The Case For industrial Shares

The choice between resources and industrials will depend upon your individual circumstances, goals, income needs, and so on.

Generally, resources can suit investors looking for higher growth exposure. Over the past decade, resource shares have exhibited more of what fund managers call ‘growth characteristics’ – simply put, the rise in their share price has been greater than that for industrials.

However, those higher returns have come at the expense of increased volatility.

In fact, over the past 20 years, resources experienced volatility of 22% pa¹ compared to 13% pa² for industrials. Industrial shares have historically generated more consistent growth in capital and income.

Now let’s look at the benefits of investing in industrial shares through the prism of four of the main factors investors consider when making any share investment, income growth, tax and inflation.

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1. CAPITAL GROWTH

Capital growth occurs when the value of an investment increases over time. Under normal conditions, movements in a company’s share price should reflect changing expectations of its profits. When you invest in shares with growth characteristics you may be better able to protect the value of your capital.

The tendency of industrial shares to grow in value over time is one of its key attractions.

Over the past 20 years, industrial shares returned 5.0% pa³ in capital growth alone (excluding dividend payments). The ability of industrial shares to grow its share price is linked to the successful growth strategies they pursue within their business – new product development, international expansion, entrance to new markets, and so on. These strategies underpin the sustainable capital growth of successful industrial companies.

2. INVESTING FOR INCOME

The income you receive from direct shares is in the form of dividends. Dividends are paid out of a company’s earnings. Dividends generally increase as a company grows.

Industrial companies have historically paid strong dividends, with a sector average yield of 5.1%.pa⁴. As industrials tend to operate in more predictable business sectors – banking, retail, manufacturing, etc. – its earnings are less cyclical and operations more flexible. This means they can prudently pay out a large portion of its earnings as dividends – particularly in comparison to resources.

Resource companies typically have very high capital expenses, such as equipment and machinery, and its profitability relies heavily upon the changing market price of the commodities they sell or use. As a result they are required to retain a large portion of earnings to provide a cushion against volatile market conditions. This naturally means they have less cash to pay out to shareholders.

3. TAX-EFFECTIVE INCOME

Not only are industrial shares a good source of income, they can also be very tax effective. This is because Australian share income is taxed favourably through what is called ‘dividend imputation’, also known as ‘franking credits’. This means that if the company has already paid tax on its income, you may be eligible to receive a tax benefit for dividends received from that company. This is so tax isn’t paid twice on the same income.

4. PROTECTION AGAINST INFLATION

Inflation erodes your purchasing power and diminishes your real investment returns. So it’s important that your investments provide protection against inflation.

Over the past 20 years, industrial shares have consistently generated both income and capital growth above the rate of inflation.

This protection against inflation is one of the reasons industrial shares are often highly valuable to long-term investors – including those looking to fund their retirement.

HOW DOES AN INDUSTRIAL SHARE FUND FIT INTO A BALANCED PORTFOLIO?

Every investor has different needs for income and growth, a unique tax situation, and a personal risk tolerance. You need to consider all these four factors when making investment decisions.

Over the past 20 years, Australian industrial shares have delivered income and capital growth at levels that have comfortably beat inflation at a level of volatility or risk that is lower than both resource shares and the overall Australian market.

LESSONS FROM 50 YEARS OF INVESTING

Perpetual’s Industrial Share Fund has been helping people invest in Australia since 1966. Since then, almost every aspect of our country has been reshaped – but some time-tested investing ideas are more important than ever. See what’s changed and what should never be forgotten in our new eBook From Decimal to Digital: Lessons from 50 years of investing in Australian shares.

You can download your copy from here.

INTERESTED IN INVESTING? 

If you believe you could benefit from investing in the Perpetual Industrial Share Fund, find out how to invest here.

¹ Annualised volatility of historical monthly returns of the S&P/ASX 300 Resources Price Index from 30 June 1996 to 30 June 2016.

² Annualised volatility of historical monthly returns of the S&P/ASX 300 Industrials Price Index from 30 June 1996 to 30 June 2016.

³ Annualised return of the S&P/ASX 300 Industrials Price Index from 30 June 1996 to 30 June 2016.

⁴ Average dividend yield of S&P/ASX 300 Industrials Accumulation Index from June 2001 to June 2016.

This information has been prepared by Perpetual Investment Management Limited (PIML) ABN 18 000 866 535, AFSL 234426 for financial advisers only. It is general information only and is not intended to provide you with financial advice. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. The PDS for the Perpetual Industrial Share Fund, issued by PIML, should be considered before deciding whether to acquire or hold units in the fund. The PDS can be obtained by calling 1800 062 725 or visiting our website www.perpetual.com.au. No company in the Perpetual Group (Perpetual Group means Perpetual Limited ABN 86 000 431 827 and its subsidiaries) guarantees the performance of any fund or the return of an investor’s capital. Past performance is not indicative of future performance.