What is ethical investing and why should you choose an ethical fund manager?
Ethical or socially responsible investing is not an easy term to define. I always considered it to mean not buying shares in companies which operate in sectors such as gambling, tobacco, alcohol and mining of minerals such as uranium which might be considered damaging to society or the environment. So I always figured that an ethical managed fund would be one which holds investments outside of these sectors.
Having done a done a little research on this topic, it seems that this area is more complex than I first thought. According to the Responsible Investment Association of Australasia, there are a number of methods which fund managers (or investors generally I guess) can adopt in their approach to ethical investments.
Broadly speaking, there are 4 different methods. These are Negative Screening, Positive Screening, Best Of Sector and Sustainability Analysis.
Negative screening is essentially what I've already described. The fund manager will simply avoid investing in certain sectors of the stock market like those I mentioned above, but beyond that, they can buy shares in whatever companies they like provided they don't operate in those industries.
Positive screening on the other hand aims to identify specific companies whose operations are likely to have a positive impact on society and the environment. I guess you could consider this a more active approach.
The best of sector approach does not discriminate between industries but rather will seek out investments, within each sector, in a company which is seen to be the most 'ethical' in that sector. So the fund manager may invest in a company within the gambling industry but they would choose the company which could be considered a leader when it comes to sustainability.
Finally, sustainability analysis involves analysis of the entire stock market using information from a broad range of sources then ranking companies based on a set of standard criteria.
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Within Australia, the main players in this space seem to be Hunter Hall and Australian Ethical Investment.
Hunter Hall run a number of funds and seem to have a bias towards value investing. According to their website, Hunter Hall employ a negative screen which "restricts investment in companies that derive revenues associated with the sale of armaments or tobacco, gambling, cruelty to animals, destruction of the environment and uranium mining". You can choose from both listed and unlisted funds.
Australian Ethical Investment offer 5 different retail funds and a superannuation fund. As far as I can tell they seem to use the positive screen approach to their investing. And I'm sure I read that both Hunter Hall and Australian Ethical Investment donate a set percentage of profits to charity each year.
An interesting piece of information I picked up during my research is that the name of the Marketing Manager of Australian Ethical Investment is Roger Green. Does anyone else find that amusing?
One thing I kept reading was that ethical managed funds are more likely to underperform the market because they are restricted in what they can invest in. Given the recent resources boom on the Australian stock market, I'd be curious to know how these funds have fared over the past few years when compared to their 'less ethical' peers.
But even if there was evidence of underperformance, I suspect that if, as an investor, you feel strongly enough about social issues or about the environment to choose an ethical managed fund, then wearing a potential performance hit for your beliefs probably wont bother you too much.
Sunday, January 25, 2009
Monday, January 5, 2009
Australian Stock Market Floats For 2008
New company floats on the Australian Stock Exchange copped an absolute pasting during 2008. I can't be any more plain than that. Very few companies whose shares listed on the ASX during 2008 ended up which a share price exceeding the issue price.
Float activity was down on previous years as well, as measured by either the number of new issues or by the aggregate amount of capital raised. But this was to be expected. With the All Ordinaries down 43% for the year and panic stricken investors heading for the exits at the first sign of trouble only the very brave or very needy chanced their arm with an IPO. I suspect most executives who had intentions to float in 2008 would have delayed their plans until a calmer mood prevailed over world stock markets.
Measured by the number of new company floats, 2008 was a poor year, with only 72 new listings. This is the lowest since 2002 and is a far cry from the peak in 2007 of 242 new company floats. Also, only 2 billion dollars was raised last year - once again well behind the 9.7 billion dollar figure for 2007.
Of the 72 floats, only 2 finished with their heads above water.
An honorable mention should go to Tiaro Coal who have managed to break even by finishing the year at 20 cents - the same as the issue price back in March when the Australian Stock Exchange was first graced with it's presence.
After that it gets ugly. More than two thirds of new listings finished the year at less than 40% of their original issue price. The companies floated were mostly small with lots of mining and exploration plays amongst them. But there is one exception...
BrisConnections floated at the end of July at an issue price of $1.00. Since then it has plummeted like a stone to 0.1 cents - not $0.10, but $0.001 or a tenth of a cent. The company plans to construct a toll road in Brisbane connecting the Airport to some other stuff (I don't know the geography of Brisbane very well). I believe there are lots of tunnels involved.
