Does the top 100 still offer fertile hunting grounds for a geared share strategy?

The ASX100 is a ripe hunting ground for investors looking to gain access to Australia’s largest and most influential companies across a diverse range of sectors. It is a universe where brokers and fund managers trip over each other looking for opportunities however for investors with a high-risk profile, a geared share strategy, where wins and losses are magnified, there may be advantages.

Borrowing to invest in shares is less well known than borrowing to invest in property. This approach, known as gearing, can offer higher returns for investors with a long-term investment horizon, higher risk profile and, who can cope with short-term volatility. 

Gearing is an opportunity for investors to lever up their invested capital with borrowed funds. It increases an investors’ risk because it has the potential to accelerate both returns and losses.

For example, in a geared share strategy, an investor may invest $45, and the strategy borrows $55 to expand that position size up to $100, offering the investor the full returns and losses on that $100 invested.

Another key advantage of a geared share strategy is that investors access franking credits across the whole portfolio, including the amount initially invested and across borrowed levels too. 

The magnification of returns and losses in a geared share strategy highlights the need for active stock picking to construct a portfolio of quality companies that can operate through all market conditions.

The ASX100 offers an ample selection of investible companies across a range of sectors that meet this criterion for resilience. At First Sentier Investors, we look for high-quality companies that have strong growth runways, that have demonstrated an ability to operate through different market conditions and that have a balance sheet to fund them through these periods. We also invest in stocks that are suitable for a geared portfolio, such that it is not a geared version of our other funds.

Significantly these company’s shares tend to be more liquid, being exclusively in the ASX100, which is important when managing a geared strategy. It allows us to access greater liquidity so that when the market falls, portfolio holdings can be quickly liquidated to reduce borrowing by the fund, and similarly when the market rises, capital can be deployed quickly.

To gain an edge in the much-examined ASX100 hunting ground, we consider a range of factors that can affect a company including microeconomic, ESG, accounting, macroeconomic and financial factors. Much time is also spent talking to company management, competitors (you probably learn more about Woolworths talking to Coles than talking to Woolworths), customers, suppliers, regulators, to fully appreciate the risks and opportunities when investing our client’s funds. The learnings and insights gained from meetings with company management assists us in making more informed decisions when deciding to invest (or divest) in a particular company.

We still see the ASX100 as an exciting place to invest. Although the ASX has large and successful banks, insurers, miners and supermarkets, there are also quality opportunities in other areas, namely in Xero and WiseTech (software), ALS Limited (testing), Brambles (pallet pooling), Aristocrat Leisure (gaming), Goodman Group (property) and Carsales.com and REA Group (online classified)*.

David Wilson is Deputy Head of Australian Equities Growth at First Sentier Investors and Portfolio Manager of the First Sentier Australian Geared Share Strategy. 

*Reference to specific securities (if any) is included for the purpose of illustration only and should not be construed as a recommendation to buy or sell the same. All securities mentioned herein may or may not form part of the holdings of First Sentier Investors’ portfolios at a certain point in time, and the holdings may change over time.

*Very high risk. As the strategy borrows to invest, there is potential for significant losses in falling markets. The strategy is intended for investors with a high-risk appetite and a minimum 7-year investment horizon.