investments according to our established strategies and principles. This ensures that our approach remains focussed on what is best for you without any external influence from institutional mandates.

What to Expect During the Transition?

The transition to Cornerstone Wealth Advisers will be a smooth process. At some point, you will be asked to sign a letter authorising me to continue providing financial advice under the new license. I will keep you informed every step of the way to make sure you are fully aware of what is happening. If you have any questions or concerns about this transition or any other matter, please do not hesitate to reach out to me directly.

The past few days have
been particularly
turbulent for the
Australian and global
share markets!

Recent Market Volatility

The ASX 200 experienced its largest one-day decline since May 2020, plummeting by 3.7% on Monday. This was accompanied by significant declines on Wall Street, with the technology, financials, and real estate sectors bearing the brunt of the losses. Specifically:

  • Uranium Stocks: Experienced substantial declines, with some falling more than 25% over two days.
  • Growth Stocks: Particularly those in technology and resources, were hit hard.
  • Sectors: Technology fell by 6.6%, Financials by 4.9%, and Real Estate by 4.6%.

Despite these dramatic drops, I want to reassure you that our portfolios have remained resilient.

Here’s why:

  1. Exclusion of Worst-Performing Stocks: We did not hold any of the 30 worst-performing stocks during this downturn.
  2. Strategic Sales: We recently sold our positions in bank stocks, locking in significant profits. A real-life example for illustrative purposes is used in the numbers below:
    • ANZ: Purchased at $15.34, sold at $29.24, achieving a 90% profit.
    • Westpac: Purchased at $14.89, sold at $27.27. realising an 83% profit.
    • NAB: Purchased at $15.12, sold at $36.00, resulting in a 138% profit.
  3. Defensive Assets: Our portfolios are well-positioned with substantial exposure to defensive assets such as Hybrid Securities, Term Deposits, Cash, and Fixed Income Investments. These assets are providing strong risk-adjusted returns and have not been affected by
    recent market turmoil.

Australian Economic Overview

The Australian economy is showing signs of slowing growth but is not expected to collapse in the near term. We anticipate conditions will improve next year due to several factors:

  • Consumer Spending: Expected to rise, supported by income gains and government policies.
  • Monetary Policy: Official rates are likely to remain around the current 4.35% for the foreseeable future.
  • Inflation: Expected to stay above the 2-3% target range until at least next year, due to various factors including wage
    increases and rental costs.

Consumers have been drawing down excess savings built up during the pandemic. As a result, household savings have decreased significantly but should stabilize as income expansion and tax cuts take effect.

Current Portfolio Strategy

Given the current market environment and economic outlook, we are adopting a cautious but opportunistic approach:

  • Cash Reserves: We maintain elevated cash reserves to handle near-term market volatility and to capitalize on opportunities when they arise.
  • Growth Entities: Our preference is for structural growth entities, particularly in healthcare, where demand remains strong despite economic instability.
  • Cyclical Opportunities: We are exploring opportunities in cyclical sectors like consumer discretionary, industrials, and real estate, especially where market sell-offs have been overly harsh.
  • Higher-Yield Investments: We are seeking investments with above-market yields but only at reasonable prices. The market average yield is currently being bolstered by large-cap resources stocks like BHP Group and Woodside.

As contrarians we often find the best investment opportunities among strong companies going through temporary troubles showing in weak share prices. Market misconceptions can lead to businesses being out of favour. With patience, these can rise in value as the market catches up in time.

Our exposure to Lised Property Trusts should provide at least a reasonable hedge against inflation over time. Development is likely to be slowed by higher borrowing costs.

REITs are not the highly geared entities that some were found out to be leading into the global financial crisis so most should manage the rise in borrowing costs well. Landlords can lift rents in strong economic periods while increased materials, wages and land costs help support asset prices and make it more difficult for developers to justify bringing on additional supply.

Demand conditions vary substantially across property sub-segments.

Our Investment Philosophy

Our investment philosophy is built on:

  • Client-Centric Approach: Tailoring portfolios to meet your specific goals and risk tolerance
  • Long-Term Discipline: Focusing on a patient, disciplined approach to avoid the pitfalls of emotion-driven decisions
  • High-Quality Assets: Prioritizing investments in high-quality companies with strong fundamentals
  • Diversification: Reducing risk through diversified asset allocation
  • Margin of Safety: Investing at a discount to value to enhance potential returns while minimising risk. Cost
  • Efficiency: Seeking low-cost investment solutions to maximise returns.

Stock Spotlight

Domino’s Pizza (ASX:DMP)

Domino’s Pizza stands out as a prime example of a company with significant growth potential. It operates the master franchise in numerous countries, including Australia, New Zealand, and parts of Europe and Asia. Key strengths include:

  • Cost Efficiency: Large scale provides cost advantages, enabling cheaper product inputs and faster delivery times.
  • Expansion Potential: Significant opportunities for new store rollouts, particularly in emerging markets such as Germany and France.
  • Technology and Innovation: Ongoing investments in technology to improve customer service and operational efficiency.

Despite a recent disappointing trading update, we believe there is substantial value in Domino’s for patient investors. The company’s strategies for expanding its international footprint and optimising store performance present considerable upside potential.

Equity Portfolio Approach

Our approach involves:

  • Concentrated Portfolios: Actively managing a portfolio of outstanding businesses with high-quality characteristics.
  • Fundamental Analysis: Utilizing a combination of quantitative and qualitative analysis to select investments.
  • Value Creation: Targeting businesses with sustainable competitive advantages, high returns on capital, and robust cash flows.

Conclusion

In closing, I want to emphasize that price remains a crucial factor in our investment approach. The financial markets are dynamic, and we are continuously seeking opportunities that offer a margin of safety to secure long-term investment returns. If you have any questions about this update or wish to discuss anything further, please feel free to contact me directly.

Thank you for your continued trust and support as we navigate these changes and strive to achieve your financial goals.

Yours faithfully,

Darren

What sets Cornerstone Wealth Advisers apart

Cornerstone Wealth Advisers’ core principles

  • Unbiased financial advice
  • Experienced advisors providing a personal client experience
  • Robust and deliberate investment process

You are welcome to pass on this commentary or our contact details to anyone whom you think would benefit from our services.

General Advice Warning

Disclosure

The information provided in and made available through this document does not constitute financial product advice. The information is of general nature only and does not consider your individual objectives, financial situation or needs. It should not be used, relied upon, or treated as a substitute for specific professional advice.

We recommend that you obtain your own professional advice before making any decision in relation to your particular requirements or circumstances.

Darren Harrow are Authorised Representatives of Cornerstone FP Pty Ltd for financial planning services. AFS Licence No. 561117.