Welcome mat is out for equity speculators
The June quarter was the best quarter in more than 20 years for the US market, following a horrid March. Covid-19 has continued to spread in many parts of the world, though death rates are substantially down on peak levels. Despite this, markets have looked through the near-term disappointment to earnings, and the fact earnings per share for the S&P500 may not recover to 2019 levels until 2022. In Australia, the recovery could be more prolonged given the extent of large dilutive equity raises. Part of the willingness to do this comes from the unprecedented amount of monetary stimulus injected into the economy by central banks.
This environment has caught the attention of retail investors, whose savings are now yielding very little. Record numbers of retail online trading accounts were opened on many low-cost direct market access platforms like Robinhood in US, Selfwealth in Australia and Sharesies in NZ.
How we create value
As fund managers, we are tasked with creating value. One of the most important questions to determine how likely you are to create value is how easy is the game you are playing? In life, like investing, there are easy and hard games. New Zealand does well in rugby, which is a comparatively easy game as it is not as popular globally as football and there is less competition. We feel deservedly great when we win consecutive Rugby World Cups, however, it’s not so much we have the best athletes or some genetic disposition towards rugby. Rather, for our national sport we have picked a game which is easier because much of the rest of the world doesn’t play it and of those that do, few play it well.
Finding easy games is why we have operated traditionally in the Small Cap end of the market as there is less competition and it is easier to outperform. It’s important to differentiate between more competition and more participation. While we prefer less competition, we like more participation. So we welcome more retail investors joining the stock market with a speculation mindset, as it makes the game we play easier and allows us to create more value.
Too much optimism?
We must also be mindful of the level of exuberance in the market when a large number of new investors start showing up to play the game, as this is often a warning sign market participants may be too optimistic about share prospects.
A long-term approach
It has been a great time to reflect on our investment process and how we executed during the June quarter. It was obviously a difficult time dealing with the emotions of rapidly falling markets, unprecedented economic impact and working from home in isolation and trying to formulate our game plan within such a compressed timeframe. What I have learnt is it’s difficult to time markets, quality assets are only genuinely on sale very rarely so you need to make the most of those infrequent time periods, and having a long-term approach to investments can help avoid the short-term noise which causes fluctuating share-prices.
Please find below updates for June supplied by each of the portfolio managers. Thank you for entrusting your capital with us.