In this climate of wildly swinging share prices fund managers have to work hard for their money. No longer is a company’s underlying profitability the guiding factor of whether or not its share price will gradually rise over time; macroeconomic factors are taking a bigger toll on the share prices of Aussie companies, especially over the short term.

Weak performing sectors last month were consumer discretionary, property and financials – reflecting a shift away from cyclical industries and a move towards more defensive sectors such as telecommunications, IT, REITs, utilities and consumer staples (which all posted positive returns over the month).

Fund manager Perennial Investment Partners started buying shares in Transurban Group last month in its Growth High Conviction Shares Trust, citing the need to hold investments that perform well in difficult times. “Tollroads have consistently delivered steady growth despite challenging economic environments,” it notes. “This is due to CPI-protected toll increases under concession arrangements and ever-increasing traffic congestion in major urban areas.” The fund manager expects Transurban to achieve above-average growth driven by expansions to Citylink in Melbourne, the M2 and M5 in Sydney and the commencement of the Capital Beltway project in Washington DC from FY2013. Some shares in ConnectEast were sold to partly fund the investment in Transurban Group.

In an interesting move, the fund opted to completely sell out of Rio Tinto and buy more shares in BHP Billiton. Shares in Sims Metal and News Corporation were also sold – while the fund increased its stake in JB Hi-Fi.

As of 31 August, the biggest stock holdings in the Perennial Growth High Conviction Shares Trust were Australian Infrastrastructure, Asciano, OneSteel, Oil Search, Lend Lease Group, JB Hi-Fi, Transurban Group, Computershare, AMP and CSL.

Perennial’s Value Smaller Companies Trust holds a number of gold mining stocks as a hedge against sluggish global growth such as Alacer Gold (up 16.4% for the month) and Troy Resources (up 10.4%). Both stocks benefited from a firmer gold price (up 13.5%).

Given the volatility over the last month, the fund sold half of its shares in Abacus Property and switched the money across to FKP Property and Australand as these stocks were trading at a greater discount to their net tangible assets relative to Abacus. The fund also took profits in Fantastic Holdings and NIB Holdings, preferring to add to holdings in ToxFree Solutions, Breville Group and Clough.

The fund’s coal stock pick is Sedgman, up 15.3% for the month, following a strong annual result and the announcement of a string of coal contract wins.

Investors in mining stocks with operations overseas need to keep abreast of any negative geopolitical moves that could swiftly dent profitability, such as Horizon Oil that tumbled by 21% following rumours that the PNG government could hand over ownership of the country’s resources to landowners. Fund managers at Perennial contacted management to get the lowdown given Horizon Oil’s significant exposure to PNG, and were confident that the rumours were just that. (For more on Horizon Oil, read this week’s 35 Broker Buys)

Perennial’s Value Shares for Income Trust ditched its shares in Seven Group Holdings saying that the stock no longer offered good value or an attractive dividend yield; it also reduced its holding in Amcor to buy shares in stocks that offer better value and more attractive yields such as Wesfarmers and Tatts Group, with FY12 gross dividend yields of 8.1% and 13.5% respectively.

The fund’s biggest holding is Telstra, which based on a share price of $3.03 at the end of last month, offered a gross yield of 13.2%. The fund managers believe that this level of dividend is sustainable in the medium term, supported by NBN cash flows. “Telstra delivered a full-year result which showed that operating trends were ahead of expectations,” it said. “The company provided positive guidance for F12 earnings and, importantly, reiterated its commitment to paying a 28 cents per share dividend in FY12.”

Fund managers think that Macquarie Group and Harvey Norman are currently trading at “extremely compelling valuations” and “offer investors the prospect of very good returns over the longer-term given their strong leverage to any recovery in their respective markets.”

As at 31 August 2011, the fund’s biggest holdings were Telstra, Commonwealth Bank, National Aust. Bank, Westpac, ANZ Bank, Seven West Media, AMP, Metcash, Wesfarmers and Foster’s.

7 Stocks The Funds Are Buying

 Company ASX Code Current Share  Price Target Price Range (Consensus Broker)
Transurban  TCL  $5.38  $5.40 – $6.10 
BHP Billiton  BHP  $38.17  $47 – $57
JB Hi-Fi  JBH  $15.23  $15.57 – $22.19
FKP Property  FKP  $0.54  $0.81 – $1.04
Australand  ALZ  $2.34  $2.85 – $3.20
Wesfarmers  WES  $30.51  $29.70 – $38
Tatts Group  TTS  $2.15  $2 – $2.80


7 Stocks The Funds Are Ditching

 Company  ASX Code  Share Price Target Price Range (Consensus Broker)
Rio Tinto  RIO  $71.30  $103.5 – $115
Sims Metal  SGM  $14.31  $18 – $22.3
News Corporation  NWS  $15.52 $15.30 – $20.50
Abacus Property  ABP  $2  $2.10 – $2.30
Fantastic Holdings  FAN  $2.20  –
Seven Group Holdings  SVW  $8.55
Amcor  AMC  $6.57  $7.50 – $8.60


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