After sucking lemons for so long, it's been a sweet ride for shareholders during the past five months or so. The sharemarket, as measured by the benchmark ASX 200 index, has shot up about 13 per cent since it hit a low in early June.
Meanwhile, the many of us who have parked our money in cash are seeing our returns dwindle as the Reserve Bank cuts rates. For those thinking of taking the first step back into equity markets - or those who never left - we asked five of the country's top fund managers for their top tip on how to be a successful investor, where they see the market heading in the next six to 12 months, and a stock pick that looks the goods on a three-year time frame. Here's what they said:
CHAD PADOWITZ
Wingate Asset Management
Top tip Equity markets are volatile by nature. The failure to grasp and accept this is the greatest hurdle to successful investing. Provided your reasons for buying were well thought out and still valid, you should be comfortable with the fact that at times your shares will move down significantly in the short term.
Outlook We are reasonably optimistic on markets as they remain among the few asset classes not trading at historically high valuations. Despite weak growth, a consistent reduction in interest rates globally enhances the yield characteristics of equities.
Top stock Western Union is a cash-based payment network operating in more than 100 countries. Transfer payments are growing at rates in the mid-single digits with particular growth in emerging markets. The company is trading at about 10 times next year's earnings, while buying back about 5 per cent of their shares a year with a 3 per cent dividend.
IAN HARDING
WaveStone Capital
Top tip It's usually best to follow your instincts rather than what is popular. Markets (over)react so quickly these days that it pays to take a step back before you commit. It is far more important to get the big calls right than worry too much about intra-day trading.
Outlook Equity markets are improving. Smart money is beginning to return to shares, although risks remain in Europe, [there's] a slowdown in China and an impending "fiscal cliff" in the US. There are positive signs that good corporate news is now being rewarded and not overshadowed by macro-economic events.
Top stock Sirtex Medical is a medical device/pharmaceutical company 10 years in the making. Solidly profitable today and growing quickly, Sirtex has an approved injectable radiation microspheres product to treat liver cancer, and no corporate debt. The potential to replicate the success of a Cochlear or CSL clearly exists.
ED PRENDERGAST
Pengana Capital
Top tip Investing in small companies is similar to investing in private businesses. You need to understand the people behind the companies intimately, which involves direct contact with senior management, suppliers and competitors. Judging management skills and risk controls is critical, and if things change and dent your confidence, sell quickly.
Outlook We anticipate further strength in the sharemarket, barring any additional major shocks in the global economy. Given the level of uncertainty surrounding Europe, the US and China, the market is more risky than in "normal" times however, current valuations allow room for prices to rise should the situation become more predictable over time.
Top stock We expect REA Group, which owns realestate.com.au, to continue to perform well over the coming three years as advertising budgets for domestic real estate continue to migrate online.
JOHN ABERNETHY
Clime Capital
Top tip Success can only be measured over a long time say, 10 years. Against this long-term background there are three key investment rules. First, have a way of assessing the value of a company's shares before purchasing. Second, be patient in terms of buying and in terms of holding an investment. Third, utilise a reinvestment policy when favoured shares are in value.
Outlook In the next 12 months my view is that Europe will undertake a massive debt restructure. This is positive but is already factored into markets. The US will take a short-term growth hit from its election and resolution of the "fiscal cliff". China will maintain steady growth with solid demand for our export commodities. The outlook is for a rising Australian equity market.
Top stock Assuming China maintains its growth and exports increase, then BHP Billiton is the best of our major companies. BHP is good value now and this will increase rapidly on a weakening currency.
JEREMY BENDEICH
Avoca Investment Management
Top tip Only invest in things you can understand. I have friends who are surgeons. Sometimes they pick stocks. I say to them, "This doesn't make sense. I would never try to do eye surgery if I wasn't trained, why do you think you can pick stocks?"
Outlook We can find stocks that are attractively valued at the moment. Some have suffered due to high domestic interest rates, but the Reserve Bank is cutting rates, so these should recover. There are some quite interesting housing activity-related businesses showing value, along with some financials that will recover.
Top stock NEXTDC operates data centres. As the world moves to cloud-based computing, NEXTDC is well placed to grow revenue and profit. NEXTDC can earn returns in excess of the cost of its capital because it has lower costs to build than its competitors and it will be able to generate higher yields as their data centres are attractive for tenants.
Frequently Asked Questions about this Article…
With cash returns falling as the RBA cuts rates, should everyday investors move back into the ASX 200 and sharemarket?
The article notes many cash investors are seeing returns dwindle as the Reserve Bank cuts rates and that the ASX 200 has risen about 13% since early June. Several fund managers are reasonably optimistic because equities are not trading at historically high valuations and lower interest rates can enhance equity yields. However, they also warn of risks (Europe, China, the US fiscal cliff), so moving back into shares should reflect your time horizon, risk tolerance and well‑thought‑out reasons for buying.
What practical investing tips did top fund managers share for everyday investors?
Fund managers in the article gave straightforward tips: accept that equity markets are volatile; follow your instincts rather than fads; focus on big calls over intra‑day trading; treat small caps like private businesses and know the management; assess value before buying; be patient and think long term; and only invest in things you truly understand.
What is the near‑term market outlook (6–12 months) according to the fund managers featured?
Across the managers, the outlook is cautiously positive: equity markets are improving and smart money is returning, helped by falling interest rates. But they flag ongoing risks from Europe, a slowdown in China and US fiscal issues. One manager expects a major European debt restructure and a short‑term US growth hit, while another expects the Australian equity market to rise if global conditions stabilise.
Which individual stocks were highlighted as promising three‑year picks and why?
The article lists several top stock picks and the reasons given: Western Union (cash‑based payments in 100+ countries, mid‑single‑digit growth, buybacks and a 3% dividend); Sirtex Medical (profitable medical device company with an approved liver cancer therapy and no corporate debt); REA Group (owner of realestate.com.au, benefiting from online advertising migration); BHP Billiton (favoured if China maintains growth and a weakening currency helps exports); and NEXTDC (data centres positioned to benefit from cloud computing with lower build costs and attractive tenant yields).
What should everyday investors know about investing in small companies or small‑cap stocks?
The article stresses that small‑cap investing is like buying into a private business: you need to understand the people behind the company, talk to senior management, suppliers and competitors, assess management skills and risk controls, and be prepared to sell quickly if your confidence is dented.
Is Western Union described as a good value and income stock in the article?
According to the article, Western Union is presented as a value income option: it operates a cash‑based payment network in more than 100 countries, transfer payments are growing in the mid‑single digits, it was trading at about 10 times next year’s earnings at the time of the article, it repurchases roughly 5% of shares each year and pays a roughly 3% dividend.
Why does the article suggest NEXTDC could be a strong growth company for investors?
The article highlights NEXTDC’s position in data centres as the world shifts to cloud computing. It notes NEXTDC can grow revenue and profit because it has lower costs to build than competitors and can generate higher yields from attractive facilities, allowing returns in excess of its cost of capital.
How should investors measure success and decide when to buy or hold shares?
One manager recommends measuring success over a long timeframe (for example, 10 years) and following three rules: assess a company’s value before buying, be patient when buying and holding investments, and use a reinvestment policy when favoured shares are undervalued. These principles help focus on long‑term performance rather than short‑term noise.
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