Ask A Fund Manager
The Motley Fool chats with the best in the industry so that you can get an insight into how the professionals think. In this edition, U Ethical chief investment officer Jon Fernie picks three ASX shares that will play great defence and are ethical to boot.
The Motley Fool: How would you describe your fund to a potential client?
Jon Fernie: We’ve got the U Ethical Australian Equity Trust — they’re style agnostic funds and managed to provide investors with capital growth and income. And we integrate ESG and ethical considerations and fundamental analysis.
We’re mainly invested in large-cap stocks and believe that investing in quality ethical companies with reasonable valuations will deliver competitive returns over the longer term.
Probably the other thing to add is, as an ethical fund manager, we screen out stocks which we view as harmful to society in the environment. Then we also look to hold stocks that have a positive impact and also take an active stewardship approach through proxy voting engagement with companies and also industry collaborations.
MF: Do you think the recent power crisis in eastern Australia has acted as a bit of a wake-up call for the underinvestment in renewables?
JF: Yeah, definitely. You can see that there’s not just what’s happened within Australia, but obviously more broadly on a global scale with the conflict in the Ukraine, and you can see the dependency on fossil fuels in Europe. That probably highlighted the need for energy independence, but also that transition to renewable assets.
Hottest ASX shares
MF: What are the three best ASX share buys right now?
JF: The first one that we highlight is Brambles Limited (ASX: BXB). We see this logistics business as well managed with relatively defensive earnings. They’ve got a leading market position globally and trade on reasonable multiples.
I think the market’s a bit concerned about a plastic pallets trial that they’re doing with Costco Wholesale Corporation (NASDAQ: COST), and we think that’s a bit overdone.
Positively, we’ve seen a significant drop in lumber prices, which is a key input for them, and the stock’s also potentially a takeover target and has had some preliminary discussions with a suitor.
MF: It’s held its value pretty well this year, hasn’t it?
JF: It has, partly because of the rumours, and it’s not as down as significantly as some other stocks in the market, but it’s still, over the last 12 months, down circa 10%.
MF: I didn’t realise until you mentioned it just now that lumber prices are actually down. It must be the only commodity that’s down this year.
JF: Yeah. They’ve come off significantly.
MF: Why is that? Is there an oversupply?
JF: Yeah. I think that there’s… concerns with housing in the US, and that’s a key driver of lumber prices.
MF: And the second-best buy?
JF: Second one is Suncorp Group Ltd (ASX: SUN). We continue to like the general insurers at the moment. We’ve obviously seen a big spike in terms of longer term bond yields, and they’re going to be key beneficiaries of that, given their investment portfolios.
While claims inflation is likely to remain high, they’ve also seen really strong premium rate increases across most categories. And if you take a stock such as Suncorp, they’re now trading on a forward dividend yield of close to 6%.
MF: 6%? Wow, that’s not bad. The insurance sector loves it when interest rates go up, doesn’t it?
JF: Yeah, they’re pretty leveraged to the rise in interest rates, given their investment portfolios.
MF: Your third pick?
JF: The third one is Sonic Healthcare Limited (ASX: SHL). So a well-run business with diverse global operations and it hasn’t been sold off as dramatically as some other stocks in the market — off [about] 10% in the last month.
And we’re going to see their earnings normalised [after the company] benefited a lot from the COVID PCR testing, and that’s going to drop off. But we’re also going to see an improvement in their core business volumes and think that, generally, their earnings are going to be pretty resilient if we see a weaker global economy.
MF: I see that one’s also a dividend payer as well.
JF: Yeah. But they’re not quite as attractive as Suncorp’s — their dividend yield is just below 4% at the moment.