Change of focus for investment giants in switch from dividends to growth

A sell-out of AMP by a leading fund tells a wider story with implications for every investor.

The trade off for dividend yield against growth is underway.

Extraordinary times call for extraordinary decisions. Earlier this week one of the stalwarts of the sharemarket, the Australian Foundation Investment Company which been managing money since 1928, announced it had sold ALL of its AMP shares.

AFIC giving up on AMP is not just another share sale, it’s a milestone and it tells us as investors more about the market today than a dozen analyst reports.

With 130,000 faithful shareholders, AFIC does not make decisions like this easily. On face value alone the move is fascinating.

The AMP was once a top-10 holding for AFIC. The two companies had cross links that were very powerful. One-time AFIC board director Stan Wallis had also been a director of AMP.

In other words, AFIC selling out of AMP had for a long time been inconceivable.

But nothing stays the same for long in the investment market. In a low-rate environment we are looking at a new reality every investor must face: the finance sector — which has carried the ASX for a decade and still dominates in terms of market capitalisation — is fading as a force.

In its latest report AFIC, an $8bn listed investment company, has spelled out a new direction.

The fund is now openly moving towards growth stocks, where dividends don’t matter as much, in favour of “growth opportunities’’ in healthcare, online fulfilment and related industrials.

As Mark Freeman, the CEO of AFIC, explained: “In these times we want companies with a real competitive advantage. We want to have more growth. It means we will have some lower dividend yields and you have to accept that.

“In fact the yield across the entire sharemarket is starting to come down.

“What we have sold … we have sold steadily and not in one move, and what we have bought we have often bought at moments where there is opportunity.”

AFIC has been loading up on blood products group CSL, Ramsay Healthcare, industrial property giant Goodman and investment bank Macquarie.

Meanwhile, it’s been offloading AMP, the former Westfield holding encased in Unibail-Rodamco, struggling building materials group Boral and the ill-fated NAB spin-off CYBG. The fund has also been “underweight’’ (steering clear) of the big four banks and avoiding regional banks.

No doubt Freeman believes the trade off for dividend yield against growth is worth it — and that is undeniably the case if you contrast say, CSL and AMP or CSL and NAB (another market leader that AFIC would have deep ties with — a former CEO of NAB, Don Argus, was also an AFIC director at one stage.)

Retail investors might want the 6 per cent dividend yield from NAB, it is undeniably a strong attraction in an era of low rates but the “price appreciation’’ part of the equation is literally missing — NAB is the same price today as it was in 2010 — it has literally stood still for almost a decade.

In that respect the stock is the definitive “bond proxy” — it pays a yield and not much else.

So what is AFIC doing to replace the role once played by the banks and AMP?

The accumulation of CSL typifies Freeman’s approach — the dividend yield on the CSL is by local standards microscopic at 1.2 per cent (the wider market is still showing around 4.3 per cent) — but the price appreciation of the stock has been powerful, rising from $185 at the start of the year to $239 today, with Goldman Sachs targeting another lift to $249 in the weeks ahead.

The increased investment in CSL is coupled with an accumulation of Ramsay Healthcare, offering two exposures in the growth focused healthcare space.

A closer look at AFIC’s investment moves also shows that the manager is still a believer in a diversified portfolio and it is clear that when it exits or lightens a holding in a sector it will if possible seek to replace those holdings with a different stock with better prospects in same sector.

Though it has lightened its holding in the big banks, there is a parallel lift in holdings in Macquarie Bank, where the dividend yield is may be two thirds that of the mainstream banks but the prospect of price growth is a trade off the manager is willing to take.

Two other stocks that have left the AFIC register also point to the same theme. AFIC has sold out of the remnants of the original Lowy family shopping centre group by quitting Unibail-Rodamco, which bought the one-time Australian shopping centre king some years ago. Shopping centre groups all over the world are under pressure and across Australia a major row is brewing over current levels in retail outlets as consumer sales continue to disappoint.

At the same time it has lifted its stake in the Goodman Group which is also a property trust but in a very different line of business.

Goodman has a strong presence in industrial estates and a booming business in online fulfilment specialist property, particularly its global relationship with Amazon for which it creates specialist fulfilment centres.

All up, it’s a change of the guard and a useful template for anyone reviewing their own portfolio.