BrisConnections has so far raised $400M out of its total $1.2B - and this is where it gets interesting. You see the shares (stapled securities to be more accurate) were issued on a partly paid basis with 2 further installments due (each of $1.00) over the next couple of years. This means the the purchase of each one of these securities at the knock down, bargain basement price of $0.001 buys you the obligation to stump up another $2.00 down the track.
I can almost hear your brain ticking over as you ponder that one. Let's say you have a lazy $500 to 'invest'. At the going rate of a tenth of one cent per security, your 500 dollars (plus brokerage of course) will buy you 500,000 of these little beauties. "Not bad!", you say. Then you do the maths and work out that over the next 2 years you'll need to fork out an additional 1 million dollars - that's $1,000,000 - to make the installment payments.
And just to make sure you are in no doubt as to your legal requirement in this matter, the kind folks at BrisConnections sent out a letter to shareholders early last month reminding shareholders of their obligation to make the installment payments. In the letter, they stated that "BrisConnections will take a vigorous approach to collecting any such outstanding payments."
Finally, I should point out that, despite the tone of this article, I don't mean to imply that all of the floats to hit the Australian stock market in 2008 were of poor quality, although I suspect some of them may well have been. Value investors would know that a fall in price does not necessarily mean the company is no good. On the contrary, value investors may well want to pick through the carnage of last year's IPOs to see if there are any hidden gems which may be worthly of closer inspection.
Float activity was down on previous years as well, as measured by either the number of new issues or by the aggregate amount of capital raised. But this was to be expected. With the All Ordinaries down 43% for the year and panic stricken investors heading for the exits at the first sign of trouble only the very brave or very needy chanced their arm with an IPO. I suspect most executives who had intentions to float in 2008 would have delayed their plans until a calmer mood prevailed over world stock markets.
Measured by the number of new company floats, 2008 was a poor year, with only 72 new listings. This is the lowest since 2002 and is a far cry from the peak in 2007 of 242 new company floats. Also, only 2 billion dollars was raised last year - once again well behind the 9.7 billion dollar figure for 2007.
Of the 72 floats, only 2 finished with their heads above water.
- Phosphate Australia (ASX:POZ) finished the year at 44 cents after listing in July at an issue price of 20 cents - an impressive 120% gain.
- Heartware (ASX:HIN) finished up 20% at 60 cents after an Initial Public Offering at 50 cents in November.
An honorable mention should go to Tiaro Coal who have managed to break even by finishing the year at 20 cents - the same as the issue price back in March when the Australian Stock Exchange was first graced with it's presence.
After that it gets ugly. More than two thirds of new listings finished the year at less than 40% of their original issue price. The companies floated were mostly small with lots of mining and exploration plays amongst them. But there is one exception...
BrisConnections floated at the end of July at an issue price of $1.00. Since then it has plummeted like a stone to 0.1 cents - not $0.10, but $0.001 or a tenth of a cent. The company plans to construct a toll road in Brisbane connecting the Airport to some other stuff (I don't know the geography of Brisbane very well). I believe there are lots of tunnels involved.
BrisConnections has so far raised $400M out of its total $1.2B - and this is where it gets interesting. You see the shares (stapled securities to be more accurate) were issued on a partly paid basis with 2 further installments due (each of $1.00) over the next couple of years. This means the the purchase of each one of these securities at the knock down, bargain basement price of $0.001 buys you the obligation to stump up another $2.00 down the track.
I can almost hear your brain ticking over as you ponder that one. Let's say you have a lazy $500 to 'invest'. At the going rate of a tenth of one cent per security, your 500 dollars (plus brokerage of course) will buy you 500,000 of these little beauties. "Not bad!", you say. Then you do the maths and work out that over the next 2 years you'll need to fork out an additional 1 million dollars - that's $1,000,000 - to make the installment payments.
And just to make sure you are in no doubt as to your legal requirement in this matter, the kind folks at BrisConnections sent out a letter to shareholders early last month reminding shareholders of their obligation to make the installment payments. In the letter, they stated that "BrisConnections will take a vigorous approach to collecting any such outstanding payments."
Finally, I should point out that, despite the tone of this article, I don't mean to imply that all of the floats to hit the Australian stock market in 2008 were of poor quality, although I suspect some of them may well have been. Value investors would know that a fall in price does not necessarily mean the company is no good. On the contrary, value investors may well want to pick through the carnage of last year's IPOs to see if there are any hidden gems which may be worthly of closer inspection.
