More analysis needed on company fundamentals
Many Australian investors are not doing analysis of company fundamentals in relation to high yields, according to Fidelity global equities fund manager Amit Lodha.
Speaking at a Fidelity roadshow, Lodha said many people failed to analyse the reasons behind high yield shares.
"Is that yield coming from cash flows, or is it coming from capital expenditure? Is it coming from future growth, or is it coming from capital? Is the company re-investing enough to sustain itself over a period of time?" Lodha asked.
A company can be high yield but leveraged 20 times, he said.
Not enough investors are asking the right questions, he added.
Companies with high yields must have good fundamentals that make them capable of increasing yield over a period of time, Lodha warned.
That yield must come out of cash flow, not capital expenditure, he said.
Investors have to be careful of the quality of growth in domestic listed companies, according to portfolio manager Kate Howitt.
The best reinvestment that a company can make is small incremental investment in its area of expertise, she said.
Two thirds of listed companies are only generating returns close to their cost of capital, Howitt said.
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