Month: November 2024

The World According to GARP ETF

Slack Investor has never seen the film, though well reviewed, but he did struggle through the complex book by John Irving in the late eighties. His interest in GARP has been rekindled by a new ‘Smart Beta’ ETF that has been floated by Global X in October 2024. This one is fresh!

Smart Beta refers to an enhanced indexing strategy that seeks to exploit certain performance factors in an attempt to outperform a benchmark index – Fidelity

This is good … is it possible to get the benefits of passive investing with some of the advantages of active investing strategies? Can you have low fees with better performance than benchmarks? Perhaps all the hard work in selecting growth stocks can be done with a financial selection algorithm and Slack Investor can get back to the couch.

Global X S&P World ex Australia GARP ETF

Exposure to companies with robust earnings growth and solid financial strength trading at reasonable valuations – Global X S&P World ex Australia GARP ETF

Growth at A Reasonable Price (GARP) … in an ETF … am I dreaming? Is this too good to be true? Ahh … there is a management fee. But, it’s 0.3%. Not bad for a fund that has some selection smarts plus international exposure. There is a lot to like about this ETF.

Selection Process for GARP ETF

The GARP ETF tracks the S&P WORLD EX-AUSTRALIA GARP INDEX using a rules based stock section process. From the global shares universe, all companies are assigned a Growth score for their previous 3-yr growth. Then there is a Quality score that combines company assets to debt ratio, return on equity (ROE), and the earnings to price ratio (Inverse of P/E Ratio).

Once the ranking is complete, shares are selected that score highly in both categories and some restrictions on exposure to individual shares and sectors is applied – Mark LaMonica, Morningstar

So, by weeding out some of the companies that are ‘unreasonably’ priced the top 250 global companies are selected according to GARP principles. The price (P/E Ratio) filter should help mitigate the portfolio downside in a market downturn.

Performance

The GARP ASX ETF has only been running a month but Morningstar has gathered some data based upon the GARP principles over time.

GARP seems to perform better than the S&P 500 in some time frames, particularly in the periods that include a share crash. The 5-yr period includes the 2020 ‘Covid Crash’ and, the 20-yr frame includes the  2007–2008 financial crisis (GFC). But these are just index values – without fees. When you factor in the GARP management fee of 0.3% compared to the iShares S&P 500 ETF (IVV.ASX) fees of 0.04%, the outperformance of GARP does not look as good.

Top 15 Holdings GARP

GlobalX GARP ETF top 15 holdings

There are a lot of tech companies in here but also some consumer discretionary stocks. Some of the more expensive (high P/E ratios) tech companies must have been filtered out by the GARP process. It is only when Slack Investor takes a closer look at these companies that he starts to get ‘cold feet’. Overall, Slack Investor thinks this is a good package to get exposure to reasonably priced growth companies. Two things that hinder Slack Investor from investing are :

  1. The overlap in holdings to some of the ETF’s that he already owns. e.g. Betashares Nasdaq 100 ETF (NDQ.ASX) and Betashares Global Quality Leaders ETF (QLTY.ASX) – a purchase of this ETF would not really add to the diversity of his share ownership
  2. In the the top 15 holdings, there are 3 Petrochemical companies – Exxon, Chevron and Shell.

Slack Investor will admit to some hypocrisy here. He owns a 15-yr old petrol driven car and regularly uses jet fuel to get to far away places. On the plus side, his roof is making renewable energy. However, the world is getting hotter and he’s aware that we must continue to work toward phasing out the use of fossil fuels. Are you listening Donald?

Slack Investor is a part owner of all types of companies through index and broad market ETF’s (e.g. VGS, STW, S&P 500 Index, etc). However, he has a ‘piddly’ moral stance of trying not to bundle into the Slack Portfolio any ETF’s that actively select higher proportions of Tobacco, Gambling or Fossil Fuel companies.

Is this making a better world? Probably not. But, leave Slack Investor alone to pursue his token activism – no harm done. Besides, it’s likely to be better than doing nothing. This is a personal thing and, Slack Investor encourages all investors to take on any sort of investment stance that feels right for them – providing it is profitable in the long term.

Lessons in Going Down – and October 2024 – End of Month Update

Dramatic falls in a stock price … are not very nice. However, they are part of the game when investing in growth stocks. These falls usually come during reporting season. This is sometimes known as ‘confession season’.

ASX-listed companies are all required to report their earnings within two months of June 30 and December 31. The half-year reports are usually floated into the market during August and February – and this is the main time that the confessions come in. ASX companies can also give quarterly updates and, they are strictly bound by ‘Continuous Disclosure’. This is where they are obliged to promptly announce any new information that may affect the stock price.

Once an entity becomes aware of any information concerning it, that a reasonable person would expect to have a material effect on the price, or value of the entity’s securities, the entity must immediately tell ASX that information – ASX Continuous Disclosure Guide

When bad news comes in, there will be an announcement and there is usually a fall in stock price. Most of the time, bad news comes in the form of an earnings forecast not being met – an earnings downgrade. It is time for Slack Investor to get off the couch.