Saturday, January 3, 2009
Australian Stock Market Worst Annual Return Ever?
The Australian stock market gave investors a wild ride during 2008. It was not a year for the fainthearted. An investment in Australian shares as measured by the All Ordinaries index is down by almost 43% - that really hurts!
Australian Stock Market Chart - 2008
The All Ords started out the year at 6,462.8 and finished at 3,659.3. Along the way it touched a high of 6,462.8 on the first trading day of the year before plunging to a low of 3,201.5 on 21 November. As far as I can tell, this is the worst performance recorded since 1900.
Australian Shares Not All Bad News...
Unless you've had to sell shares, the good news is that this is only a paper loss. Granted, it might be some time before the sharemarket regains the levels it was at in 2007, but if you have a long term view and focus on the fundamentals of the businesses you're invested in, there should be light at the end of the tunnel.
Even better, if you have cash available, there are some screaming bargains on offer at the moment. I think that prudent and discerning investors will do very well in Australian shares over the medium term. But I suspect there could be more volatility on the way.
The All Ordinaries has recovered slightly from it's low point in November but as we've seen in recent months fear and panic can wipe out any tentative gains in the blink of an eye. Baring any more catastrophes (by that I mean large corporate collapses or bailouts) the next interesting time will be when listed companies start reporting their financial results to the ASX in a month or two.
Until now, the market has been anticipating the impact of the global slowdown in economic activity. Once we start seeing some actual financial results, we'll have a much better idea of how the various sectors, and the individual companies within those sectors are faring.
Australian Stock Market Chart - 2008The All Ords started out the year at 6,462.8 and finished at 3,659.3. Along the way it touched a high of 6,462.8 on the first trading day of the year before plunging to a low of 3,201.5 on 21 November. As far as I can tell, this is the worst performance recorded since 1900.
Australian Shares Not All Bad News...
Unless you've had to sell shares, the good news is that this is only a paper loss. Granted, it might be some time before the sharemarket regains the levels it was at in 2007, but if you have a long term view and focus on the fundamentals of the businesses you're invested in, there should be light at the end of the tunnel.
Even better, if you have cash available, there are some screaming bargains on offer at the moment. I think that prudent and discerning investors will do very well in Australian shares over the medium term. But I suspect there could be more volatility on the way.
The All Ordinaries has recovered slightly from it's low point in November but as we've seen in recent months fear and panic can wipe out any tentative gains in the blink of an eye. Baring any more catastrophes (by that I mean large corporate collapses or bailouts) the next interesting time will be when listed companies start reporting their financial results to the ASX in a month or two.
Until now, the market has been anticipating the impact of the global slowdown in economic activity. Once we start seeing some actual financial results, we'll have a much better idea of how the various sectors, and the individual companies within those sectors are faring.
Monday, December 22, 2008
What I Learned About Investing In 2008 : Lesson 1 - Patience
The Australian Stock Market has had a terrible year based on almost any measure you care to name. The All Ordinaries and major S&P ASX indexes are all down significantly from the beginning of the year and some market pundits are saying we still haven't reached bottom - but I guess we wont know when the bottom is until it has passed. World stock market indexes have fared little better and in some cases even worse.
It's approaching the time of year when I like to reflect upon my investment activities over the past year and consider what the coming year may hold. It's a great opportunity to take a couple of steps back and look at the year's events and my participation in and reaction to them from a safe distance. Time can sometimes give us a better perspective from which to consider our actions.
With that in mind, I thought I'd share some thoughts on what investment lessons I've learned from the tumultuous year that has been 2008. Before I started writing this, it was going to be a single post. But as I started writing, the words just stated to flow to I think I'll spread this over a number of posts.
Value Investing Takes Patience.
I like to consider myself a value investor or even a contrarian investor. However, in recent years (with the exception perhaps of 2008) this has taken more and more patience. Value investing opportunities become very scarce. I was accumulating cash, my trigger finger was becoming itchy but there just weren't any decent targets to take aim at.
Then the sub-prime mortgage came along and suddenly some of the shares on my watchlist were getting cheaper. To put things in perspective, the All Ordinaries had been as high as six and a half thousand in 2007 and fell to around five thousand in the first quarter of 2008 and looked like staging a recovery from that point.
