The big investment lessons of the last few years
29 January 2014 - Patrick Cairns
Top fund managers discuss what uncertain markets have taught them.
Cape Town – Since the financial crisis of 2007-2008 the world's stock markets have moved in extreme and often surprising ways. Despite sharp downturns, the gains have been more pronounced than most could have foreseen in the dark days at the end of 2008 and the start of 2009.
On top of this, monetary policy in much of the developed world has artificially suppressed bond yields and kept interest rates at or near zero for much longer than many would have thought possible. As a result, real interest rates in many of the world's major economies have been negative.
All in all, it has been a mad ride for fund managers. There have been great opportunities, but also many pitfalls. And along the way there have been many lessons to be learnt.
For Roger Williams, manager of the Centaur Flexible Fund, the most significant of these is that in the midst of such market uncertainty it becomes even more important to act with courage.
“Market turbulence throws up great opportunities, but you need to act quickly and with conviction to exploit these gaps,” he says. “Failure to do so can result in substantial returns left on the table.
“It is in these moments where a good valuation system, the ability to act quickly and experience are particularly valuable. At Centaur we have read the market exceptionally well, but could have done even better if we backed some key calls with bigger positions.”
It's probably easier said than done, but Neville Chester, senior portfolio manager at Coronation Fund Managers, believes that sticking to their convictions and ignoring short term noise was an important part of the strong performance of Coronation funds over the last few years.
“The period 2007 to 2009 vindicated our view on focusing on the long term no matter how much pressure there is to conform to the popular story of the day,” he says. “In 2007 and early 2008 commodities and construction were the ‘hot’ sectors and despite record high valuations they continued rising, while we held very little of these positions for our clients.
“There was intense pressure on us during this period of under-performance, but we remained focused on valuations and saw the vindication as markets cracked in the second half of 2008. This positioned us well to aggressively buy commodities in 2009 because they became very cheap based on long term valuations when the consensus view had changed to sell them.”
This point is echoed by the head of the investment team at 36ONE, Cy Jacobs:
“For us, we learnt the importance of investing for the long term in companies that have a sustainable dynamic business model that can continually innovate and create value,” he says. “There is no substitute for long term investing in quality companies that are well run and that have structurally well-positioned businesses that can sustain growth, and ultimately return value to shareholders.”
For Ricco Friedrich from SIM Unconstrained Capital Partners and co-manager of the SIM Value Fund, this also means not trying to be too clever.
“Inflections occur over extended periods and the slow recovery in economic growth since the collapse in 2009 is testament of this,” he says. “So don’t try and be smart in timing the swings and roundabouts. Rather focus on the bottom up stock fundamentals and if you pick good business and pay a fair price, the operating performance of the company will ultimately be reflected in the share price appreciation.”
Shaun Le Roux, manager of the PSG Equity Fund, reinforces this point:
“If anything, the last few years should have taught many investors just how unpredictable macro is,” he says. “Cast your mind back to mid-2012 when Europe was imploding and Spanish and Italian ten year bond yields were above 7%. At the time none of the so-called experts could see a way out for Europe and yet today we see the same yields at less than 4%.
“At PSG Asset Management we claim no ability to predict macro outcomes and focus all our attention on the bottom up risks and returns for the individual assets that we own. This has served us very well over the past few years.”
Perhaps most significantly, Friedrich adds that the last few years have taught fund managers that they have to be flexible.
“We've seen that being a contrarian has no guarantee of being successful,” he says. “One needs to keep an open mind and a good sense of humour. Sometimes the facts change and the fundamentals of a company may be worse than expected. If there is no clear indication that they will improve in the near term, it’s probably better to sell.”