“Highly volatile markets” may well rank as something to be afraid of, especially if you are investing strictly on a long-only basis: In other words you don’t have any hedging in your share portfolio. In a fascinating piece today, Mitch Sneddon discovers in an analysis of his own portfolio of Listed Investment Companies that the LICs who can “short” outperform those who can’t. It’s an outcome that is exceptionally timely as we face the rockiest start to the calendar year for a long time.
Later this week, Eureka subscribers will have a chance to put questions directly to some leading LIC managers about their ability to “short”, or to protect their investors through any other means (holding cash for example).
On Thursday (January 21) at 11:00am, Sebastian Evans, the chief executive of NAOS Asset management will be in the studio with Mitchell Sneddon. Both the NAOS Absolute Opportunities and NAOS Emerging Opportunities funds are long/short funds.
In contrast, Tom Millner, the chief executive at the BKI Investment Company does not “short” within his fund. He will be sitting down on Thursday January 21 at 4:00pm to tell us why he believes his “long only” approach to investing wins in the end. It’s a fascinating debate and if you get the chance to watch both interviews, it should give any investor a very up-to-date understanding of one of the key issues facing investment managers this year.
One more thing: just as a heads up, our first major webcast of the year is set for Thursday February 4 at 12.30pm. I will host a special preview of the reporting season with our analysts James Samson and Mitch Sneddon. The webcast will focus heavily on the outlook for the various stocks in our three portfolios - small caps, LICs and income stocks…make sure it’s in your diary.
Growth First model portfolio
There are no changes to the Growth First model portfolio this week. Despite global volatility and gyrations through the portfolio, we will not be making any knee jerk reactions and will continue to monitor and analyse positions while making sure they still represent compelling value.
The portfolio is invested in smaller cap stocks that can behave with higher volatility than the overall market. This is partly due to low liquidity and partly due to risk perceptions associated with small caps. In this context we have seen some more pronounced share price moves in the growth portfolio both upwards and downwards of late.
The healthy cash component in the portfolio has given us a natural buffer from the market movements and also affords us some time to sift through potential bargains.
This week we bring an update on our long term view on Vita Group Limited.
- Mitchell Sneddon
Income First Model Portfolio
As we return from the holiday period, the Income First model portfolio has continued to trade with resilience. The model is outperforming a very weak market, but is still down overall as heavy selling has occurred across global markets.
The standout performer has been Wellcom Group (WLL), which has proven to be a quite defensive investment in terms of the short-term price action. With reporting season approaching, there will be a focus on looking to further deploy the large available cash balance in order to boost the prospective yield of the portfolio. That said, the high cash balance has to date proven a key foil to weak markets and high levels of uncertainty. As such, we will only look to deploy cash for the most compelling opportunities.
This week I highlight Silver Chef Limited (SIV), which promises a good income first style investment. However, given risk levels and that sold off markets are creating strong comparable opportunities, we have chosen not to invest the portfolio in SIV for the moment.
- James Samson
LIC model portfolio
There are no changes to the LIC model portfolio this week. We've seen some ups and downs in the last week or so (more downs than ups) but before I go and make any changes or react to what we are seeing I need to ask myself why am I invested in this portfolio in the first place. What is the purpose? My purpose is long term, consistent returns with minimal fiddling with the portfolio.
Equity markets will be volatile. Volatility in the portfolio has largely come from those exposed to large cap companies that are included in the ASX200 index. The LICs that focus on stocks outside of the top 100/200 and hold cash have held their ground well.
Remember we are not attempting to time markets here. What we are doing is backing our chosen managers who will keep their cool when everyone else in the market is losing theirs. If you fall into the category of those panicking right now and looking for the exit, perhaps you need to look at these managers too. It's not easy to sit there and watch 100 points wiped off the market in a day and not know when it will end.
One of the toughest aspects of investing is having the right temperament and simply put, these LIC managers do what most of us can't.
Join me this week as I talk live with BKI Investment Company CEO Tom Millner and CEO of NAOS Asset Management Sebastian Evans. Join in and take advantage of having these two in the studio this Thursday.
- Mitchell Sneddon