I didn't want to miss the buying opportunity so I started buying. While I didn't spend all of my cash, in retrospect a think I spent too much, too early, leaving less in reserve for the opportunities which would emerge later in the year.
I think I fell for the old "this time it's different" line. You know the one where everyone tells you that there's been some sort of fundamental shift in how sharemarkets work. Think back to the dot-com boom (and bust). It 's happened many times over - the stock market crash of 1929, tulip mania - the list goes on.
Stock market commentators were saying that higher prices were justified. They said there was a great weight of superannuation money driving asset prices and that this was an ongoing and long term trend which would support shares prices. They said that industrialization of China had lead to a resources "super cycle" - everything was different now!
Even though I considered myself a skeptic, I was worried that the market would recover from this hiccup and carry on it's merry way, leaving me behind. I felt I needed to take advantage of the "relative" value in share prices, even though I didn't consider it absolute value.
Investing is a long term game. Even though the last bull market was a long one, history told us that it had to end. It also told us that the longer the bull market and higher it goes, the longer and deeper the bear market that follows it. Benjamin Graham, author of The Intelligent Investor and Security Analysis recommended buying blue chip stocks at no more than two thirds of their most recent highs. This was to protect investors from the market's inevitable manic depressive behavior. He believed there would always be another opportunity - that the market would always over-correct on both the upside and the downside.
Once again, Ben has been proven right. The Australian Stock Market has shown how quickly things can turn ugly. I should have had more patience in waiting for that value to emerge.
It's approaching the time of year when I like to reflect upon my investment activities over the past year and consider what the coming year may hold. It's a great opportunity to take a couple of steps back and look at the year's events and my participation in and reaction to them from a safe distance. Time can sometimes give us a better perspective from which to consider our actions.
With that in mind, I thought I'd share some thoughts on what investment lessons I've learned from the tumultuous year that has been 2008. Before I started writing this, it was going to be a single post. But as I started writing, the words just stated to flow to I think I'll spread this over a number of posts.
Value Investing Takes Patience.
I like to consider myself a value investor or even a contrarian investor. However, in recent years (with the exception perhaps of 2008) this has taken more and more patience. Value investing opportunities become very scarce. I was accumulating cash, my trigger finger was becoming itchy but there just weren't any decent targets to take aim at.
Then the sub-prime mortgage came along and suddenly some of the shares on my watchlist were getting cheaper. To put things in perspective, the All Ordinaries had been as high as six and a half thousand in 2007 and fell to around five thousand in the first quarter of 2008 and looked like staging a recovery from that point.
I didn't want to miss the buying opportunity so I started buying. While I didn't spend all of my cash, in retrospect a think I spent too much, too early, leaving less in reserve for the opportunities which would emerge later in the year.
I think I fell for the old "this time it's different" line. You know the one where everyone tells you that there's been some sort of fundamental shift in how sharemarkets work. Think back to the dot-com boom (and bust). It 's happened many times over - the stock market crash of 1929, tulip mania - the list goes on.
Stock market commentators were saying that higher prices were justified. They said there was a great weight of superannuation money driving asset prices and that this was an ongoing and long term trend which would support shares prices. They said that industrialization of China had lead to a resources "super cycle" - everything was different now!
Even though I considered myself a skeptic, I was worried that the market would recover from this hiccup and carry on it's merry way, leaving me behind. I felt I needed to take advantage of the "relative" value in share prices, even though I didn't consider it absolute value.
Investing is a long term game. Even though the last bull market was a long one, history told us that it had to end. It also told us that the longer the bull market and higher it goes, the longer and deeper the bear market that follows it. Benjamin Graham, author of The Intelligent Investor and Security Analysis recommended buying blue chip stocks at no more than two thirds of their most recent highs. This was to protect investors from the market's inevitable manic depressive behavior. He believed there would always be another opportunity - that the market would always over-correct on both the upside and the downside.
Once again, Ben has been proven right. The Australian Stock Market has shown how quickly things can turn ugly. I should have had more patience in waiting for that value to emerge.
Saturday, December 20, 2008
Institutional Transactions - Week Ending 19/12/2008
This week has been a relatively quiet one for institutional investors - at least among the money managers that I keep an eye on. I guess everything is winding down before Christmas. And with the the performance of the Australian stock market (and global financial markets for that matter) this year, I suspect this is a year that some of those in the industry would prefer to forget.
