It's pretty disappointing as an investor when a stock you own fails to at least do as well as the broader market. The fact of the matter is that by necessity 50% of stocks underperform the market. With those sorts of odds it's clear why it is so hard for investors to beat an index fund and why Warren Buffett counsels that for most investors an index fund is the most prudent path to take.
For investors in wealth manager AMP Limited (ASX: AMP) the past 1, 5 and 10 year holding periods have been anything but value adding. While the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) has gained approximately 6%, 44% and 60% over each of those time frames, AMP's share price has returned -7%, 0% and -8% respectively.
Despite the weak past performance, there are reasons for shareholders to expect that there are better times ahead…
1) The weak share price has increased the appeal of AMP's fully franked dividend yield. Currently the stock is trading on a forecast yield of 4.8% which should support the stock price. While this yield isn't as impressive as Telstra Corporation Ltd's (ASX: TLS) 5.4% yield, the potential for capital gains from AMP appears higher.
2) AMP's vast customer base and market leading financial planning network means the firm is well placed to benefit from the continued rise in superannuation and especially future increases in the contribution rate.
3) A major cause of AMP's recent struggles has been increased claims paid on its income protection insurance products. In hindsight it could be argued that AMP mispriced the insurance premiums on these products by failing to accurately forecast the level of claims. Management looks to have learnt its lesson and has been working hard to fix the Wealth Protection business – investors can expect improvements in the coming quarters.
