Glynn, while the marketing materials of most fund managers tout their long term investment horizons, in my observation these investment horizons have dramatically narrowed in the past decade due to the influence of gatekeepers such as the ratings agencies and investment consultants. Short-term underperformance often results in a manager being put on a watch list or have their investment rating downgraded which normally results in significant outflows. The issue with being forced to take a shorter-term view is that it encourages managers to crowd into the hot stocks du jour, to signal that they are cutting edge and "get" new companies and technologies, unlike their more staid rivals. This results in prices being bid up for these companies far about their fundamentals, such as what we are currently seeing with the WAAAX stocks.
Graeme, I probably should not have revealed the practice of "window dressing", but it has to do with incentives. A downgrade from an asset consultant can have a very material impact on a fund manager's business as it will certainly result in significant outflows and in some cases damage the viability of the manager's business. Given this fund managers have a strong incentive to do everything in their power to maintain the "recommended" grade. Having a portfolio with a few "Dogs" from the previous year combined with an underperforming year is likely to result in tough annual review from the asset consultants. The manager also wants to avoid a situation where for example they have held OneSteel in 2014 defended the holding in the review and then seen the company subsequently slide into administration. Hugh
Douglas, A2M has been very successful offshore in focusing on a particular niche where the company has some form of comparative advantage namely a) A2 beta-casein protein and b) "clean" Australia/New Zealand manufacturing which has been a big asset selling product into China. This suite of IP and organic growth is very different from Fosters simply opening up the chequebook to buy stakes in breweries in Shanghai, Guangdong and Tianjin. Hugh
I appreciate the positive feedback. I like ROCE as it looks at how efficiently a company uses the capital given to it by shareholders and banks/bondholders. One of the weaknesses of ROE as a measure is that highly geared companies can appear very efficient using ROE as the business is primarily financed by debt. Changes to business or capital market conditions can render such companies vulnerable. Hugh
Great note Steve. Earlier this week we were looking to do a piece combing through BIG's Appendix 4Cs and to over the last year to try find some obvious signs for retail investors that they should have concerns, without much success. The quarterly cash flows appeared strong and the only sign we could find was the categorisation of operating cash flows as "Receipts from customers and other sources" - not really massive warning sign when these accounts were examined in mid 2017. Hugh
Kui, Great question, if you apply the $409M proceeds against debt the gearing only comes down to 36%, outside the target range of 25-35%. So QBE require organic capital generation to fund the buy-back. Whilst new management have made some positive moves, it is probably premature in February to assume that QBE will have a smooth year without any major cat events, especially prior to the Atlantic hurricane season (June to November). Hugh
Great article Jason, especially point 1. Small cap valuations and the hunt for growth at any price is very similar to what i saw as a small cap analyst in 2006 and 2007.
Thanks Rod but often the presentation of these statements also deceive professional investors with decades of experience, financial education and 12 plus hours a day to analyse a company.
Mark, The beta's that you are getting from Commsec don't look right. What we use is a 5 year beta with observations taken weekly. From experience shorter periods (which Commsec may be using) tend to throw up some weird numbers. Email me on email@example.com if you want to discuss further Hugh
On High Priced Shares -
Jaiprakash, GMA's buy-back is clearly supporting the share price, though one may question the long term rationale behind reducing a mortgage insurers prescribed capital rating at a time when GMA's metrics are deteriorating sharply. Hugh
Thanks Dylan. PTM are yet to buy back a share since the buy-back was announced Sept 13th 2016
Great piece Andrew, sensible advice for small cap investors
Great piece Nick, solid analysis