Sell quickly and buy slowly
Outperforming a rising market is no mean feat. It has no costs, reinvests all dividends the moment they’re paid, and is 100% invested at all times. According to Marcus Padley, the best opportunities for outperformance come when the market corrects.
“Fear is three times faster to have an effect on the brain than confidence, so you have to sell quickly and buy slowly.”
In this short video, Marcus explains how they use their ability to move to 100% cash to help outperform during volatile markets.
We found it very hard to outperform a bull market, and anyone who suggests that it's easy is just marketing. You've got an index which is a fantasy: an ASX300 accumulation index that doesn't have any employees, water coolers, rent, anything. It is perfectly compounding dividends and it is fully invested. An index is aggressive in a bull market - no cash.
The moment you hold cash as a fund manager, you're going to underperform because you've got the compounding market working against you. If you've got 20% cash, it's 20% of your fund compounding in the wrong direction creating underperformance. So it's very hard for fund managers to beat a compounding index.
What we have found is that the opportunities are when the market corrects. The market corrects quickly as we've seen in the last year or so. The theory is that fear is three times faster to have an effect on the brain than confidence, so you have to sell quickly and buy slowly. If anything goes on our gravestone at this point in our funds management career, it's going to be “timed the pandemic perfectly”. Through the years we have been trying desperately to outperform the market by 0.5%, 1%, 2% a year. To outperform an accumulating index, it would be fantastic. But what of course we discovered is that in the times when the market drops quickly, we can outperform extremely quickly. So we outperformed around 20% in 23 days because we went to 100% cash.
Our main value add is that we have become quite good and sensitive to the precipitous moments in the market. Our design is to try and get our outperformance in the bad bits, get clients out, do what we would do. There are times when you would sit back as an individual retail investor and say, "No, I'm just going to back out for a while." And we decided in the pandemic to do that for ourselves and do it for our customers. So, we cashed up 100%.
Our main point of difference is that most fund managers can't cash up. It's not in their mandate. We can go to 100% cash. We've got two asset classes: equities or cash. We will go to a 100% cash if we need to, and we're prepared to, and we do it quite decisively. Although that might seem terrible and scary, truth of the matter is holding cash is the lowest risk thing you can do, so it's not actually that risky. All you're risking is missing performance if the market keeps going up. That's our major point of difference.
We do all the other stuff everybody does around stock selection. We're constantly watching the sector tides or the currents underneath the market tide and playing sector themes and playing stock themes. We go after some small stocks as well that you wouldn't pick out on fundamentals as well as part of the whole process.
But the main outperformance we think is going to come by protecting our investors from precipitous moments.
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