> Understanding equities. March 2014

Transcription

1 > Understanding equities March 2014

2 Table of contents 1. Introduction to equities 2. Investing in equities Ways to invest How do equities fit into my portfolio? Equity strategies Market indices Performance and the psychology of investing Measuring performance Risks of investing in equities 3. The importance of active management // 2

3 1 Introduction to equities // 3

4 Introduction to equities What are equities? > Units of ownership in a company issued to raise money to fund business growth Type of equity Cyclical Defensive Blue chip Growth Income Description Affected by ups and downs in the overall economy Producing staples such as food, beverages, pharmaceuticals and insurance Issued by companies with long histories of growth and stability Entrepreneurial companies experiencing a faster rate of growth than their general industries Have historically paid larger dividends, compared to other types of shares // 4

5 Benefits of investing in equities Why invest in equities? > Strong capital gains over the long-term > A good source of income, with inflation built into earnings > Can be converted into cash quickly and with minimal impact on the price received > Tax advantages through the dividend imputation scheme > Liability is limited to the amount invested in the company > Corporate control and certain voting rights // 5

6 Comparison of ordinary and preference equities Ordinary or preference shares? > Equities fall into two different categories ordinary or preference: Ordinary Have a right to vote Have the right to maintain a certain percentage in the company Do not know the dividend amount you will receive in advance Dividends can increase as the company grows Preference Do not have any voting rights No rights over the stake in the company Dividends are known (fixed) Fixed dividend amount is usually higher than the dividends on ordinary shares // 6

7 Risk and return characteristics Equities rank high on the risk-return scale Source: AMP Capital. For illustrative purposes only. // 7

8 2 Investing in equities // 8

9 Investing in equities: Ways to invest Ways to invest > Investing directly You invest in equities in your own name > Investing indirectly Buy and sell decisions are being made by investment professionals Active funds: aim to outperform the market Passive funds: track an investment index in an effort to provide returns consistent with the overall market > Exchange traded funds Allows investors to gain exposure to the market, without buying shares in individual companies These funds seek to track the underlying index by investing in a basket of securities reflecting that index // 9

10 Investing in equities: How do equities fit into my portfolio? How do equities fit into my portfolio? > Most likely included in the growth part of a portfolio; recommended investment period is a minimum of five years > When considering investing in shares, ask yourself: What is my time frame for investment? What sort of return do I want to achieve? What level of risk am I prepared to take? Will I actively trade shares or take a long-term buy-and-hold approach? Do I want income from dividends or capital growth in the value of my shares? // 10

11 Investing in equities: Value and growth Value or growth investing Value strategies Aim to buy cheap, looking for equities believed to be priced below the company s intrinsic value; look to sell when the share price reaches or exceeds fair value Greater focus on the value of the share than the growth potential of the company Growth strategies Focus on companies that show potential of above-average growth, even if the share price appears expensive Aim to maximise their capital gains, even if this comes at the expense of receiving less income in the form of dividends Manager tends not to follow the crowd or chase after popular shares that may be overpriced For illustrative purposes only. // 11

12 Investing in equities: Lon-short strategies Long-short strategies > Aim to benefit from rising and falling markets by sourcing profits from both positive and negative share price movements > Long investing involves buying a share with the expectation that its price will rise or outperform an underlying benchmark > Short investing aims to profit from a fall in a stock s share price. It involves selling a borrowed share with the expectation that the share will fall in value, and agreeing to purchase the share back at a later date // 12

13 Investing in real estate: Example of a short trade An example of a short trade > An investment manager has been tracking company XYZ, and believes its share price is overvalued Source: AMP Capital. For illustrative purposes only. // 13

14 Investing in equities: Market indicies Market indices > Equities are grouped in indices on share markets, by size and by sector. Index S&P/ASX 200 S&P 500 The Dow Jones Industrial Average The Nasdaq composite Description The investable benchmark for the Australian equity market. The S&P/ASX 200 is comprised of the largest 200 companies listed on the Australian Securities Exchange by market capitalisation* Includes 500 of the most widely traded shares in the US. It covers about 70% of the market s total value Price weight average of 30 of the most influential companies in the US which represent about one quarter of the value of the total market. It does not represent small or mid-size companies Broad based market capitalisation weight index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market * Market capitalisation is calculated by multiplying the number of shares in circulation by the prevailing share price // 14

15 Investing in equities: Performance Investing in equities over longer periods improves the probability of a positive return * Source: History and the Australian share market, Global Financial Data, AMP Capital, January 1900 July Past performance is not a reliable indicator of future performance // 15

16 Investing in equities: Psychology The psychology of investing Emotions, not logic, can rule the average investor s decision making Investors who go against the sentiment early can make the most money For illustrative purposes only // 16

17 Investing in equities: Measuring performance Measuring performance > Some of the key metrics that investment managers commonly use to evaluate whether a particular share appears to be a good investment opportunity include: Earnings per share (EPS) Price-to-earnings (P/E) ratio Price to Book ( P/B) ratio Dividend yield Return on equity (ROE) Real rate of return // 17

18 Investing in equities: Understanding risks Risks > Share markets are subject to volatility, which is the result of large fluctuations in the value of shares > There are specific risks relating to the shares of individual companies including disappointing profits and dividends, management changes or reassessment of the outlook for the company or industry > International equities are also influenced by global economic trends and individual country risk (e.g. political environment and laws); these investments also carry currency risk for Australian investors // 18

19 3 The importance of active management // 19

20 The importance of active management The importance of active management > As markets are not always efficient, with the right research and methodology, a good manager can identify undervalued securities to invest in, thereby adding excess return over the performance benchmark > Active managers can play a valuable role navigating portfolios through an environment of heightened market volatility > Some active managers will be more successful than others // 20

21 Important note While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN , AFSL ) and AMP Capital Funds Management Limited (ABN , AFSL ) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided. // 21