Some Of The More Interesting Substantial Shareholder Notices This Week.
452 Capital Pty Ltd bought some more Consolidated Media Holdings Limited shares (ASX:CMJ) to go to over 7% this week following an announcement at the end October that they held 5%. They joined Perpetual, among others, as substantial shareholders of the company. Consolidated Media Holdings is the old Publishing And Broadcasting, without the gaming assets plus a few other 'minor' tweaks.
Australian Value Investor Maple Brown Abbott Limited has sold down its stake in Metcash Limited (ASX:MTS) again after selling shares in September and October this Year. Maple Brown Abbott join 452 Capital Pty Limited and Lazard Asset Management in heading for the exits in recent months. I don't follow Metcash at all, but I noticed from the share price graph that the stock price has been rising in recent months.
Perpetual has been active in the market again this week. The have been buyers of Consolidated Media Holdings Limited, Billabong (ASX:BBG), Incitec Pivot (ASX:IPL), CVC Ltd and sellers of Skilled Group (ASX:SKE), Crown Ltd (ASX:CWN) and Norfolk Group (NFK).
In other news, Manhattan Software passed 50% ownership of MYOB Limited. This is after the MYOB board capitulated and recommended a revised, conditional offer from Manhattan at a little over $1.15 per share. The offer is conditional on acceptances reaching 90% at which point the rest of the shares can be compulsorily acquired (the details of the offer are a little hard to explain in a concise manner here, so have a look at the announcement on the Australian Stock Exchange website if you want exact details). The directors, who control nearly 30% of MYOB stock have said they will accept the higher offer. After reaching 50% this week and including the board's almost 30%, Manhattan Software must be close to 80% - just 10% away from taking MYOB private.
Some Of The More Interesting Substantial Shareholder Notices This Week.
452 Capital Pty Ltd bought some more Consolidated Media Holdings Limited shares (ASX:CMJ) to go to over 7% this week following an announcement at the end October that they held 5%. They joined Perpetual, among others, as substantial shareholders of the company. Consolidated Media Holdings is the old Publishing And Broadcasting, without the gaming assets plus a few other 'minor' tweaks.
Australian Value Investor Maple Brown Abbott Limited has sold down its stake in Metcash Limited (ASX:MTS) again after selling shares in September and October this Year. Maple Brown Abbott join 452 Capital Pty Limited and Lazard Asset Management in heading for the exits in recent months. I don't follow Metcash at all, but I noticed from the share price graph that the stock price has been rising in recent months.
Perpetual has been active in the market again this week. The have been buyers of Consolidated Media Holdings Limited, Billabong (ASX:BBG), Incitec Pivot (ASX:IPL), CVC Ltd and sellers of Skilled Group (ASX:SKE), Crown Ltd (ASX:CWN) and Norfolk Group (NFK).
In other news, Manhattan Software passed 50% ownership of MYOB Limited. This is after the MYOB board capitulated and recommended a revised, conditional offer from Manhattan at a little over $1.15 per share. The offer is conditional on acceptances reaching 90% at which point the rest of the shares can be compulsorily acquired (the details of the offer are a little hard to explain in a concise manner here, so have a look at the announcement on the Australian Stock Exchange website if you want exact details). The directors, who control nearly 30% of MYOB stock have said they will accept the higher offer. After reaching 50% this week and including the board's almost 30%, Manhattan Software must be close to 80% - just 10% away from taking MYOB private.
Monday, December 15, 2008
Watching What Fund Managers Are Buying And Selling
Buying Australian shares has taken nerves of steel in recent times. All of the major Australian stock market indexes have spent most of the year in a decline that has ranged anywhere from a steady fall to alarming drop depending on the prevailing mood in world financial markets.
Australian investors need all the help they can get. Could keeping an eye on what the professional fund managers are buying provide you with some clues as to how to invest your money? While institutional investors don't always get it right I think watching what shares the managed funds are buying and selling can be a useful exercise.
I tend to use this information in one of two ways.
Identifying Investment Opportunities:
The first way I use this information is as a way of finding new shares to invest in. I should stress at this point that just because a fund manager is buying shares in a particular company, does not mean I would automatically go out and but that stock. Investing money in something just because a leading fund manager is buying is not a good way to make money, in my opinion.