Slack Investor is not a ‘Day Trader’ and, also Slack! This means that he doesn’t get wind of a dramatic fall in one of my holdings till the end of the day. Sometimes it is even days after the event.

This gives him time to think about what to do next, and there are two schools of thought.

  1. Accept the loss and sell the stock to employ your funds elsewhere – as bad news often comes as a series.
  2. Reassess the numbers on the company and ask ‘Would you invest in this company today at the current price?‘

Experience tells Slack Investor that he is usually better off with option 1 – and investing the proceeds with a, hopefully, price increasing stock.

Recent Case Studies from the Slack Investor Rogue File

Megaport (MP1)

1-YR Chart Megaport – From Yahoo Finance

This was a sudden fall from grace as it was bought in August 2024. There was an earnings downgrade and it was an easy decision to get out – as no ‘love’ had been developed for the company. Slack Investor was wrong on his understanding of this companies earnings growth.

Webjet (WEB,WJL)

This is a complex one. Slack Investor recently bought Webjet (WEB) at around $9 on the basis of their fast growing internet business WebBeds – and its seemingly good projected numbers. In September 2024, Webjet went through a demerger that split the business into its retail Travel Agent (Webjet Group – WJL.ASX) and its global Business to Business booking site, mostly WebBeds, (WEB Travel Group – WEB.ASX). Webjet announced a profit warning on 14th October and the share price plummeted 35% in a day. Whoops!

1-YR Chart WEB Travel Group – From Yahoo Finance

Slack Investor planned to sell WJL, the retail travel agent part of the business (not a high growth sector), and keep the growing (+22% CAGR) demerged WebBeds (WEB). This might be a good business one day – but the big 35% drop spooked him and he sold them both for a combined price of $4.80. Ouch!

Codan (CDA)


5-YR Chart CODAN – From Yahoo Finance

Slack Investor thinks this is a good growing business but they had some revenue shortfalls that caused a 19% 1-day price drop in 2022. He probably should have got out then. However, he has grimly stuck with them and, after 2 years of falling stock prices, they seem to be on the right track. It remains in his portfolio.

Dicker Data (DDR)

5-YR Chart Dicker Data – From Yahoo Finance

After a 16% fall in a day in May 2024, Slack Investor reassessed the numbers on this stock – a projected 2026 PE of 16 and an ROE of 39%. The numbers looked pretty good – and he held on. However, the last two years of revenue growth have been 2% and 4% respectively. Slack Investor is not sure what is going on … but this company has not been growing. He sold at $8.69 this week.

Taking a loss … and moving on

This is a real skill – that doesn’t come easily – but is essential for managing a portfolio of growth stocks. Slack Investor is better at this than he used to be. Usually, growth stocks will come with a high Price/Earnings ratio as the future earnings growth will be factored into the price of the stock. These type of companies are particularly susceptible to a rapid decline in price when bad news emerges that might affect future earnings.

  “Some people automatically sell the ‘winners‘— stocks that go up— and hold on to their ‘losers‘— stocks that go down— which is about as sensible as pulling out the flowers and watering the weeds” – Peter Lynch – One Up On Wall Street

Slack Investor tries to adhere to the Peter Lynch philosophy when tending to his garden of stocks. He doesn’t always get these decisions right – but he does find it ‘cleansing’ to get rid of the bad performers. With experience, he has found that, more often than not, if there is a dramatic 1–2 day fall in a stock price (>15%) – it often takes a while to recover! Slack Investor is usually happy to take the loss and move his funds elsewhere. There is ‘opportunity cost’ in staying with a stock that is going nowhere.

Despite these bad performers, he doesn’t beat himself up about them. It is just part of investing. He takes solace that his whole portfolio is up about 8% in the 4 months of this financial year – and he does have good long-term results.

With the money raised from selling the dud investments, he bought into quality earnings with half the proceeds topping up his Supply Network (SNL) holding. The rest went into a new stock that he has been watching for a while – the logistics software business WiseTech (WTC).

The company had a price drop over a saucy scandal involving the founder and CEO Richard White. He resigned and Slack Investor is betting that these private-life dalliances should not interrupt the fine profitability (ROE 2026 20%) and established revenue growth (1-yr 2024 CAGR 20%) of this great Australian company.

1-YR Chart WiseTech Global – From Yahoo Finance

October 2024 – End of Month Update

Slack Investor is IN for Australian index shares, the US Index S&P 500 and the FTSE 100.

All markets drifted down slightly. As many of the big market crashes have occurred in September and October, Slack Investor is always relieved to get past this time of year.

For October, the ASX 200 (-1.3%), the FTSE 100 (-1.5%) and the S&P 500 (-1.0%).

All Index pages and charts have been updated to reflect the monthly changes – (ASX Index, UK Index, US Index).