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Peter Thornhill

Discussion in 'Other Asset Classes' started by Redwing, 10th Apr, 2016.

  1. Redwing

    Redwing Well-Known Member

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    Peter Thornhill talks about the ASX Industrial Index, yet I cannot see where he mentions the shares, or how he buys into the "Industrial Index"?

    In the Top 50 the industrial shares listed are

    CSL Limited
    Brambles Limited
    Amcor Limited
    James Hardie Industries plc
    Orica Ltd
    Computershare Limited
    Incitec Pivot Ltd

    Yet he frequently mentions CBA (Financial) and Wesfarmers (Conglomorate) as two cited examples when talking of dividends/yield
     
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  2. Hodor

    Hodor Well-Known Member

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    My understanding, from reading motivated money and forums, is he doesn't give info on picking specific stocks. From memory motivated money says you can pay someone if you are not confident to pick your own stocks.

    There are some low cost LICs that avoid miners which are a school of Peter Thornhill type play. I am not aware of any specific ETFs, I found one that closed for some unlisted reason.

    The Bell Potter LIC report provides information about the major LICs along with a breakdown on their holdings by sector. I found it useful to identify LICs that align with the Peter Thornhill way of thinking. Just google it.

    If you have plenty of cash you could buy direct shares, for me the LIC approach is what I'll be using.
     
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  3. CatCafe

    CatCafe Well-Known Member

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    I think his definition is anything thats not a resources company as historically they haven't paid dividends
     
  4. The Falcon

    The Falcon Well-Known Member

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    In this context "industrials" means ASX 200/300 minus materials / resources. IML, Perpetual and the like follow this as well, as does Whitefield. Therein is "how to".
     
  5. austing

    austing Well-Known Member

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    Latest "My Say" from Thornhill:

    Welcome - Motivated Money

    Study the graphs carefully. The power of dividend paying Industrials is amazing.

    As an aside Note that the Industrial focused LIC (WHF) does include REITs hence a potential drag on its performance.
     
    Last edited: 28th Apr, 2016
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  6. The Falcon

    The Falcon Well-Known Member

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    the ex resources / materials / reit filter is a good primary filter for long term investors imho.
     
  7. austing

    austing Well-Known Member

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    Yes, given that most fund managers use the All Ords or ASX 200/300 Accumulation Index as a "weak" benchmark it is incredible to think that just by holding a broad selection of stocks equivalent to the All Industrials index one would be outperforming the majority of investors/fund managers even before fees. Remove REITs and you're doing even better again. Adding a further filter of some basic criteria like moat and removal of volatile cyclicals along with buying stocks on market weakness or bad news then one is right up there at the top. Finally given that one is not paying high management (and potentially performance) fees and not having to be overly active in trying to meet short term quarterly performance targets then the results will be quite frankly unbelievable not just in terms of capital growth but more importantly Income growth.

    Unfortunately however the only way to achieve significant outperformance at present is through holding stocks directly. An All Industrials (ex REITs) ETF would be a good start. The current UBS Morningstar Quality ETF (code ETF) minus Resorces and REITs even better.

    I have been following the shares for income approach for a very long time but there is always a thing or two that one can learn from others even if circumstances may not allow full implementation. So a big thanks to my friend The Falcon.
     
    Last edited: 30th Apr, 2016
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  8. The Falcon

    The Falcon Well-Known Member

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    And the problem with that UBS ETF ;

    The Morningstar® Australia Moat Focus Index™ is a rules-based, equal-weighted index intended to offer exposure to quality companies that Morningstar determines have sustainable competitive advantages based on a proprietary methodology that considers quantitative and qualitative factors.

    The Index is designed to target exposure to approximately 25-50 wide and narrow 'moat' stocks in the Morningstar Australia Index™ with the lowest ratios of current market price to fair value price determined under an independent research process by the Morningstar Equity Research team. The fair value estimate is based primarily on Morningstar's proprietary three-stage discounted cash flow model. Morningstar checks its fair value estimates against other valuation measures, such as sum-of-the-parts, multiples and yields, among others.

    they will churn the holdings at each rebalance. (approx. 50% t/o pa)......and you are relying on Morningstar valuation which we all know is pretty worthless.

    This is the same problem that US moat / quality ETFs have. And the driver is the same thing we always talk about, short term performance bias to avoid fund outflows!

    BUT, within the framework of the ETF there are some hints.....ie. equal weight + quality + valuation. Add to that ex. resources, materials, REITs but then take a longer term view "the capacity to suffer", for which the quality filter is key. Some of the Morningstar methodology is good but the application sucks :)
     
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  9. The Falcon

    The Falcon Well-Known Member

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    ok, maybe i'll post thoughts from my esteemed long term investor friend on what Thornhill's stock picking criteria was (when he was picking direct stocks for his portfolio).

