The wealth manager reported that in recent years it has observed an increasing number of ‘cherished holdings’ in portfolios, shares in companies that are held for emotional or historical reasons rather than on the basis of sound fundamentals.
Richard Champion, deputy chief investment officer at Canaccord, explained: “You could have an emotional attachment to a company because of a family connection or maybe you worked there yourself. Another common occurrence is people who inherit a holding from a relative or are holding on for tax or legal reasons."
Some companies historically were very good investments, but the world changes, Champion said adding: "It’s worth paying the tax to get that portfolio diversification, as the alternative is far worse."
“The trouble with a prized portfolio,” the firm posited “is that your investments can often get skewed towards a single company – and the risk is that sentiment gets in the way of judgement. All too often, investors stay in love with things that stopped being good for them a long time ago – what was once ‘the bomb’ has now bombed, and pretty badly at that.”
Instead, investors have to “be prepared to act decisively” and dispassionately and reassess their portfolios regularly.
Trouble on the horizon
‘Cherished holdings’ become easier to spot during waves of dividend cuts, which have a tendency of exposing problems in companies. It’s no coincidence that the sectors in which significant dividend cuts have occurred over the last year (such as mining, banking and food retail) have experienced big share price falls, making their companies more vulnerable, said Campion.
You may have a ‘cherished holding’ on your hands if the company in question suffers from dividend security issues, balance sheet weakness and if it has switched from generating strong returns to weak returns, according to Canaccord.
Canaccord named GlaxoSmithKline, Marks & Spencer and Vodafone as several recent examples of ‘cherished holdings’ that are ‘undermining the performance of investors’ portfolios’ and could be prime candidates for future dividend cuts.
All three companies have had a rough time over the last decade, characterised by falling earnings per share and their failure to reinvent themselves to keep up with more robust competitors.
Identifying ‘cherished holdings’ before they become a serious problem is paramount, said Champion: “We’re absolutely adamant that when we see these threats, we want to get them out. Even if that means a sharp reassessment for our outlook in the company involved.”