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Hardened investors showcasing lessons learnt from GFC
Despite double-digit returns on offer in the first half of the year, investors are discriminating to a degree we haven’t seen in years, a portfolio manager has said.
Hardened investors showcasing lessons learnt from GFC
Despite double-digit returns on offer in the first half of the year, investors are discriminating to a degree we haven’t seen in years, a portfolio manager has said.
Investors are becoming increasingly wary of companies pulling multiple non-core levers to maintain high margins, according to Robert Almeida, global investment strategist at MFS.
“This year, after nearly a decade of monolithic market movement during which well-managed companies performed about the same as those less well managed, we’ve seen a fundamental shift,” he stated.
Three areas of underperformance
MFS said that the avoidance of companies without durable business models can create value for investors who hold discriminating portfolios with a quality bias, which was a lifeline for smart investors in the lead up to the global financial crisis.
Markets have underperformed in three main ways, Mr Almeida said.
- Companies with high levels of leverage
- Companies with falling gross margins, often resulting from a lack of pricing power
- Lower-quality cyclicals
Difference between this cycle and previous cycles
The difference between this cycle and the two cycles that preceded it was an overinvestment in certain sectors of the real economy and overexposure to those overbuilt sectors, according to the global investment strategist.
In the late 1990s, he noted that investment in fiber optics and other technologies drastically exceeded the demand for the technology.
Similarly, in the mid-2000s, investors loaded up on bonds and structured property products that were levered to residential real estate.
This occurred under the assumption that prices would never fall and home owners could pay mortgages, Mr Almeida said.
“There’s less investor euphoria today than in 1999 and 2007, and unlike the past two cycles, there are no obvious cycle-ending bubbles ready to burst,” he considered.
“However, investors don’t appreciate the unsustainably high margins many companies enjoy today,” Mr Almeida concluded.
Read more of GFC here.
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