What these top fund managers learnt in 2021/22

Hans Lee

Livewire Markets

I'm no football fan, but even I'm familiar with the phrase "a game of two halves". In the first half of the year, the assets pumped by low rates and lingering stimulus continued to soar. Among the highlights of a remarkable 12 months in financial markets:

  • Buy-now-pay-later darling Zip Co (ASX:ZIP) peaked at over $12 in February 2021. It's now worth just over 50 cents per share. 
  • Wisetech Global (ASX:WTC) is up nearly 25% over the past year, but since January, has lost more than $20 from its share price.
  • After bottoming out at under $20/share, Woodside Energy (ASX:WDS) is now worth over $31/share (and more, if you believe Allan Gray's Simon Mawhinney) and,
  • Core Lithium (ASX:CXO) extending its 2021 gains by piling on an extra 64% in the last six months alone.

Then, there is the ultimate risk proxy in Bitcoin.

  • Bitcoin is down more than 50% year-to-date despite climbing to its all-time highs just seven months ago. 
This is all a long way of saying that many asset classes and securities eventually had their day in the sun. While growth-type assets outperformed in the first half, value-type assets have roared back in the second half. 

After such an unprecedented and remarkable year, what have investors learned and what will they take away into next year? We asked four leading investors and Livewire contributors to share their thoughts. This is what they came back with...

Good things come to those who wait

Roger Montgomery, Montgomery Investment Management 

The best-performing stocks in the first half of the 2022 financial year were arguably those of companies with far more hope and optimism than cash and profits. Despite my skepticism, my own warnings to refrain from ‘investing in anything without profit’ and three decades of experience, the possibility there might be something I didn’t understand in the booming prices for profitless tech microcaps, cryptocurrencies and NFTs resulted in a tiny (1%-2%) allocation of my personal wealth to funds managing these asset classes.

You can now safely assume the reward for my indiscretion was a 70 percent decline in the market value of these tech microcaps, cryptocurrencies, and NFTs funds.

Patience is all that is required to prove the axiom that prices always follow value. Asset markets have a well-known habit of transferring wealth from the active to the patient. Price may disengage from intrinsic value for a period and the length of that period cannot be predicted. The return of prices to true value however can always be relied upon. 

Patience is all that is required if you want to see it happen.

According to urban legend, when the wisest ancient philosophers were asked to summarise, in four words, life, the universe, and the future of the world, they settled on; ‘This too will pass.’

My only job is to buy quality companies at a rational price and apply patience. 

The inflation dragon was just slumbering
Shane Oliver, AMP Capital 

2021-22 was a poor year for investors. Maybe it was partly payback for the strong returns of 2020-21. But the big driver of markets over the last year was the surge in inflation which necessitated a shift to aggressive monetary tightening. 

The big lesson (or re-lesson) for me from the last year is that inflation – long thought to be dead and a baby boomer nightmare from the 1970s – was just resting and can raise its ugly head when the circumstances are right. 

The good news is that central banks are taking the inflation threat seriously.

The bad news is that this is likely to drive a slowdown in economic growth and company profits. But given the disaster that the 1970s was for investment returns, I would rather endure the short-term pain of putting the inflation dragon back in its cave rather than let it continue to roam free torching economies and investments.

For the next year, I will want to see that central banks don’t ease up before inflation is clearly coming under control. And I think that it will. So I will be watching out for evidence of a market bottom that would support more cyclical stocks but will also keep a few inflation hedges in place just in case – resources stocks may fit the bill on this front. 

Be brave, be dramatic
Steve Johnson, Forager Funds Management 

Most investors do too much. I’ve been guilty of the same. Selling those stocks that have done well to buy the latest and greatest new idea always feels appealing. Working hard to do nothing is a skill that is very difficult to master. More often than not, it’s a skill that is very useful.

In the past 12 months, though, we were guilty of not doing enough in our International Fund. We were aware of and vocal about a bubble in growth stocks. We sold half of our position in some stocks that were beneficiaries and three-quarters of our stakes in others. We invested 4% of the portfolio in commodities stocks that have performed very well. We bought shares in Tesco and Lloyds Bank, two very cheap stocks that, unlike most, have gone up over the past year.

But the returns have still been terrible. The remaining investments in the winners of 2021 tumbled, some as much as 70%. The implosion in growth stocks has taken almost every non-mining small company along for the ride. Rising interest rates have translated into a significant re-rating (downwards) for some of the fund’s high-quality larger companies.

And thus the main lesson of the past year. Building rain doesn’t count if you don’t build arks as well. 

Our portfolio changes were meaningful but they needed to be dramatic. Patience is usually a virtue but there are times when urgency is called for. The 2021 financial year was one of them. 

All market panics are opportunities in hindsight!
Nick Thomson, Lakehouse Capital 

This past year has been a challenging time for many investors but for old hands, it has served as a timely reminder that acting like an owner with a long-term mindset is incredibly important. Volatility is back, and in our view, is likely to remain with us for some time. But that is not necessarily a bad thing as drawdowns such as those we are currently witnessing, whilst painful at the moment, provide lucrative opportunities for patient and discerning investors.

The key is having a clearly articulated philosophy and process that provides investors a north star when fundamentals become dislocated from reality. 

To that end, consider Alphabet, one of the world's most dominant and successful businesses. 

In addition to being the world's leading internet search provider, where they have a monopolistic position with about 90% market share, they also have eight other products with over one billion users (YouTube, Cloud, Gmail, Chrome, Android, Google Play, Maps, Photos). The company continues to grow revenue and earnings at a very healthy double-digit clip and post the most recent selloff is trading for less than 20x earnings. Add to that a clean balance sheet with over $100 billion in net cash and it's not hard to see why we believe owning such high-quality leaders represents a compelling opportunity.

Ultimately, economic conditions may well deteriorate further before things improve, however, that is not necessarily true of the share market. Equity markets are forward-looking: that’s why shares generally start to recover before backward-looking economic data begins to hint at a turnaround.

In times like these, it’s important to zoom out and remember that all market panics look like opportunities in hindsight.

In summation

2021/22 was not a standout year - but it was a year for the patient and the stoic. Roger and Steve both echoed similar mantras about the need to stay invested without losing your nerve. Nick took the view that market panics are just opportunities to zoom out and stay calm. Of course, all this is only possible if you keep an open mind and do not forget the big picture at the end of the day. Finally, Shane took the view that some things are just hiding in plain sight. If stimulus and hope were the storylines of 2020/21, then inflation and recession have certainly dominated the 2021/22 narrative.

What will 2022/23 bring? We'll be here to bring it all to you - and we hope you stick around to watch it all play out.

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Hans Lee
Senior Editor
Livewire Markets

Hans is one of Livewire's senior editors. He is the creator and moderator of Livewire's economics series "Signal or Noise". Since joining Livewire in April 2022, his interview record includes such names as Fidelity International Global CIO Andrew...

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