Investment opportunities from the experts
To mark the 400th edition of Firstlink’s weekly newsletter, 45 of Australia's leading investors and market experts have exclusively answered our question about the best investment opportunities for the next few years. Our thanks to them all, there are many great insights in here.
To manage the overall length, each person was given only 200 words but with a high degree of subject freedom. Some offered themes, others stock ideas, with a sprinkling of portfolio construction and sector views thrown in. They include many people who have never written for Firstlinks as we cast our net wide (articles are published in the order they were received).
We have also produced a free ebook with these insights, which we encourage you to forward to a friend or colleague and suggest they register for the free weekly newsletter.
In the 400 editions, we have published thousands of articles which remain permanently on our website. There is a button on the menu bar to find all the previous editions, as well as a list of the hundreds of writers. The search box is a great tool for researching subjects in our archives.
Firstlinks reaches about 80,000 readers a month who take two million pageviews a year. Thanks to our sponsors for supporting investor education, and to Assistant Editor, Leisa Bell, for coordinating the responses into the ebook and website.
Graham Hand, Managing Editor
Warren Bird, Uniting Financial Services
Achieving real diversification
The best opportunity in the future is the same opportunity as we’ve always had – to build a growing base of wealth and income through a diversified portfolio of financial assets. Diversification is the key to ensuring that when something goes wrong, it doesn’t blow up your portfolio, remaining only a small blip within a solid overall outcome. It's the opportunity to have no regrets.
There are plenty of opportunities to do this properly. You don’t need a special insight or a slice of luck.
I don’t mean that you need to hold a few shares plus a property or two and some fixed income. Asset class ‘diversification’ is not the main story. The individual investments you own need to be an appropriately small portion of your total holdings that, if they fail, they won’t bring you unstuck. Lots of individual assets, spread across many industries and countries, is critical. Local share portfolios need at least 30-40 stocks, but you also need some well diversified exposure to global markets. Credit portfolios need at least 100 (more if you have high yield bonds) and not just A$ holdings. Properties need diversified tenant bases (or at least the potential to replace a tenant from one industry with someone in a different field altogether).
Roger Montgomery, Montgomery Investment Management
Chief Investment Officer
Macquarie Telecom is building a quality business
In a world of AI, fintech, autonomy, broadband, electric vehicles and platform revenue models, a steady reliable income stream seems like a boring prospect, but we believe attractive investment returns will be born from pursuing such income streams.
In the absence of rapidly rising interest rates, inflation or central banks losing control of the bond yield curve, interest rates on cash will remain punitive and we believe income-producing assets that can be acquired at attractive yields will attract eager buyers later.
Consider a data centre company like Macquarie Telecom or a telecommunications business like Uniti Wireless. These businesses are managed by highly-regarded founders with a reputation for delivering value as well as a strongly-aligned ownership incentive. And while they aren’t generating those steady, boring annuity style income streams just yet, they are growing rapidly towards that endgame.
Cloud, data centre, government cyber security and telecom company Macquarie Telecom is majority owned and managed by David Tudehope. He has systematically converted a carpark in Sydney’s north to a multibillion-dollar data centre with regulators, government departments and major corporates as tenants. When complete, and fully tenanted, a steady, reliable and boring annuity stream will emerge.
Such income streams will be attractive to large super and pension funds willing to capitalise such assets on much lower rates than individual investors and so a steep premium could transpire, providing another avenue for capital gains for investors with patience.
Andrew Lockhart, Metrics Credit Partners
Position for rising rates with an investment in corporate loans
When interest rates hover near historic lows for long periods, it is easy to forget that they will inevitably go up. The recent spike in US Treasury bond rates is a warning that investors are starting to worry about inflation again. Unprepared investors in fixed-rate bonds risk substantial potential loss of capital and also risk missing out on the income boost as the global economy recovers and interest rates rise. Equity markets can also be more volatile during inflationary periods, with growth stocks retreating.
One asset class worth considering in this environment is private debt. Australian corporate loans earn their returns from lending fees and interest that is generally charged over a floating base rate, ensuring their returns increase as the RBA raises its cash rate. While rates are low, and income is hard to come by, a well-managed corporate loan fund can be a rare source of reliable monthly income and provide attractive returns compared to equities and traditional fixed income with less volatility than fixed rate bonds and equity markets.
And when rates do start to rise, you’ll be protected against inflation and able to capitalise on rising rates, without the risk of capital loss.
Jonathan Rochford, Narrow Road Capital
Australian private credit has a role in most portfolios
At a time when the valuations of many asset classes including equities, property and long bonds seem stretched, Australian private credit offers several attractive features. Whilst private credit is a broad church ranging from low risk loans against completed residential property through to higher risk, mezzanine loans on construction and private equity transactions, two common features standout.
First, private debt is typically floating rate or short duration fixed rate debt, so it has good upside when interest rates rise. Second, Australian private credit offers an attractive risk/return trade-off which can deliver equity-equivalent returns but with lower volatility. The graph below shows historical returns on the crossover credit portfolios (credit ratings around BBB and BB) against the ASX accumulation index, US high yield bonds and an Australian fixed interest index over eight years.
The trade-off for this strong relative performance is illiquidity, with private debt typically bought on a ‘hold to maturity’ basis. For those with an investment horizon of at least three years, typically super funds both large and small, private credit can assist by boosting returns compared to other low to medium risk assets and by reducing the fluctuations in the portfolio value.
Jordan Eliseo, The Perth Mint
Manager, Listed Products and Investment Research
Set realistic expectations
Investors may be well served watching a replay of the 1,000m short track speed skating final at the 2002 Winter Olympics, when Australian Steven Bradbury won the gold medal. While everyone else was trying to go as fast as possible (maximise returns) he stayed on his feet when they crashed.
Sometimes that’s the key to winning in investment markets.
In the 10 years to end-2020, diversified growth funds returned 9% per annum, while the S&P 500 price index essentially tripled. That is an extraordinary result given the unresolved economic imbalances that date back to the GFC era, all of which were exacerbated by the unprecedented collapse in activity caused by COVID-19, and the policy response to the pandemic.
Given where bond yields and valuations for equity markets (especially in the United States) currently sit, it’s not unrealistic to expect that markets as a whole will deliver nothing in real terms during the decade ahead, with a swathe of blue-chip fund managers advising investors that they have materially downgraded projected asset class returns.
That may not sound optimistic but forewarned is forearmed. Investors should prepare accordingly.
You can read the remaining 40 answers here.