Independent Australian investment management company, Dalton Nicol Reid has reached an important milestone, producing ten years of positive returns and no years of negative returns for its investors.
Looking at the investment landscape ahead, Jamie Nicol, Dalton Nicol Reid Chief Investment Officer, said that the low interest rate environment will make cyclical stocks, such as industrial, housing, retail and media, more attractive as economic pressures ease. However, investors must focus on identifying quality, rather than simply relying on an overall improvement in market conditions, given the on-going structural issues in the sectors.
“Domestic defensive stocks have had a good six months, but we now believes these securities are mostly fully priced. With easing economic pressure, by way of lower interest rates, it’s now time to look at cyclical stocks that can benefit from an increase in spending from business and consumers,” he said. “But investors need to focus on understanding the quality of the company and sector, rather than just looking for cheaply priced stocks.”
Dalton Nicol Reid uses a five-point quality matrix to identify relative quality of listed companies. This includes balance sheet assessment, industry structure, management, earnings strength and ESG (environmental, social and governance). Mr Nicol said there is a growing body of evidence that supports ‘quality’ investing.
“Research on quality investing has largely focused on the back testing of various quality screens to determine the impact of quality on returns. On the whole, this research has shown a strong linkage between quality and performance over the medium and long term.
“A quality portfolio will be agnostic to value or growth and moves away from size bias, given both small and large companies might have quality attributes. Following a quality investment approach allows us to identify companies that are mispriced by overlaying this quality filter with a strong valuation discipline. It also allows us to enhance returns by identifying companies when they are out of favour.”
Mr Nicol said: “A two tiered economy has been operating for the past few years with resources leading the way. The overall economic growth is likely to stay positive in the next few years but we believe the domestic industrial sector will start to drive some of this growth as the resource sector slows.”
“We also see interest rates as remaining low. This will have a number of implications for investors. With bond yields at lows, companies with sustainable profit growth will be more attractive. Retirees will chase yield, so shares that deliver dividends will be likely to attract flows from this group and pressure will ease for domestic cyclicals.”
Looking ahead for the business, Mr Dalton said; “Roughly one quarter of our FUM is invested on behalf of institutional investors. Dalton Nicol Reid is reviewed by institutional asset consultants and has also received strong ratings from research houses. A lot of institutions, particularly super funds have reduced the number of managers they hire and are focusing more on passive and index investments. As a result, any active managers chosen need to be proven alpha generators with high conviction ideas.
“Given our investment approach and proven track record managing concentrated portfolios, Dalton Nicol Reid is well positioned to take advantage of this change.”