This week it has been hard to miss the headlines about a fund manager who has decided to liquidate all its investments and return cash to investors.
This current "seeking of the sun" is coming from an Australian equities focused fund manager, Altair Asset Management.
Examination of rationale
Altair’s CIO gave four main reasons behind the liquidation decision. These factors are: Australia’s property market valuation (which Altair says will unwind imminently and have a flow-on impact on other liquid assets), an overvalued Australian equity market, China property and debt issues, and geopolitical risk including an unpredictable US political environment.
[Source: ABC News interview with Phillip Lasker 31-May-17.]
Right or wrong?
We don’t disagree with any of the points noted above. All of them are valid. However, we do not buy into the subsequent conclusion that right now is the time to sell everything and cash up.
It is quite possible that Altair’s timing will prove to be right. Given the market has returned +12.8% FYTD after this month, and being on a slightly higher than average P/E ratio, it is possible that the market will fall. Then again, it very well might not.
There have been many times in the past when the world has faced very significant uncertainties, yet markets have progressed along their merry way. Remember the Greek debt crisis and potential EU collapse for instance, with the associated doomsday ramifications?
We do not know when the next market correction is coming. No one can predict such things. Two notable past ‘sell everything’ calls have come from Alan Kohler (2011), and Andrew Roberts from RBS (Jan-16). In relation to the former, Alan Kohler subsequently and graciously issued a mea culpa. And in relation to RBS’s "cataclysmic year" call, it is worth noting that in the six months after the 2016 RBS headline, the market returned +7.3% for the next five months to the end of the FY-16. There are many other investment professionals, who time forgets, that have made similar calls.
First Samuel’s approach
First Samuel has never had any interest in making earth shattering, all-in, all-out, risk it all (at clients’ long-term expense) wagers on the market. As noted above, we know (after 17 years investing) that it is impossible to know how the market will react in the short term.
Instead, we are led by observation and common sense. Where investments make sense we act (regardless of what others are saying). And where they don’t, we don’t.
The market, of course, will go up and down - and push the prices of our companies up and down too (sometimes markedly).
If share prices go too high, we will sell. And look for other opportunities. If there are none, our cash holdings will build - as it has done over the past two years.
If share prices go down, we will look to buy more, if it is sensible to do so.
Over the past 17 years, this has worked well, through many market cycles and conditions.
First Samuel’s current positioning
Our portfolio continues to offer good returns over the medium term, as the companies we own will see their profits (and therefore dividends) grow, and they remain inexpensive.
We are quite cognisant of the risks identified by Altair (as we were of the risks that were around in the past, and we will be aware of new risks that will arise in the future). However, we remain true to our long term investment approach. Currently, our clients have an average of around 24% cash in their share portfolios, which is quite high by our historical standards. Furthermore, the investments we currently own have a defensive bias. We are, however, still finding some places to invest and would expect that cash level to stabilise around here, as the portfolio resettles.
The target share portfolio remains inexpensive (at 10.1x PE) with good growth (+8.0% earnings growth p.a. for the next three years), and reasonable dividends (at 4.0% p.a.).
Broadly speaking, with this construction we would expect to deliver fairly similar growth in the next 3 years as we have in the last 17. That is, on average, low double digit returns. Of course, the returns will not be linear. As usual.
To paraphrase Howard Marks “the world is full of fund managers that have called the market right exactly once”. They have their moment in the sun.
Maybe this Altair decision will be right on this occasion. But we view his all-in bet as risky and not in the long term interest of clients – no one can predict the future.
Instead, we will continue to focus on investments that make sense, and investing the current cash holdings as and when opportunities arise.