Investors may have had sleepless nights over the past year about the ability of so-called growth investments to ever show positive returns again, says Anet Ahern, CEO, PSG Asset Management.
“They may worry about how they are going to protect and grow their savings. Fund managers who apply a proven valuation-based approach have also had their investment beliefs tested. These managers must have been tempted to sell out and go with the crowd by buying into what was popular and comfortable. Indexing gained popularity once more as active managers struggled to beat the narrow market indices.”
She adds that many investment gurus, experienced advisers, professionals and adverts “remind us of the time it takes for a strategy to work.”
“Yet, when the market dislocates and hits us with volatility, we become very short-term focused. We digest every bit of bad news as if our lives depended on it and we obsess over it, projecting the bad news into the future. It fuels our dinner conversation and compels us to take action. This is often unnecessary.”
Periodic volatility is inevitable
Ahern says if we go back in history, we find that periods of extreme volatility occur at least once a decade, it’s the way of the world. “We should therefore not be surprised when it happens, although such a reaction is only human.”
Uncertainty creates pessimism; pessimism creates opportunity
The marvel of the investment market is that it swiftly discounts what is going on in the investment environment, and often overreacts. If you are able to take a step back and think longer term, there can be some really good investment opportunities.
“Recent examples of opportunities arising from pessimism in our portfolios include buying Capitec and Capitec paper during the African Bank debacle, as well as Super Group,’ she states.
To think long term, you have to look beyond the noise
When fund managers have faced difficult markets and came through them with lessons learnt, it is not a guarantee that all their future decisions will be right. However, it will stand them in good stead when it comes to thinking more clearly and taking the emotion out of investment decision-making.
“Our fund managers have three questions they ask in response to the question, ‘What is going to happen to the market?’”, she adds.
- Is the company in question likely to be around in five years’ time? “We question the strength of the company’s business model.”
- Is the company likely to make money at some point in the next five years? “We often forget that a good management team responds better to a poor environment and often creates a more robust company for the next upturn, however mild it ends up being.”
- Given the answers to the first two questions, “is the company likely to be trading at a higher price-earnings ratio at some point in the next five years?”
Ahern says if the answers to all of these questions are yes, “then our clients are very likely to get a good return from the investment. This approach considers the time period and the factors that can give us insight when we’ve done in-depth research. However, no amount of in-depth research can help predict the short term.”
History provides evidence of the merits of a long-term focus
Some of the most admired investment businesses have been built over 30 years or longer.
“When you review their histories, patches of volatility, uncertainty and hardship will be evident. Yet, the ones who stuck to their well-proven process lasted and flourished, and their clients were well served. Any long-term investment strategy will be tested over time. It is the investor who partners a long-term view with good advice and the fund manager who takes a long-term view when making investment decisions who will have the best chance of success,” Ahern concludes.