Income investing the Market Matters way

today is James Garish from Market Matters.

James is Market Matters lead portfolio manager, guiding members through daily commentary and directing the Market Matters portfolio.

He brings with him 20 years of experience.

His presentation topic today is income investing the Market Matters way.

Welcome to the presentation, James.

Thanks for having me and thanks to all the viewers out there.

I am gonna focus on income investing today.

And as we just pointed out on the lead portfolio major at Market Matters, I'm also a senior portfolio major at Shoren Partners.

I'm gonna give you today or provide to you today some ideas around income investing, stocks that we like here and now, the approach that we take from a portfolio perspective.

I'm gonna run you through the performance metrics of our income strategy.

and really try and give you some practical ideas around how we go about investing for income in this type of market.

It's designed to be timely and for you to come away with some good ideas, hopefully.

I'll just draw your attention to the disclaimer on the screen there, so please take notice of that.

And I'll just give you a quick, very quick overview of Market Matters.

We've been around for around 10 years now.

We're a digital advice platform, so we provide investors or empower everyday investors with market insight intel.

We've been operating in the markets for the last 20 years.

We're on the desk on a daily basis, so we're really designed to provide practical information, insight, and importantly, what we're doing in the market on a daily basis in a timely way.

very much aligned.

We're very much aligned with what we publish on Market Matters and how we invest in our portfolios.

I've got the bulk of my investable capital in the portfolios.

We've got a strong track record and it's built on performance and above all I guess we're real.

We're trying to create this

you know, a real sense of what's playing out in the markets and provide ideas that may not necessarily be available on other platforms.

So just to give you a quick background of the market matters active income strategy, portfolio returns over the past years have been, past five years have been solid.

We're running at 10.6 per cent per annum for the past five years.

We run a cash plus 4% benchmark on this portfolio and I'll dig into some of the reasons why that's the case throughout this presentation.

To give you an idea of our other strategies, so the income strategy is probably our most, well it is the most conservative strategy that we run.

We've got an active growth strategy which returned over 22%.

Last year was about 10% ahead of the market and our international strategy did about 26% in calendar year 23, obviously on the backdrop of a pretty strong market for international equities.

Our approach to income investing is really based on a couple of key important points.

So simplicity is at its core.

We manage a portfolio that is simple to understand.

We want our investors in the portfolio to be able to understand the positions within that portfolio.

It's blended in nature, so it holds a high yielding Australian equities, large cap Australian equities within the ASX 200, as well as income securities.

So hybrid securities listed on the ASX, for instance, and other income listed income type securities.

We hold some fixed rate bond exposure, but that's dependent upon our macroeconomic views at the time.

We're top down bottom up investors.

And what I've mean by that is we

I think that the macro is really important.

What plays out from a macroeconomic standpoint has a really big bearing on how, in our view, you should be positioning portfolios, the type of investments you should hold and the type of investments you should avoid.

A very simple example of that would have been your fixed income exposure over the last couple of years.

staying in floating rate fixed income as opposed to being in fixed rate bonds.

And that is really driven by what our expectation of the macroeconomic environment is.

I've got a full-time macro strategist that spends 100% of their time looking at the macroeconomic environment.

And I know a lot of

Funds out there that do suggest that, you know, that are very bottom up investors, we think the macro is very important.

And above all, we're active and results driven.

So we're not trading every day, but we're active around how our positions are set for the prevailing conditions.

And we're a high conviction strategy.

So by that, I mean we have a maximum of 20 positions in the portfolio.

So to give you an idea around portfolio returns, I've just got the chart on the screen below.

The ASX 200 is not a realistic benchmark of this portfolio because the portfolio is set around 60% in Aussie equities and around 40% in fixed income style securities.

So we run a cash plus 4% benchmark on the back of that.

I guess I'm showing here is over the last five years, the portfolio up 10.6%, the ASX 200 up 9.7.

You don't need to be an equity only portfolio to, I guess, beat the market if you like.

And it comes down to being able to manage the risk in a portfolio, the volatility in the portfolio and have smoother returns over time applied consistently.

So that is, I guess, one of the key highlights that I like to highlight of the market matters

investment process.

As I touched on before, we start at the top down and then we meet bottom up.

So top down is all around macroeconomic analysis, understanding what's playing out in the economic environment, economic growth, the outlook for interest rates, monetary policy and the like.

I guess, you know, one simple, very simple example of why having a hand on the macro is important.

When the RBA cash rate is at 10 basis points, it made no sense to us to lock in fixed rate returns.

And that could be through fixed income, so fixed rate bonds, but it can also be

the type of equity you hold, there's a lot of bond like equities out there that perform poorly as interest rates go up and vice versa.

So the macroeconomic environment is key.

We then look at the sectors that we wanna be involved in to align with our macroeconomic views.

Then we look at stock selection and putting it all together in a portfolio construction process.

So it gives you a sense of the market matters investment process there.

On the screen, this is the active income portfolio that we've got as at the end of February.

The returns are on the screen there, but it gives you a sense of the type of investments that we like.