What I tend to do is research the company in more detail and apply my own quality and valuation criteria to it. Look at earnings and dividends. Does it have low debt? Does income cover the interest on borrowings with a sufficient margin? Does it have a good return on invested capital? And so on...
In most cases, I cant make a compelling case to buy shares in the company and I move on to the next opportunity. It doesn't mean the stock wont go up - it just means that I can't find any reason to buy based on fundamentals.
Because of the resources available to most institutional investors, they are more likely to spot opportunities before I do. In this way, a number of situations have come to my attention which I would otherwise have missed. It's normally after a sudden share price drop that a situation like this presents itself.
As Part Of My Investment Research:
The other way I use this information is as a kind of a sanity check when I'm doing my research. When investigating an investment opportunity, I normally have a look to see who the substantial shareholders are and who has been buying or selling lately. While it's not normally a deciding factor, if I see that one of the better Australian fund managers has been buying, it would strengthen the case. Conversely, if I see that some of the best performing managed funds have been selling, it would raise a red flag and cause me to dig a little deeper. But, just because they are selling, doesn't automatically mean the company is a poor investment. You don't know why they are selling.
How To Find The best Fund Managers:
This is a difficult question. If you're going to spend time watching a professional you'll need to make sure it's someone worthwhile. Perhaps the best indicator is the fund managers performance over an extended period of time - preferably through both bull and bear markets. Look for consistent performance as measured against an index like the All Ordinaries or the ASX 100 (or some other appropriate sharemarket index) or against other managers with a similar risk profile.
The other thing to look at - and I think this is just as important as performance, if not more so - is their investment style. Do they buy growth stocks or are they a contrarian investor? My value investing bias leads me to monitor fund managers like Maple Brown Abott or Investors Mutual or one of the other value investors. The important thing is to make sure their style matches your idea of what makes a good investment.
Benefits Of Following Fund Managers:
As I said earlier, these guys have more resources than you do. They're likely to have looked of lots of companies before buying and hopefully they've done their homework. And while this doesn't mean you should automatically follow them, it can give you ideas or add weight to an idea you already have.
Disadvantages Of Following Fund Managers:
I will stress again that you should not mindlessly follow the actions of one or more institutional investors, buying and selling whatever shares they do. You're not privy to the reasons behind a given transaction. Remember the decision was made in the context of an entire share portfolio. Depending on their investment strategy, it may be part of an broader asset allocation policy. Or it could be a high risk purchase of a distressed security in an industry where the manager has special expertise. Or any of more than a dozen other reasons.
The other problem is when they sell. They wont give you a call or send you an email to tell you they're about to sell. And if they're a big investor and they sell a large quantity of stock, the share price could be dragged right down by the selling pressure. You could then be stuck with an unloved company which was bought for reasons which may no longer be apparent.
If you take a long term approach to wealth creation you can afford to be patient. The Australian stock market will continue to throw up bargains so you can afford to be picky. Keeping an eye on the fund managers can be good sport but don't get carried away.
Australian investors need all the help they can get. Could keeping an eye on what the professional fund managers are buying provide you with some clues as to how to invest your money? While institutional investors don't always get it right I think watching what shares the managed funds are buying and selling can be a useful exercise.
I tend to use this information in one of two ways.
Identifying Investment Opportunities:
The first way I use this information is as a way of finding new shares to invest in. I should stress at this point that just because a fund manager is buying shares in a particular company, does not mean I would automatically go out and but that stock. Investing money in something just because a leading fund manager is buying is not a good way to make money, in my opinion.
What I tend to do is research the company in more detail and apply my own quality and valuation criteria to it. Look at earnings and dividends. Does it have low debt? Does income cover the interest on borrowings with a sufficient margin? Does it have a good return on invested capital? And so on...
In most cases, I cant make a compelling case to buy shares in the company and I move on to the next opportunity. It doesn't mean the stock wont go up - it just means that I can't find any reason to buy based on fundamentals.
Because of the resources available to most institutional investors, they are more likely to spot opportunities before I do. In this way, a number of situations have come to my attention which I would otherwise have missed. It's normally after a sudden share price drop that a situation like this presents itself.
