Question 1: I’m researching ‘stable’ corporate and government fixed interest ETFs, such as Vanguard’s VAF. Why has such a boring, safe product gained near on 9% this year?
Answer: When bond yields fall, bond prices go up. Because bond yields have fallen (the 10 year Australian Government treasury bond now yields around 1.35%), funds that invest in fixed interest securities (like Vanguard’s VAF) have seen the value of their investments rise and on a “mark-to-market basis”, recorded strong positive returns. When and if bond yields rise, fixed interest funds will lose value. Investing in fixed interest is not without risk. It is less risky than investing in shares, but not riskless. If you want to minimise the capital risk, look for bond funds (or bond ETFs) of short duration. However, they will typically pay a lower return and have a lower running yield.
Question 2: I really enjoy your Saturday Switzer Report. Can you tell me why nobody ever seems to go short in bank stocks? These seem to me to be an obvious target at certain times.
Answer: Our column lists the most shorted stocks by proportion of the ordinary shares on issue. It is quite unusual to have a top 10 company in this list. That said, there are always short positions in the major banks. Mostly, the shorters have got it wrong with the major banks and have paid the price. According to the latest ASIC data, these are the current short positions:
ANZ: 19.2m shares sold short, 0.67% of issued capital
CBA: 22.7m shares, 1.29%
NAB: 36.5m shares, 1.30%
WBC: 53.1m shares, 1.54%
Question 3. You have previously recommended Challenger for both its strong position in the annuities market for the future and its relatively high dividend yield. I previously bought at around $10.80. With its recent decline now to $6.50 per share, would you recommend buying some more, particularly with dividend yield now around 5.5%?
Answer: I got Challenger wrong and cut it from our growth portfolio at the end of May. I feel a little burnt. Clearly, the market also got it wrong, not seeing the impact of ultra-low interest rates and the Royal Commission on annuity sales by planners. As for the market, according to FN Arena, there is 1 buy recommendation, 6 neutral recommendations, and 1 sell recommendation. The consensus target price is $7.27, about 12% higher than the current market price. The broker range is a low of $6.52 to a high of $8.80. Mike McCarthy wrote positively about Challenger in Monday’s Switzer Report.
Question 4: Is it too late for someone sitting in cash to buy at these high prices?
Answer: I’d like to say to you that it’s never too late, and that it is “time in the market” rather than “timing” that counts, but if you’re 100% invested in cash, I don’t think you’re up to investing in shares. There is nothing wrong with a strategy that preserves capital. I don’t try to pick bottoms or tops (I know I can’t) but rather, follow the trend and when it gets more expensive, lighten off, and when it’s cheaper, increase the exposure. At the moment, the uptrend is intact so it’s right to play it from the long side. But I am not increasing my exposure as the market is moving into the expensive (more bullish) phase. (Charlie and Tony’s articles are worth reading).
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.