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In this interview recorded in August 2010 Simon Cooper, Managing Director of Chancellor Hattersley Lloyd outlines our investment philosophy and discusses the expected length of the sharemarket recovery, the US reporting season and economic activity. Simon also shares Chancellor Hattersley Lloyd’s view on core stock holdings for portfolios and covers our investment thesis and recommendations  for QBE Insurance (QBE) and Macquarie Group (MQG).

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At Chancellor Hattersley Lloyd we believe that with a properly managed approach to investment an investment portfolio should deliver reliable capital appreciation and growth in dividend payments.  We believe that companies that can increase and sustain dividends by increasing profitability and free cash flow over time, will in the long run deliver a reasonable return on the capital invested.

A recent article published in the ‘Lex’ column of the Financial Times supports our investment philosophy and highlights the importance of dividend growth in selecting investments.

The article discusses the investment options available to everyman John Smith, a cautious and methodical investor, in times of extreme global uncertainty.

“Dividends from blue chip companies catch the eye… (because) during the very long term productive assets producing real cash flows are attractive.” And if the world economy enters another recessionary period “…there are worse businesses (for everyman John Smith to invest in) than making and selling the essentials for life.”

The article references research on the US sharemarket by Oppenheimer Asset Management. Oppenheimer’s research found that shares in the top fifth of S&P 500 stocks ranked by dividend growth rose on average 12.5% p.a., compared with 5.7% p.a. for the S&P 500 index. The article concludes that along with a solid balance sheet, regular growth in dividends is the key.

Read the full article as published by the Financial Times (Subscription required)

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In this interview recorded in July 2009 Simon Cooper, Managing Director of Chancellor Hattersley Lloyd explains his general philosophy towards investment and advises that a properly managed investment portfolio will seek growing dividend yield and a long term capital gain.

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The RBA notes that gradual global economic recovery is not leading to stronger inflation. Core inflation measures are falling in many developed countries due to excess economic capacity.

In Asia (ex-Japan) the situation is different and the RBA notes stronger growth, falling unemployment and increased exports and industrial production. The RBA’s views are certainly supportive of strong economic growth in developing countries and weaker growth in developed, nothing particularly new here but the RBA does note evidence of declining fixed asset investment in China, which is an important development and if it continues it may suggest the Chinese economy will avoid an asset price bubble, and subsequent collapse of the economy post bubble. Investment in the Chinese economy is particularly relevant to Australia, where investment in resource development is a major part of future economic growth.

Domestically the RBA suggests that the Australian economy is strengthening and underlying inflation is slowing.

At the household level the bank noted the rapid rise in housing prices in 2009 but suggest prices have leveled out after the winding back of higher grants to first home buyers. This is a very important point and something that the RBA will monitor very closely in making future interest rate decisions. A growing population, falling unemployment, weak private sector investment (particularly residential construction) and liberal bank lending at the household level are the ingredients for a housing bubble in Australia.

Business conditions while firm are not supported by increased lending and the RBA once again discussed weakness in the flow of finance to the business sector. This weakness reflects both a desire by banks to de-risk their lending books and corporates to reduce their gearing. Neither are supportive of longer term economic growth or investment.  Which begs the question, if banks are happily lending to households for residential mortgages but not to housing construction firms what will happen to housing prices? On a side note our research team recently attended a meeting at which Ralph Norris, the  CEO of CBA, commented that in 2009 the Commonwealth bank grew its mortgage lending book faster than it ever has before.

Similarly if corporates are not borrowing and yet there is a substantial increase in investment in the resource sector then which non-resource projects are suffering from the lack of capital and how will this shape the Australian economy in the next 10 – 20 years?

Given further evidence of recovery in the Australian economy and pressure in the housing market we thought that the RBA’s decision to hold rates in February was surprising. Perhaps  we are  misjudging the potential for a housing market bubble (particularly as we understand that mortgage rate spreads are not only high but have grown and not contracted since the RBA began to raise rates in October 2009).   We suspect that the continued evidence of economic recovery in Aus will lead to the RBA lifting rates again in March by 0.25.  We are still targeting a cash rate level of approx. 5.25% by the end of 2010.

To read the latest minutes of the RBA Board in full click here

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The distribution of superannuation death benefits can sometimes become a complex and highly emotionally-charge issue.

This was illustrated in a recent decision by the Superannuation Complaints Tribunal that followed complaints about how a super fund intended to distribute super death benefits.

To read the full article by Vanguard Investments click here

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IGA>D (the company’s grocery wholesale distribution business) continues to be the powerhouse of Metcash and is performing well against competition from other major retailers, such as Coles and Woolworths.  Wholesale sales of IGA>D rose 9.3% to $3.48 billion, with earnings before interest, tax and amortisation (EBITA) growing 11.5% to $163.3 million or 85.3% of the total group EBITA. Comparable store sales grew by 6.4%. IGA-D has made a significant investment in its fresh produce offering, the full benefits of which has yet to be realised.

The Campbells Wholesale division which services convenience stores had a poor result with EBITA falling 14.8% to $13.5 million. Campbells Wholesale represented only 7.1% of total group EBIT for the half years period and was adversely impacted by a bad debt of $1.5 million and convenience sales in general being affected by a trend by consumers to  switch to value shopping.

Read more in Metcash’s release

Disclosure: Staff of Chancellor Hattersley Lloyd own shares in Metcash.

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