After uncertainty and volatility that has plagued financial markets for many years, there may finally be a shift underway from fear to hope as investors are becoming more accepting of risk.
This is the message Hyperion Asset Management’s Managing Director, Tim Samway, delivered during his keynote speech at a series of luncheon presentations for financial advisers that are taking place in all major cities around Australia throughout December.
According to Mr Samway, this new investor outlook is seeing a shift away from cash and other non-growth assets as investors seek both good returns and preservation of capital.
“When investors are in ‘fear’ territory, they tend to stay overweight in cash. However, as investors seek more volatile asset classes like equities they must look for the quality stocks,” said Mr Samway.
But according to Mr Samway some investors are likely to still be distracted by short-termism, a tendency for investors to shorten the evaluation periods. Something that Mr Samway says is a killer of investment returns.
Mr Samway went on to explain that the key to providing both growth and capital preservation is due diligence. “The focus on due diligence for capital preservation rather than trusting diversification puts quality investing in a different league. At Hyperion our unique investment philosophy and process takes a bottom up approach to investing and allows us to identity high quality companies that will always outperform over the long-term. There is no substitute for quality.”
Mr Samway continued, saying that in order to pursue quality this means ignoring the benchmarks which are made up of poor quality businesses. The key, he says, is to focus on the less mature companies which offer better growth in earnings.
By way of example, Mr Samway cites quality companies such as, SEEK, REA, Carsales.com, Trade Me and Domino’s Pizza.
“Around 25 per cent of Hyperion’s portfolio is invested in companies that are exploiting the secular transfer of sales from traditional forms to online. Their valuations are above market but we think that the drivers of their long term growth have not been fully appreciated by the market. There is also opportunity for market re-rating in the future but more importantly there is the opportunity for these companies to continue to deliver 20%+ earnings per share growth,” said Mr Samway.
Mr Samway suggested that the wealthy would be the early movers when the markets recover. Referring to the phenomenon where gamblers take greater risks with their winnings (referred to as the house money) compared to the risks they will take with their original stake.
He noted that, “The house money effect kicks in after a period of market recovery. Investors are happier to take more risk when they are making gains from their initial financial starting point. Investors with more money and a smaller gap between their goals and their present financial situation will be the first to play with the house money when the markets recover.”