Let’s say you’re a hard working professional footballer. You know the offside rule, live in the gym, practise hard. Then on game day, your first pass goes astray and you realise the pitch is 10 yards wider and 10 yards shorter than regulation. All your feel, touch and tactics are thrown off.
That’s what it’s been like for many “common-sense” investors since the GFC. All the disciplines that worked for decades – buy quality, pay a reasonable price, avoid companies weighed down by debt – were thrown out the window. How could they not be when central banks all over the world are printing money, slashing interest rates and where investors in Japan and German are buying bonds so they can lose money in comfort?
“… at the turning of the tide”
Finally – as Gandalf would say – the tide is turning. The disciplines mentioned above – investment theorists call them ‘value investing’ – are coming back into vogue.
Since, but not entirely because of, the election success of Donald Trump, US bond rates have started to rise, deflation fears have eased and people have begun to question the value of central banks pushing on the string of quantitative easing.
Rates and prices
Normally, rising interest rates are not welcomed by share investors. Yet as some economists have started to point out, when rates are “normalised”, assets get priced more rationally – on their quality, sustainable earnings and relative value rather than “potential” growth or artificial short-term income potential.
Naturally that doesn’t mean all share prices reflect the true value of the underlying asset – but it does mean that the pricing and overall market dynamics isn’t so distorted by a central banks GFC remedy that’s past its use by date.
Not so HIP anymore
In Australia we have seen this in what some people call the HIP sectors – health, infrastructure/utilities and property. In early 2016, with rates at artificial lows, investors crowded into these stocks looking for their high yields. At one point (May 2016) infrastructure stock Transurban was trading on a P/E of 75 times its estimated 2017 earnings. It’s down around 20% since its July 2016 peak (as at January 6, 2017).
The end of the easy money era means sharemarket investors are back to looking at the prospects of individual businesses – rather than judging thematics like central bank moves or geopolitics.
That’s a world where common-sense investing is rewarded – and where companies like Perpetual who have been value investors for over 50 years – can potentially add real value to investors’ portfolios.
Are you a common-sense investor?
Perpetual’s Industrial Share Fund has been managed using value investing principles for over 50 years. We’ve collected fund manager insights from Portfolio Managers past and present in From Decimal to Digital – Lessons from 50 years of investing in Australian Shares.
Visit the Industrial Share Fund page to learn more and find out how to invest
This information has been prepared by Perpetual Investment Management Limited ABN 18 000 866 535, AFSL 234426. It contains general information only and is not intended to provide you with financial advice.
LESSONS FROM 50 YEARS OF SHARE INVESTMENT
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