    It was pretty simple and no great science to it at all, and frankly, no consideration of quality filter....ie. stuff like Qantas and Bluescope!

    From what he could work out, what he would do is just pick the largest couple of stocks in each industrials subsector, and buy on weakness. That meant everything except resources and REITs. Sometimes he would just get other ideas from talking to people in the biz, like CCP that he has held for a long time (got this tidbit from someone else that knows him) That was pretty much it. Buy the biggest, reinvest the dividends. And, he was/is a "stock collector" running up to as much as 70 positions but normally in the 40-60 stock range. Sell trigger is/was dividend suspension, and dividend cut would be review trigger.

    My view, is that the larger number of stocks in this case actually becomes easier to manage as when applying basic filters on larger numbers, the level of conviction per position required is lower, and if one goes pop, who cares. Even this very rough filter was enough to see very very few stocks go to zero (from memory only 1 or 2?) over a couple of decades. The net result of being right "on average" is very powerful.

    Note, although some similarities, this is not my approach, just sharing for interest.
     
    Last edited: 30th Apr, 2016
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  10. Hodor

    Hodor Well-Known Member

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    Interesting discussion and educational.

    I noticed that the UBS ETF is below ETFs such as VAS which don't apply any fancy filters and have lower costs. Will be interesting to see what happens over the coming years.
     
  11. The Falcon

    The Falcon Well-Known Member

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    VAS is preferred over that ETF. But in some of it's methodology there is an answer :)
     
  12. Ouga

    Ouga Well-Known Member

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    Great discussion guys!
    Thank you for the insights. For an investor looking at keeping things as simple as possible through ETF & LICs with no direct shares, beyond WHF, what other options are there out there? ARG, AFI and MLT all have materials. Keen to hear other options are being used in the ETF/LIC space to try and follow this approach.
     
  13. Hodor

    Hodor Well-Known Member

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    I looked at this report
    http://cadencecapital.com.au/wp-content/uploads/2016/02/Bell_Potter_Dec_2015.pdf
    Gives a breakdown by sector on the LICs holdings, along with MER.

    MLT, WHF, BKI seem to play the industrials game. MLT has fairly minimal resource holdings and the MER is second to none.
     
  14. The Falcon

    The Falcon Well-Known Member

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    Yeah easiest way to get this kind of tilt is Milton, BKI or Whitefield. Not "full bag" but in the right direction.
     
  15. austing

    austing Well-Known Member

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    @The Falcon,

    Thanks for highlighting the UBS ETF churn issue. I should have known better than to suggest it in the long term focused Industrial income context. I more than most have been critical of rule based ETFs for their churn and unintended outcomes etc much preferring traditional cap weighted index ETFs. Then again as you know I didn't even know what day of the week it was last night:oops:. What I was trying to get across is that the All Industrial Market Index minus REITs along with a quality filter such as Moat would be an excellent starting point. But these holdings need to be then held long term unless the dividend is cut or suspended for stock specific reasons. Churn will mess things up. Hence we are unlikely to see a low cost ETF that will meet this criteria.

    Unfortunately holding some direct stocks will likely be required to achieve outperformance of the Industrial index. There are active Industrial Share funds but high fees somewhat negate the benefits especially in regards to income. A combination of older LICs including those mentioned above (eg MLT, BKI, WHF) and direct stocks can work together in achieving significant outperformance as proved by Thornhill. This is the approach I take albeit I'm far less adventurous than Thornhill sticking to a relatively small number of no brainer large cap industrials for "income" outperformance compared to an all LIC/ETF approach.

    This so called outperformance makes for great discussion but don't lose sight of the fact that these graphs of the Industrial accumulation index are merely to point out the power of dividends. At the end of the day all that matters is that one invests in those stocks/funds likely to pay a growing dividend stream. Additional quality filters may improve the outcome but the majority of the benefit from the dividend investing approach will be gained from simple things such as holding nothing more than the older LICs with additional emphasis on those with a more Industrial focus. Holding direct shares may improve on this but you must be prepared for some additional effort. For many the stress, time and effort just won't be worth it!

    In summary, some of us will raise topics to stimulate discussion for those who are interested in different approaches. It is good to keep an open mind and dicuss more advanced topics at times. However one should never lose sight of how powerful and effective the simple strategies are.
     
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  16. The Falcon

    The Falcon Well-Known Member

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    Yes well said.
     
