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IT SEEMS the global financial crisis, apart from the myriad problems
resulting in economies and financial markets, also caused a change in
investor behaviour.
One result is that many investors aren’t investors any more but have become speculators, introducing a range of risks they may not be aware of.
One example, according to a presentation by Cannon Asset Managers, is that the market average for holding shares has dropped from around 25 years in the 1970s to about 18 months in the 2000s.
“People are holding shares for a shorter period than they buy a toaster or a washing machine,” says Cannon chief investment officer Adrian Saville.
He adds the market is now dominated by speculators, which brings with it specific risks.
“Since the onset of the global financial crisis, investors seem to have surged from risk-loving to risk-fearing and back to risk-loving.”
Saville says unlike the “emperor of yore” – yes, the one without clothes – investors shouldn’t be fooled into thinking risk has been effectively reduced by policy actions and the return to a more normal mood among participants in capital markets.
“Indeed, while there’s an overwhelming sense that risks have waned over the past year, there’s a lot of evidence to suggest a different view – which sees some high-risk events that are resident in capital and financial markets.
"An investor who is naked to those elements raises the risk of capital erosion, under a best-case outcome, and the permanent destruction of capital, under a worst-case scenario. By the same token, an investor equipped to deal with those risks has the fabric to seize the abundant opportunity presented in this environment.”
Following its deep value investment philosophy, Saville says the average holding period for shares in Cannon portfolios is 4.3 years, against an industry average of 1.6 years.
But what are those risks, particularly the “hidden risk” investors don’t see?
“Take inflation risk as an example. We’ve been talking about it for two years and the tensions we see in the Middle East and North Africa are a symptom of food price inflation. That comes from printing too much money – that’s the hidden risk.”
Saville says with investors diversifying portfolios offshore they should remember fast-growing emerging markets aren’t great investment cases.
“Just because a country is showing rapid economic growth it doesn’t follow that its financial markets will perform well. While China led global growth last year, the Shanghai composite index fell 5.3%. By contrast, while Japan’s economy grew slowly, its Nikkei 225 index outperformed the Chinese market by around 10%.”
He says the explanation for that is simple: asset prices are high in China, as they have fully priced in anticipated growth.
“By contrast, Japan has been left for dead, leading to the under-pricing of some high quality assets.”
A similar warning to that on fast-growing emerging markets can be applied to South African companies, with Saville saying investors shouldn’t confuse great businesses with great investments.
“That flags a number of much-loved companies in SA that are priced on very demanding multiples and, while they may be world-class businesses, they’re priced for perfection – which leaves the investor naked to the risk of disappointment. Such examples include Naspers [JSE:NPN], Capitec Bank Holdings [JSE:CPI] and BHP Billiton [JSE:BIL]."
So where are the under-priced opportunities?
“Among others, compellingly priced businesses include the under-loved building and construction firms Aveng [JSE:AEG] and Group Five [JSE:GBF], as well as Anglo American [JSE:AGL] and Grindrod [JSE:GND].”
Other value opportunity shares that will be found in Cannon portfolios include Lewis Stores, Nedbank Group [JSE:NED], Sasfin Holdings [JSE:SFN], Investec [JSE:INL], Old Mutual [JSE:OML] (which Saville says has essentially been overlooked) and Steinhoff International Holdings [JSE:SHF].
“An investment process that places risk at centre reveals exceptional opportunity that’s always present.”
Seems it’s all about keeping your clothes on when taking serious, long-term investment decisions.
* This article was first published in Finweek.
* To read more Finweek articles, click here.
One result is that many investors aren’t investors any more but have become speculators, introducing a range of risks they may not be aware of.
One example, according to a presentation by Cannon Asset Managers, is that the market average for holding shares has dropped from around 25 years in the 1970s to about 18 months in the 2000s.
“People are holding shares for a shorter period than they buy a toaster or a washing machine,” says Cannon chief investment officer Adrian Saville.
He adds the market is now dominated by speculators, which brings with it specific risks.
“Since the onset of the global financial crisis, investors seem to have surged from risk-loving to risk-fearing and back to risk-loving.”
Saville says unlike the “emperor of yore” – yes, the one without clothes – investors shouldn’t be fooled into thinking risk has been effectively reduced by policy actions and the return to a more normal mood among participants in capital markets.
“Indeed, while there’s an overwhelming sense that risks have waned over the past year, there’s a lot of evidence to suggest a different view – which sees some high-risk events that are resident in capital and financial markets.
"An investor who is naked to those elements raises the risk of capital erosion, under a best-case outcome, and the permanent destruction of capital, under a worst-case scenario. By the same token, an investor equipped to deal with those risks has the fabric to seize the abundant opportunity presented in this environment.”
Following its deep value investment philosophy, Saville says the average holding period for shares in Cannon portfolios is 4.3 years, against an industry average of 1.6 years.
But what are those risks, particularly the “hidden risk” investors don’t see?
“Take inflation risk as an example. We’ve been talking about it for two years and the tensions we see in the Middle East and North Africa are a symptom of food price inflation. That comes from printing too much money – that’s the hidden risk.”
Saville says with investors diversifying portfolios offshore they should remember fast-growing emerging markets aren’t great investment cases.
“Just because a country is showing rapid economic growth it doesn’t follow that its financial markets will perform well. While China led global growth last year, the Shanghai composite index fell 5.3%. By contrast, while Japan’s economy grew slowly, its Nikkei 225 index outperformed the Chinese market by around 10%.”
He says the explanation for that is simple: asset prices are high in China, as they have fully priced in anticipated growth.
“By contrast, Japan has been left for dead, leading to the under-pricing of some high quality assets.”
A similar warning to that on fast-growing emerging markets can be applied to South African companies, with Saville saying investors shouldn’t confuse great businesses with great investments.
“That flags a number of much-loved companies in SA that are priced on very demanding multiples and, while they may be world-class businesses, they’re priced for perfection – which leaves the investor naked to the risk of disappointment. Such examples include Naspers [JSE:NPN], Capitec Bank Holdings [JSE:CPI] and BHP Billiton [JSE:BIL]."
So where are the under-priced opportunities?
“Among others, compellingly priced businesses include the under-loved building and construction firms Aveng [JSE:AEG] and Group Five [JSE:GBF], as well as Anglo American [JSE:AGL] and Grindrod [JSE:GND].”
Other value opportunity shares that will be found in Cannon portfolios include Lewis Stores, Nedbank Group [JSE:NED], Sasfin Holdings [JSE:SFN], Investec [JSE:INL], Old Mutual [JSE:OML] (which Saville says has essentially been overlooked) and Steinhoff International Holdings [JSE:SHF].
“An investment process that places risk at centre reveals exceptional opportunity that’s always present.”
Seems it’s all about keeping your clothes on when taking serious, long-term investment decisions.
* This article was first published in Finweek.
* To read more Finweek articles, click here.
