Future view on values

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.