Australian blue chips offer mediocre long-term returns
Australian investors tend to have their equity portfolio's heavily skewed to the blue chips which only provide investors with mediocre long-term returns unless they speculate successfully on the price to earnings ratio, according to Montgomery Investment Management.
The firm noticed that the reason for this was that most of the large cap companies in Australia, which dominated the major stock market indices, were mature businesses with little ability to retain any sizeable proportion of their annual profits to reinvest at an attractive rate of return.
Chief investment officer, Roger Montgomery, said: "When the companies pay out more than they earn they don't grow".
According to Montgomery, the dividend yield is usually the maximum return an investor would receive as it all "comes back to dividends and capital allocation".
"In simple terms, if you chase a high yield and the company pays all of its earnings out as a dividend, the yield is about all you should expect,"
Also, he stressed that without the growth in earnings, there can be little growth in dividends.
"Only by retaining a large portion of profits and redeploying those profits at high rates of return, can a business increase in value. And in the long-run share price always follows the change in value," he added.
For the past 10 years to June 2016, the S&P/ASX 100 stock market index, measuring Australia's top 100 companies by market capitalisation and accounting for 63 per cent of the Australian equity market, has returned only 1.1 per cent per annum.
AUTHOR
Oksana Patron
Recommended for you
Some 42 per cent of CEOs say they are actively reinventing their business to stay relevant in the next decade, with consumer services the most common choice for asset and wealth managers.
Former Ophir Asset Management chief executive, George Chirakis, has joined private equity manager Scarcity Partners, while the asset manager has appointed a replacement from Macquarie.
Australian Unity has appointed a fund manager for its Healthcare Property Trust, joining from Centuria Healthcare, as it restructures the product with a series of senior appointments.
Financial advisers nervous about the liquidity of private markets funds for their retail clients are the target of fund managers launching semi-liquid products which offer greater flexibility and redemptions.
