Avoiding investment own goals

Anthony Aboud

Anthony Aboud

Portfolio Manager
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Watching the stock market often reminds me of an Under 7’s game of soccer. The ball gets kicked to a spot on the field and all the players converge on it. Then someone boots the ball 10 metres away and the same thing happens. ‘Group think’ can result in frustrating games for parents to sit through on Saturday mornings, but for investors the consequences can hurt the hip pocket.

A beautiful game – if you know the rules

Over the last 18 months, I think stock market players (commentators and investors) have been using the wrong ball (latest market theme) on the wrong field (the macro environment).

What really matters – the underlying asset value – has been left in the locker room.

Games are following a predictable path as a result:

First Half Game plan revolves around a theme (Trump Trade, Brexit, Quantitative Easing). Consequences are simplified – if x happens it will be good for markets, if y happens it won’t be.
Half-time Key dates for votes/reports/polls are identified for future trading opportunities. Everyone becomes an expert and opinions converge to a consensus view.
Second Half The results aren’t coming so they bring on a substitute – the next ‘big thing’ grabbing the headlines. This forms the starting line-up for the next match.

Consequences of consensus

I’m very sceptical of consensus macro calls on the popular themes of the day.

Take the resources sector as an example. When I look back on my notes from a year ago, the consensus amongst stock broking strategists was to go short or underweight on resources. After all, the materials sector had fallen 16% in 2015 due to low commodity prices and concerns of oversupply.

Fast forward 12 months and the resources sector has been the best performing sector in the ASX with the S&P ASX Materials sector up 43% over 2016 (well above the average market return of 11.8%). This was driven by a rebound in underlying commodity prices and better cost control from the major resources companies.

In my experience the common view is often the wrong view. Trump provides another recent example – the market consensus was that his election was incredibly unlikely. And if he did become president? Clearly the shock would shatter sharemarkets.

Well Trump did win and after a brief slump markets finished the US trading day higher and have rallied since. So most people were wrong about the outcome of the election and wrong again after they knew the result.

Staying true to your position

We are fundamental bottom-up stock pickers, however there is an element of macro in all the assumptions we make when determining the fundamental value of a company. Another area where understanding the macro outlook is important is for risk management. We need to remain vigilant that we don’t have unintended large macro leanings represented in our portfolios.

Macro investing is challenging at the best of times but is even more challenging in the current environment where there is a lot of noise. We always stay informed about the macro environment but do not base our investment decisions purely on our macro forecasts as this isn’t where our competitive advantage lies.

If you don’t have time for the small things, you won’t have time for the big things.

Richard Branson

Our advantage is in fundamental stock picking – using our experience and networks to identify individual companies that represent good value. We find situations where there is disparity between what the share price is assuming and what is happening in the real world. This could be a stock that is out of favour because it doesn’t suit the macro theme of the day, or where the market is missing a key angle in its analysis of the company.


A clear game plan in 2017

2017 will offer its fair share of macro plays and predictions – like every year before it. We’ll pay close attention to consensus thinking to manage risk and challenge valuations. But our primary focus will always be on finding value – companies with solid balance sheets, competent management and positive outlooks but with valuations that don’t reflect that reality.

Success is no accident. It is hard work, perseverance, learning, studying, sacrifice and most of all, love of what you are doing or learning to do.


This information has been prepared by Perpetual Investment Management Limited (PIML) ABN 18 000 866 535, AFSL 234426. It is general information only and is not intended to provide you with financial advice or take into account your objectives, financial situation or needs. You should consider, with a financial adviser, whether the information is suitable for your circumstances. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. The product disclosure statement (PDS) for the Perpetual SHARE-PLUS Long-short Fund, issued by PIML, should be considered before deciding whether to acquire or hold units in the fund. The PDS can be obtained by calling 1800 022 033 or visiting our website www.perpetual.com.au. No company in the Perpetual Group (Perpetual Group means Perpetual Limited ABN 86 000 431 827 and its subsidiaries) guarantees the performance of any fund or the return of an investor’s capital. Past performance is not indicative of future performance.


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