Income investors should avoid highly concentrated areas such as FAANGs and seek to diversify instead, according to Plato Investment Management.
Speaking in Sydney on Tuesday, Plato Investment Management senior portfolio manager Daniel Pennell cautioned against a high conviction approach to investing.
“We want to always get away from that concentration, and really diversification is the solution. You [then] see concentration as the risk – the two go hand in hand,” Mr Pennell said.
He added that Plato had developed a “process” over the years to pick well-known, ‘huge name’ stocks as well as stocks that “a lot of people would never have heard of”.
“It’s really important for us that we offer that differentiation … otherwise you’ve got a whole heap of funds that perform well and then at the same time don’t perform well”.
FAANG – Facebook, Apple, Amazon, Netflix and Alphabet's Google – stocks don’t generate yields, he said. “We’re not really in them, so we want to offer a different way to put faith in IT.”
Plato managing director Don Hamson added that the “high growth stocks” were looking “incredibly expensive”.
“So relative to where they normally sit, the FAANGs … and all those sorts of things, are in incredibly high multiples to where they normally sit.
“So normally growth stocks, [or] high P/E stocks, are obviously going to have higher P/Es than low P/E stocks. But the difference is: the low P/E stocks look about right; the high P/E stocks are probably around 40 per cent higher than what they normally trade at,” Mr Hamson said.
He added that next year’s risk could be a falter in “growth stocks” which would “drop back dramatically”.
“The value stocks might actually stay where they are, which is exactly what happened in the internet bubble 18 years ago when it deflated – you had these extremely high multiples come down to earth.”