  17. austing

    austing Well-Known Member

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    Further to Thornhill style selection criteria. An occasional browse of portfolios and fund updates by highly successful Industrial focused fund managers will provide very useful stock ideas. For example Investors Mutual unlisted funds and their LIC QVE. Even reading the quarterly updates by BKI, WHF and other LICs and checking out their portfolios can be worthwhile. Stock selection can be relatively easy, the hardest part is determining when to buy. Even then something as simple as buying the dips and during substantial overall market weakness is a good start should determining valuation be too daunting.

    When venturing into direct stocks some work is required but it can be kept minimal by taking shortcuts and piggy backing of others hard work.

    As highlighted by The Falcon there is safety in numbers. As stated the irony is that holding a high number of stocks is less stressful and requires less monitoring than a concentrated portfolio. Stock specific risk becomes very minimal. Just some additional paperwork.

    One can if they choose get away with minimal analysis when holding a high number and broad selection of dividend paying Industrials. And before someone jumps in with the "why not just buy an Index ETF" the rules are very different when buying long term stocks for income.
     
    Last edited: 30th Apr, 2016
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  18. austing

    austing Well-Known Member

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    Some more Thornhill stuff from communication with him from way back and other general thoughts. It takes awhile for me to remember old stuff, as usual I blame the home brew. Might as well make this thread as complete as possible.

    In regard to the thought of managing the correspondence and reporting etc for a lot of stocks Peter did use The Portfolio Management service from Pramium. I don't think he uses this now but for individual investors no doubt there are similar products out there. I think however his financial planner now looks after this. What, financial planner you say! I understand this is mostly for technical advice and looking after SMSF admin etc. More importantly I see him mention recently that for peace of mind should anything happen to him the planner will continue to administer the share portfolios for his wife. Perhaps something to consider as part of The Estate Plan for those of us who have spouses/partners with no interest in managing investments:rolleyes:.

    Personally I use Reckon Personal Plus to manage the share portfolios. Very cheap and great for all your personal finances. Even when the combination of LICs, ETFs and direct Industrials was well over 50 it was bugger all effort to look after it all. Most of the time it is just two electronic dividend statements a year for each holding that require recording. A handful of IPs took vastly more work than the share portfolios.

    Now a very important point from Peter. His biggest mistake over the years has been SELLING. Most of the time don't do it. His popular saying, "if one feels the urge to sell take two aspirin then lie down for a couple of hours till the urge passes". More times than not things sort themselves out and the company comes good again or is taken over etc. Note he generally buys the larger Industrial stocks in each sub-sector so we're not talking speculative rubbish. Even with cyclicals rather than avoid them he takes the point of view that not all companies are doing well all the time. Refer back to his Industrial Chart which contains everything including REITs, cyclicals, good and bad quality stuff. Yet the overall performance of the Industrial Market Accumulation index leaves many fund managers for dead in regard to performance. Just by avoiding REITs Peter manages to outperform this strong benchmark.

    Personally I think a dividend cut/suspension (company specific, not due to bad overall market conditions) requires at least a review of the holding. Not everyone is fortunate enough to have a portfolio pumping out over $500k pa where one can afford to wait for a company's who has suspended their dividend to come good again. Hence there is an opportunity cost.

    However rather than an all or nothing action if one wants to give the company the benefit of the doubt he/she can reduce the holding. Cyclicals typically fall into this category. Even just holding onto a few hundred dollars worth of shares in the company means you don't have to redo the paperwork again if it is once again worthy of a full position down the track due to dividend reinstatement etc. More importantly by keeping a small holding it might enable you to partake in attractive SPPs etc which can pop up when a company is working its way through difficulties.

    This is a worthwhile strategy with LICs and why it can pay to hold a number of these even if you can only afford small amounts in some of them. Occasionally a very attractive SPP will pop up and just by being a shareholder (regardless of the amount held) you get to participate. Of course one need not keep their SPP issue, it can of course be sold after allotment potentially for a profit. Even long term holders of LICs will occasionally take advantage of this strategy.

    All for now. If I can manage another day off the home brew some more Thornhill memories might come back to me:rolleyes:.
     
    Last edited: 1st May, 2016
  19. turk

    turk Well-Known Member

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    austing

    Love the info provided, but lets get serious.

    WHERE IS THE HOME BREW RECIPE:p
     
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  20. austing

    austing Well-Known Member

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    That's my wife's department, not sure where she hides the recipes. We have an agreement in this household she brews it, I drink it:cool:.

    She's been doing it for quite a while now and has gotten damn good at it. I considered her perfect before she started brewing but now even "beyond perfect" is an understatement:D.
     
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