March sees return to fundamental investing
The March quarter saw a return to fundamental investing, after a year of investors chasing high growth businesses in a low rate environment, according to Investors Mutual Limited (IML).
In an investor update, Simon Conn, IML senior portfolio manager, said over the last 12 months there were low interest rates everywhere as central banks globally drove interest rates effectively to zero.
These low interest rates had the effect of increasing the valuation of high growth businesses.
“The main impact was on long-term discount rates, so the discount rate investors were using for businesses with growth further out,” Conn said.
“Under a low discount rate they attributed a higher value to those cashflows, so that drove big increases in current valuations for a lot of the high growth business in the market.”
Conn said that also drove a huge level of speculation, as investors anticipated not only getting zero return on their cash but a perception there would be no return on their cash going forward either.
“Cash become free or worthless and in that environment we saw a huge amount of speculative excess in the market and investors have chased themes and become quite thematic and momentum-based in that environment,” Conn said.
Conn mentioned the performance of Tesla and Afterpay, which had also been noted for being in a “speculative bubble” by Platinum.
“That’s driven many valuations whether it’s Tesla or Afterpay’s valuation which don’t fundamentally make sense to us,” Conn said.
“With bond yields now having returned to about 1.7% which on absolute terms is not a high level, but it’s a massive re-adjustment to where they were at their lows, people are re-assessing a) the risk in the market; and b) some of the valuations applied to some of these high growth businesses.”
According to data from FE Analytics, within the Australian small/mid cap sector, there were three funds managed by Conn.
The sector average return was 2.62% in Q1 and the Small Caps fund was the seventh best-performer overall with a return of 7.67%.
The Future Leaders fund returned 7.48% and the Australian Small Companies fund returned 5.35.
Performance of IML small cap funds in Q1
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