Selecting high yield stocks when rates are low

Funds Management

by Carolyn Herbert

Transcription of Finance News Interview with Antares Dividend Builder Fund Portfolio Manager, Glenn Hart
Lelde Smits: Hello I’m Lelde Smits for the Finance News Network and joining me from the Antares Dividend Builder Fund is Portfolio Manager, Glenn Hart. Glenn, welcome back to FNN.
Glenn Hart: Thank you.
Lelde Smits: The Fund targets high yield stocks. How have this year’s market conditions aided or hindered this objective?
Glenn Hart: They’ve been OK, so the market is forward looking. So the market really is currently thinking about where rates will be, rather than where they are. And even whether there’s another cut or not, it’s more about where the long-term trajectory is. And the important part to that will be not only Australia, what the Reserve Bank does, but alsowhat the Federal Reserve does in the US.
So currently the low interest environment has definitely benefited yield stocks. But there are other sectors that have benefitted just as much, if not more. Such as the healthcare sector, which is a very low yielding sector, but it’ s perceived as a growth sector. So that’s also received a massive benefit from the low interest rate environment. So there are a number of areas that have benefitted from the current environment.
Lelde Smits: The Big Four banks have recently come off their highs. Where is this downward pressure coming from?
Glenn Hart: The banks have been sold off primarily for two reasons. One is because the market is worried about the higher need for capital. And two is because, some of the banks have actually started to increase their capital, which means a lot more shares on issue, big capital requirements. So we’ve seen DRPs (dividend reinvestment programs) and capital raisings take about $7 billion out of the market. It’s a lot of money, which has occurred over the past month. So that’s been a big supply/demandpressure on the banks.
I think going forward that a lot of that story about higher capital, is now in the prices. And that you most likely get fundamentals reassert themselves, which will be a little bit more positive than the market is currently pricing.
Lelde Smits: What is your current exposure to the banks?
Glenn Hart: We have been buying in the weakness. So to put it in perspective, the industrial market is trading on something like 17 times/17.5 times earnings. And stocks like NAB (ASX:NAB) and ANZ (ASX:ANZ) are around 12/11.5 time’s earnings, Westpac probably 12.5 to 13. So you’re talking very substantial discounts to the market, the industrial market for similar levels of growth. Because there’s not much growth across the whole industrial market as well, and very high yields. Yields are up now, over 5.5 per cent. So it’s a reasonable risk return trade-off now.
Lelde Smits: Many claim the Australian share market is currently looking quite fully valued. How is the Fund finding value amid these high valuations?
Glenn Hart: We’re trying to look for stocks that are not experiencing high valuations, ones that might be unloved for certain reasons. So trying to avoid the really popular and just looking for pockets of value. I would say that the recent selloff in the market has been quite savage, on some stocks. So the banks have been sold off quite severely. Also Stockland Corporation Limited (ASX:SGP) of the REITs has been sold off, really very heavily. We think the story for that is still in tact, so that’s another one we’ve been adding to as well in the weakness.
Lelde Smits: Final question Glenn. What market factors do you believe will influence the Fund’s strategy, over the second half of this year?
Glenn Hart: There are a lot of factors that might influence the market. Generally what you find, is what everyone is obsessed about will not be the factor that moves the market, because it’s already priced. So generally, the thing that will move the market over the next quarter, or half year will likely be something that we’re not focusing on now.
Lelde Smits: Glenn Hart, thank you for the update from Antares Dividend Builder Fund.
Glenn Hart: Thank you.

Carolyn Herbert

Finance News Network
Carolyn joined FNN in August 2015 as the Head of News and also presented the Market at Midday and the Market Wrap. With more than five years of broadcast journalism experience, Carolyn has worked as a finance anchor on the Sky News Business channel and as an anchor and reporter for ABC News. She is also a qualified corporate lawyer specialising in IPOs, takeovers and mergers and acquisitions.