At the start of each year our team publishes a list of stocks (no more than 10) which we believe are likely to outperform the market over the coming 12 months. These ideas are generated from our research program, which covers bottom up stock analysis and macro analysis. That is, we could be playing a macro theme or a stock specific catalyst. Our research program drives ideas for our portfolios.
If you go through our key picks list for 2020 and past 3 years (provided below), you may find one or two names which you may not be so familiar with. But, by and large, most of the stocks are well known, liquid (predominantly S&P/ASX 200), and come from a range of sectors.
As a basket, our key picks have outperformed the broader market for the past three years and 2020 picks are well ahead, so far. But that is not the most important part. Our goal as investment managers is to hit 50 – 70% win rate on a consistent basis. What constitutes a win? Positive return or at least better than the market. On this basis we are hitting our target. If we do this, the performance of our portfolios over the long-term will take care of itself. Year-to-date CY20 (Jun-20), our Australia large cap, Australian Small Cap and Global Core strategies are well head of their reference benchmarks. Since inception, all these strategies are also outperforming.
There are simple but very important reminders from this annual exercise:
- You do not need to get overly creative with your stock picks to deliver consistent performance. We aim to deliver 8 – 12% p.a. through the cycle and therefore we are not chasing “10 baggers”. Often the best plays are the ones in plain sight.
- Valuation is one part of the overall analytical framework. If we knocked out companies on a simple “high PE-multiple” measure at the screening level, we would have missed out on a2 Milk Co (A2M) and Afterpay (APT) – both of which have been or still part of our portfolios.
- Don’t follow a style (value, growth, momentum, quality) and assess each stock idea on its own merits. We went long Nine Entertainment at 9x PE-multiple and Afterpay at 83x PE-multiple. Trust your research and investment process. What gave us confidence investing in these stocks at the time was our “on the ground” research, not just spread sheet work.
Performance from the day the list was published to the end of the respective year (source: Bloomberg)
Interesting to see younger, high growth companies outperforming the older, stable growth companies (with the exception of Fortescue). I believe most of the gains in Fortescue came from Vale having low production volumes during the lock-down. Low production lead to higher iron ore prices. Fortescue benefited from this, but I wonder how long it takes for Vale to ramp production after the lock-down and drive the iron ore price down?