Joel Gray
“Jittery investors are struggling to respond to market volatility and must accept that capital preservation is now a real risk.”
This is the view of Joel Gray, Portfolio Manager at award-winning Australian equities manager Hyperion Asset Management, who yesterday said that continued subdued global economic data has vindicated the US Federal Reserve’s decision to keep rates on hold, and that markets remain jittery as a result.
“Staying focused on fundamental drivers of return can be difficult in periods of uncertainty and market volatility, yet it is actually more important than ever when the market becomes unpredictable.
“A rising tide may lift all boats, but as the tide recedes, only those companies with a robust and sustainable business model will preserve investors’ capital, and continue to perform into the future,” he said.
Hyperion’s view is that all businesses should be assessed from the point of view of protecting long term returns, and that there are four key, unchanging attributes which define a successful company and translate into outperformance for investors.
These are:
- A high return on capital, in other words, efficient and profitable use of capital.
- The ability to grow organically, without the use of excessive debt, and without falling prey to investors’ desire for high dividend payouts but rather re-investing into the business.
- A sustainable competitive advantage, and hence control over pricing.
- A predictable earnings stream.
Mr Gray said that only businesses which exhibit these attributes will continue to do well, and that attempting to circumvent rigorous due diligence and stock-specific research in favour of simple market metrics can be dangerous.
“A good example of what I’m talking about is the price-earnings (PE) ratio, which measures a company’s share price relative to its per-share earnings.
“For many investors, this ratio provides buying guidance, and in theory, a low PE ratio can indicate that a company is undervalued, and prompt them to buy. Unfortunately, the experience of the global financial crisis proved that buying solely on the basis of a low PE can have disastrous results.
“Except in extreme pricing environments, business risk trumps pricing risk,” Mr Gray said.
In conclusion, Mr Gray said that it was understandable that investors are concerned about market volatility, particularly given the subdued outlook for global growth, the slowdown in China and the uncertainty surrounding the timing of the US Federal Reserve’s decision on interest rates.
“There’s no question that volatile markets throw up both opportunities and risks. At the same time, capital preservation and performance over the long term will always stem from the strength of the underlying business and not on short term-market movements.
“The good news is that investors who are able to keep their head and maintain a steely focus on the fundamental quality of the businesses they invest in need not fear capital loss in the short term.
“And better still, they will be rewarded with outperformance in the long term,” Mr Gray said.