With the Australian economy looking a bit uncertain at the moment, I can understand the desire to find defensive businesses.
Due to the nature of the share market, it’s impossible to find businesses that will never suffer the occasional share price declines, but I do think it’s possible to find businesses that offer different performance potential compared to the general Australian economy or the ASX.
These are two of my favourite ideas:
Magellan Global Trust (ASX: MGG)
This is a high-performing listed investment trust (LIT) which is operated by Magellan Financial Group Ltd (ASX: MFG). The trust invests in the best overseas shares that it can find which generate earnings from the entire world, or at least from the USA.
Magellan Global Trust’s largest holdings include Alphabet, Apple, Facebook, HCA Healthcare, MasterCard, Microsoft, Oracle, Reckitt Benckiser, Starbucks and Visa. Not only are these businesses high-quality, but it’s hard to see any of them disappearing any time soon.
Quite a few of Magellan’s holdings are defensive, but it also holds a decent level of cash. At the end of May 2019 it had 12% of the portfolio as cash. The cash is a great short-term defence against downward market movements.
The Magellan Trust has outperformed the MSCI World Net Total Return Index (AUD) after fees over the past month, three months, 12 months and since inception. It’s hard to argue with that record.
It targets a 4% distribution yield, which is solid in this era of lowering interest rates.
Duxton Water Ltd (ASX: D2O)
Duxton Water owns water entitlements and seeks to benefit from them through both the annual lease income and the long-term growth in value of the water.
Water values have grown significantly over the past couple of years with rainfall being significantly lower than average.
Duxton Water has been busy leasing some of its entitlements so that now 48.5% is leased with a weighted average lease expiry of 3.58 years with a number of irrigators across a number of different industries. The company hopes to increase the proportion of the portfolio under lease to between 55% to 60%.
Over the past 12 months Duxton Water has generated a return of almost 28% which accounts for the change in net asset value (NAV) per share and franked dividends.
The company is steadily growing its dividend, and for the next 12 months potentially offers a grossed-up dividend yield of 5.5%.
I believe both of these businesses are attractive, defensive long-term investment ideas. At the current prices I’d say Magellan could be a slightly better buy due to its global investment mandate. It could be better to buy Duxton Water after a rainy year.