High-quality, defensive equities a hunting ground for this multi-asset investor

Please note this interview was recorded Wednesday 26 June, 2024. You can read some of the discussion highlights below or watch the video for the full experience. 

While market conditions are generally pretty good, punctuated by low unemployment, wage growth, and decent corporate balance sheets, investors could do well to be a little more cautious right now.

That’s the view of Elston Asset Management co-founder and Portfolio Manager, Bruce Williams, as he puts on his multi-asset hat.

Elston is one of Australia’s largest providers of managed account solutions, including both SMAs and IMAs. The focus of our conversation was the full risk based multi-asset portfolios.

So, what does that more cautious approach look like?

With a base case scenario of higher for longer rates, Williams and co are “a little concerned about valuations”. And while it’s not across the board, “there are certain parts of the market that we think are quite frothy”.

The other reason for caution, particularly as it relates to equities, concerns profit growth – with Williams believing it will be a little more difficult from here.

“The cost of doing business has been rising and is staying high, we think revenue growth will be a little more difficult because demand is becoming patchy, and we think that's not really reflected in the current share prices”, says Williams.

All is not lost

While that commentary might have a dire tinge to it, Williams remains positive overall and suggests that investors will need to be more selective, adding that risk management also becomes critically important in an environment where not everything is storming higher.

The Elston team is currently not spending all of the risk budget in the portfolios, instead preferring to keep some dry powder. Across the board the portfolios are underweight growth assets and overweight defensive assets – and it’s in the latter the team in finding most value, particularly in unloved areas of the market.

More specifically, the team is increasingly liking fixed income, and has gradually been adding duration to the portfolios.

“Historically, when inflation really took off, we were very underweight duration and we're now adding that in”, says Williams.

The team is also liking equities at the more defensive end, with Williams citing ResMed (ASX: RMD) as a name that stands out.

Like many other investors, Williams believes that the fear around GLP-1 drugs killing the opportunity for ResMed was overblown, instead seeing long-term demand and an underpenetrated market.

It was a name the team had wanted to own for some time, “but it never stood up on a valuation basis” says Williams. The selloff provided that opportunity and the team pounced.

Williams likes the healthcare space more broadly as well, seeing it as one of the more exciting areas of opportunity in the market over the next 12 months and beyond. He notes that demographics are supportive, whilst many healthcare names had elevated costs through COVID, which are now rolling off.

“There’s plenty of opportunity there,” adds Williams.

Another business that the team likes, which represents how the team are thinking, is The Lottery Corporation (ASX: TLC). It was added to portfolios late last year, again as an opportunistic buy when the “jackpot cycle was out of whack with long-term averages,” says Williams, “adding that it’s a very stable business”.

Take a position

Whatever the market conditions, Williams’ View From the Top is to do your research, have conviction, and take a position. Equally, he adds, you have to be prepared to recognise when you’re wrong – and not get too carried away when you’re right.

“If you get something right, you've got to be very aware as to why you got it right and not display hubris. I think hubris is an absolute killer in investment management”. 

Learn more about Bruce and Elston Asset Management here.