Importance of industrial stocks

Funds Management

by Clive Tompkins

Max Cappetta, CEO, Redpoint Investment Management and Jason Hazell, Head of Investment Communications, NAB Asset Management discuss the merits of Australian industrial stocks. 

Jason Hazell: Hi, today I’m joined by Max Cappetta to talk about the importance of industrial stocks. Welcome Max.

Max Cappetta: Thanks Jason, good to be here.

Jason Hazell: We’ve seen over many years now, there’s been a real demand for income yield from investors. Are you seeing the same dynamic play out in the Australian market?

Max Cappetta: Jason, it’s an amazing situation that we’ve been in now for probably the best part of 30 years, where interest rates have gone from high teens, down to very low single digits as we see them today. And really what that’s meant is that where we are here and today, the traditionally safe investments such as Government bonds and term deposits, just aren’t delivering the income that investors require. And particularly retirees, to fund their lifestyles, to fund their retirement plans.

Jason Hazell: When you think about the merits of resource stocks versus industrial stocks. How do you view that difference?

Max Cappetta: Again, when you do do that comparison of looking at the Australian equity market, it’s quite interesting when you split up both the resources market into one side, and then industrials on the other. What we see, that I think a lot of people are looking for is the fact that industrial stocks, generally carry half the volatility and double the income in terms of dividends, relative to the resource companies.

Jason Hazell: When you look into the industrial sector, there’s still quite a broad spread of companies within that sector?

Max Cappetta: Absolutely, I think there’re a lot of companies that people will probably know and do business with each and every day. Of course, there’re the four major banks that we’ll all generally have some kind of association with. But then there’re also the retailers where we’re doing our shopping, transportation companies such as Qantas that we’ll fly around with, even healthcare and IT companies. So a quite broad range of sectors and a broad range of activities, as opposed to what is simply more commodities based, in the resources sector.

Jason Hazell: Would you say that the business models of industrial companies are perhaps more flexible than the resource companies? Some of them may potentially only mind one commodity for example.

Max Cappetta: Absolutely and I think that is another key differentiator, when we’re trying to capture key characteristics that I think are of most interest to people, either saving for retirement or moving into retirement. When you look at the capital expenditure and really the very large amount of capital expenditure, that’s usually required for resource companies to be extracting coal and metals out of the ground, oil and gas from seabeds and the very long timeframes over which they do that, that’s one element that is really quite risky.

The other major component is that the price that they get for that commodity is generally set on the world market. They don’t really have a lot of pricing power. And so while we’re not saying that investment in resource companies is bad per se, it’s just really a different set of characteristics that maybe is not really aligned, with the objectives that some investors might have.

Jason Hazell: And you’d of course expect higher franking levels from industrial stocks I would imagine?

Max Cappetta: That’s right, although even in the Australian equity market when we look at industrial companies, we do have some companies, which have a lot of their operations offshore. That means that maybe the franking levels are not there for them. But it also means that investors get great exposure to operations and businesses that are not just focused here in Australia, but also have activities across the globe.

Jason Hazell: So thinking about that set of industrial stocks. How does Redpoint view quality selection within that group of stocks?

Max Cappetta: We believe that the key characteristics of income and growth, that investors are looking for, are best captured by having a very strong quality filter. In other words, looking for stocks that quite frankly you can take -put in the bottom drawer for 10 years plus, and be assured of a reasonable amount of price growth. And also income through dividends, both through that process and then at the end as well. And when we think about quality and what makes up the best type of company that’s going to give us that very steady outcome over the long-term, we not only focus on the financial aspects of the company, of course their earnings, their assets, their profit margins, we’re also very interested in the sustainability elements.

In other words, the way that they manage their environmental, social and Governance practices, gives us an interesting insight to make sure that not only what they’ve done in the past, through the strength of their financial statements is there, but we also have confidence that management is actually building the business in a sustainable fashion, for the very long term.

Jason Hazell: Great, thanks for your time today Max.

Max Cappetta: Pleasure, thank you for having me.