Central banks are likely to hold the key to the direction of equities in the 2018 financial year, according to the portfolio manager of blue chip-focused listed investment company, WAM Leaders.
WAM will announce on Monday that it will pay a maiden final dividend of 2c per share, fully franked, double its interim dividend.
Since the LIC became fully invested in August 2016 its portfolio has increased 8.5 per cent, compared to a 7.3 per cent rise in the ASX 200 accumulation index.
Portfolio manager Matthew Haupt said investors had to deal with a year of “noise” from geopolitical events in 2016-17, including the Brexit vote in Britain, the election of US President Donald Trump, and various European elections.
But the election of Mr Trump also hastened a switch from small caps to large caps, as the US economy picked up and bond yields rose.
“It was happening before Trump but it certainly added to that rotation,” Mr Haupt said.
“The global growth outlook improved and has continued to improve, independent of Trump.”
One of WAM Leaders best trades was a move into the big four banks around August 2016, when concerns about bank capital raisings and negativity around regulatory action were at their highest, Mr Haupt said.
‘The most pleasing trade for the year’
The banks then went on a tear in the latter stages of calendar 2016 and early 2017. Mr Haupt reduced the percentage of the portfolio in banks from 20 per cent to 5 per cent around April, just before the banks were hit by a new levy in the May Federal Budget.
“That was the most pleasing trade for the year,” he said.
Other stocks that did well for WAM Leaders included Qantas, gaming machine maker Aristocrat Leisure, market darling Treasury Wine Estates and Insurance Australia Group.
Mr Haupt said the big thematic to watch is the trajectory of global growth, which is he optimistic about.
He is looking to globally-focused Australian companies such as Boral, Incitec Pivot, SIMS Metal Management and Lend Lease to provide exposure to improved world economic outlook.
But with interest rates still historically low around the world, he remains wary of central bank action in the coming year.
If central banks raise rates too quickly, Mr Haupt expects equities will be hit. That would see WAM Leaders move further into cash; its average cash weighting through the 2017 financial year was 26.5 per cent.
While WAM’s philosophy is bottom-up stock picking based on company fundamentals, Mr Haupt argues the “extraordinary” rate settings around the world means a broader view is important.
“You really have to pay attention to it because even the best companies will get caught up in the noise,” he said.
WAM Leaders floated in May 2016 following a $394.3 million capital raising, and was fully invested by August.