Why we own Harvey Norman
Harvey Norman’s sales boomed during COVID-19 as everyone stocked up on desks, IT equipment and big screen TVs to survive lockdown. However, it’s been a much tougher ride for the high-profile retailer since then.
Since Harvey Norman was added to the direct equities component of the Cornerstone Multi-Asset and Strategic Index Managed Portfolios a year ago, its share price has fallen more than 6%1. But that’s just part of the story. The healthy dividend paid by Harvey Norman has offset that paper loss to such a degree that our holding has notched up a 4% total return. (A total return equals the profit or loss from a share price, plus any dividends paid by the company).
Its share price doldrums are the result of several issues. Consumer spending has dropped from the highs of COVID-19, particularly as the cost of living bites. A relatively strong Australian dollar has also eaten into earnings from Harvey Norman operations in Europe, Malaysia and Singapore. That’s just because it gets less in the hand when those foreign earnings are converted back into our currency, compared to when the Aussie dollar is lower.
So why do we think the company remains a suitable fit for our 30-share parcel of holdings? The key point to understand is that the portfolio is created by a quantitative model which uses algorithms to pick assets.
This number-crunching model chooses holdings based on stock characteristics our research shows are likely to deliver returns over the long term.
These five characteristics – or “factors” in technical terms – are value, quality, low volatility, momentum and growth.
The basic principle is that a selection of shares which each display some of these characteristics can be brought together in a portfolio which outperforms over time.
We’re not alone in using this kind of “multi-factor” model – it’s a widely-used practice in the funds management industry.
We own Harvey Norman because it has some “value” characteristics and some “quality” “characteristics. For example, it trades at a much lower price-to-earnings (PE) ratio than other local shares – which generally indicates a stock is good value.
1. Total return for Harvey Norman includes franking credits. Source: Bloomberg.
Cornerstone Financial Group Pty Ltd is a wholly owned subsidiary of Invest Blue Pty Ltd (ABN 91 100 874 744) which is an Authorised Representative and Credit Representative of AMP Financial Planning Pty Limited ABN 89 051 208 327, Australian Financial Services Licence and Australian Credit Licence No. 232706.
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Russell Investment Management Ltd ABN 53 068 338 974, AFS Licence 247185 (RIM) is the Investment Manager of the Cornerstone Managed Portfolios.