I'll highlight a couple and I'll go onto a slide very shortly and talk about a few in more depth.

But you'll notice sort of an eclectic mix of large cap Australian shares, well-known brands, a combination of hybrid securities,

and we've started to add some fixed income, fixed rate exposure in our fixed income allocation are moving slightly away from floating rate notes.

I'm going to give you three stock ideas here and now that we like, that fit into this index, sorry, the income investing that we're talking about today.

APA group, this gives a sense of sort of our approach.

So APA group is a regulated utility, regulated cash flows, very consistent returns.

You often refer to it as a bond like equity.

This is a company that doesn't like rates going higher, but enjoys rates going lower.

So over time, APA has traded about a 2.8% premium to the 10 year bond rate.

So APA's yield has traded about a 2.8% premium to 10 year bonds.

We're now at about 3.2%.

It yields at 7% historically.

It's going to yield about 7.3% on consensus numbers in the year ahead relative to 10-year bonds.

It gives a margin of 3.2%.

We think that's really attractive.

We've got it in the portfolio and we've recently been adding to it.

New Hope Coal, this is gonna divide some people, New Hope Corp, I should say, NAC, this will divide some listeners out there, but this is a company, you've obviously got to have a view on the coal markets, and that takes some understanding of what's playing out, the dynamics that are playing out in this push towards the global decarbonization and the like.

Coal prices have been soft in the past 12 months, but we think the outlook is improving pretty dramatically.

And as the global energy transition takes shape, we think it's gonna take longer than many expect it to, which is not a great thing, but we think that's the reality.

And over that timeframe, we think we can make money out of New Hope Corp.

They go with X dividend in April.

They're on a yield of around 10%.

You juice that up for franking, it's about a 14% income.

So that's a member of our income portfolio.

Magellan Financial Group, MFG, obviously a very tough last few years for this,

global fund manager, but we think there's a path to redemption in this company.

So, fund flows are starting to improve, so outflows are starting to ease, performance is starting to improve, and that is likely going to be supportive of fund flow going forward.

But I think the real kicker here is the amount of capital

they've got on their balance sheet.

Something between $4.50 and $5.20 a share on our estimation is excess capital on their balance sheet.

So we think they'll be able to utilise that capital better than they're utilising it now.

They've right-sized their business in terms of cost base for the funds that they're now managing.

They're paying a 7% yield, and we think the outlook for Magellan both from a self-help story, so improving operationally, the financial metrics will improve from here,

and the stock's on a single digit PE, and we think that's got upside.

Just in terms of Market Matters Invest, and to give you a quick sense of what we do on this platform.

So we're a digital advice platform first and foremost, we write about our views in the market, we publish our portfolios on the Market Matters website, but we've also

We also have the ability to invest in our portfolios, whether that's the active income portfolio or another one of our portfolios.

On a really easy to use, simple digital app, you get a great user interface.

There's a smartphone app.

And we encourage you to go and have a look at that.

If you'd like a bit more information around that, you can sign up to a monthly performance report that'll go straight to your inbox.

So that's the market matter service in a nutshell.

That's our focus on income investing in a really brief time period.

I'll pause there and see if there's any questions.

Thank you, James, for your presentation.

What do you see as the key to structuring an income portfolio, the types of assets to hold and the return dynamics that you are targeting?

Well, I think an income portfolio, first and foremost, you want income, but it's around the consistency of that income.

That's really important.

So structuring, so from a

and equity perspective, you want to be buying companies that have got consistent earnings because they pay consistent dividends.

The other important thing is growth in earnings.

So there's no point buying a

a company that you don't expect where earnings will grow because then you won't have growing dividends.

So it's all about, I guess, focusing on those companies that are predictable in their earnings and therefore predictable in their dividends over time.

But it's also holding them at the right time.

You make a good point around structure.

Our process is all around applying the same structure day in, day out and I think that's what generates the consistent returns, the consistent incomes over time.

Now building on this, what type of stocks do you target for this portfolio and how do these differ from other strategies you run?

Provide some examples if you can.

Yeah, I think, I mean, the stocks that you look at, they're not all going to be the same.

So you want to have, because we're top down, we have views on the macro environment.

So we've got views around commodity prices, for instance.

So they filter into our views.

One example would be, I know it's a well-owned large cap stock, but BHP, it's now trading at the bottom of its trading range around $44.

We think that looks appealing, but we don't get overly optimistic when it's extended on the upside in terms of its trading range.

I highlighted three stocks that we really like here and now, APA, Magellan Financial, and New Hope Corp, NHC.

Metcash would be another one that I'd highlight that's in the portfolio that I think is

has really got a path to grow the earnings of its business, but also experience a PE re-rate of its multiple as it does that, as it delivers and it improves the growth trajectory of its earnings.

So that would be another one.

And then the hybrid investments, I think, are interesting here.

So they're floating rate notes, but you're getting over 7%.

It grows for franking in what I view as fairly low risk bank notes.

So they're the areas that we focus our portfolio on, and they're the areas that have served us well over time.

Thank you, James.

Thanks for having me.