OpinionDec 18 2017

Market duality means you should play the long game

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Market duality means you should play the long game
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There is an interesting duality at work in capital markets. On the one hand, short-termism prevails.

 A fixation on maximising shareholder returns has led many companies to prioritise cost cutting, share buybacks and earnings, arguably at the expense of investing for long-term growth.

This is evident in the approach followed by 3G Capital with Kraft Heinz, as well as in the pressure exerted on companies such as Procter & Gamble and Nestlé by activist investors.

On the other hand, a few companies, led by Amazon, have engendered such trust that they have convinced shareholders to forego profits in exchange for the promise of a bright future.

Such faith is conveyed in the willingness of both equity and debt investors to finance Tesla’s long-term goals, despite the company’s cash-guzzling tendencies and proclivity to miss production targets.

An environment characterised by ultra-cheap money and somnolent levels of volatility is no place to make bold predictions.

It is also evident in private markets where ‘unicorns’ such as WeWork, a provider of serviced office space, have excited investors’ passions to a far greater extent than their more traditional peers.

Therefore, while the shares of IWG (formerly Regus) were recently punished following weaker than expected earnings, WeWork has the freedom to play by different rules.

Indeed, one of the company’s founders recently stated in an interview that WeWork’s ‘valuation and size today are much more based on our energy and spirituality than it is on a multiple of revenue’.

Shareholders of Amazon have been vindicated for showing faith in Jeff Bezos’ vision.

Yet should this confidence extend to others? An environment characterised by ultra-cheap money and somnolent levels of volatility is no place to make bold predictions on an uncertain future.

A reversal of these trends and an increase in the cost of capital will likely act as a better litmus test for the sustainability of such companies.

There is, thankfully, neutral ground between these two extremes. We prefer fund managers who are active and discerning, selecting companies they believe can survive and prosper over the long term.

A good example is Greg Fisher, manager of Samarang Asian Prosperity, a long-only equity fund investing across Asia including Japan.

Greg Fisher’s investment process is clear, consistent and based on a foundation of thorough fundamental research.

At its heart is a preference for simple, transparent and well-established businesses that trade on undemanding valuations.

The companies he invests in tend to have strong operational track records but are also well placed to sustain success through sufficient investment in their franchises.

Investing without regard to a benchmark index, the Samarang Asian Prosperity Fund often looks very different to its better known peers.

A focus on small and mid-sized companies means that the Fund will rarely hold the likes of Samsung, Taiwan Semiconductor and other staples of most Asian funds.

It also currently has a distinct geographical skew, with the manager finding the best opportunities in Japan and Vietnam.  

While equity valuations have risen to unappetising levels across much of the developed world, Greg Fisher continues to find fertile ground for cheap stocks.

By disregarding mainstream opinion and venturing off the beaten path, we believe the fund will continue to add real value to long-term investors.

Tom Yeowart is the portfolio manager of Troy Asset Management’s Spectrum Funds