As Part Of My Investment Research:
The other way I use this information is as a kind of a sanity check when I'm doing my research. When investigating an investment opportunity, I normally have a look to see who the substantial shareholders are and who has been buying or selling lately. While it's not normally a deciding factor, if I see that one of the better Australian fund managers has been buying, it would strengthen the case. Conversely, if I see that some of the best performing managed funds have been selling, it would raise a red flag and cause me to dig a little deeper. But, just because they are selling, doesn't automatically mean the company is a poor investment. You don't know why they are selling.
How To Find The best Fund Managers:
This is a difficult question. If you're going to spend time watching a professional you'll need to make sure it's someone worthwhile. Perhaps the best indicator is the fund managers performance over an extended period of time - preferably through both bull and bear markets. Look for consistent performance as measured against an index like the All Ordinaries or the ASX 100 (or some other appropriate sharemarket index) or against other managers with a similar risk profile.
The other thing to look at - and I think this is just as important as performance, if not more so - is their investment style. Do they buy growth stocks or are they a contrarian investor? My value investing bias leads me to monitor fund managers like Maple Brown Abott or Investors Mutual or one of the other value investors. The important thing is to make sure their style matches your idea of what makes a good investment.
Benefits Of Following Fund Managers:
As I said earlier, these guys have more resources than you do. They're likely to have looked of lots of companies before buying and hopefully they've done their homework. And while this doesn't mean you should automatically follow them, it can give you ideas or add weight to an idea you already have.
Disadvantages Of Following Fund Managers:
I will stress again that you should not mindlessly follow the actions of one or more institutional investors, buying and selling whatever shares they do. You're not privy to the reasons behind a given transaction. Remember the decision was made in the context of an entire share portfolio. Depending on their investment strategy, it may be part of an broader asset allocation policy. Or it could be a high risk purchase of a distressed security in an industry where the manager has special expertise. Or any of more than a dozen other reasons.
The other problem is when they sell. They wont give you a call or send you an email to tell you they're about to sell. And if they're a big investor and they sell a large quantity of stock, the share price could be dragged right down by the selling pressure. You could then be stuck with an unloved company which was bought for reasons which may no longer be apparent.
If you take a long term approach to wealth creation you can afford to be patient. The Australian stock market will continue to throw up bargains so you can afford to be picky. Keeping an eye on the fund managers can be good sport but don't get carried away.
Friday, October 17, 2008
Australian Stock Market News - Week Ending 17/10/2008
Well it was another turbulent week on the Australian stock market. The all ordinaries index was up and down like a yo-yo. The all ordinaries opened the week at 3,966, reached a high of 4,404, a low of 3,937 and finally closed at 3,945. This is a far cry from the high of over 6,800 reached by the all ords mid last year. The chart below shows the movement in the all ordinaries during this week.
Australian Sharemarket Chart
I can't believe how volatile the Australian sharemarket has been over the past month or so. Share prices collapse one day, rally the next only only to slump again. There are probably some very important lessons to be learned about human behavior and market psychology from all of this. As a long term value investor, I can't believe that the underlying value of some of these companies can vary so much from day to day.
You can understand why some people see shares as such a risky investment. I wouldn't like to be trying to learn about the stock market right now as I think the fear pervading financial markets would make it very hard on a beginner just starting out.
Surely this will be a great time for value investors. I noticed that renowned value investor Maple-Brown Abbott has been busy in the last week picking up shares in Paperlinx, Boart Longyear and Emeco. Another fund manager I keep my eye on is Lazard. They were buying shares in Specialty Fashion Group this week.
While I'm on the topic of fund managers, I noticed that Platinum Capital has announced a 1 for 4 rights issue. Kerr Neilson is a pretty canny investor so I was initially surprised to see him raising capital with the share price so low. But I guess that he must see lots of opportunities right now and will be able to put the new funds to good use.
The last thing I want to mention today is that it is now October. The significance of this escaped me until today. For those that don't remember, the crash in 1987 occurred in October and since that time October has been a regular period of weakness in the Australian stock market. Even more to learn about market psychology...
Australian Sharemarket ChartI can't believe how volatile the Australian sharemarket has been over the past month or so. Share prices collapse one day, rally the next only only to slump again. There are probably some very important lessons to be learned about human behavior and market psychology from all of this. As a long term value investor, I can't believe that the underlying value of some of these companies can vary so much from day to day.
You can understand why some people see shares as such a risky investment. I wouldn't like to be trying to learn about the stock market right now as I think the fear pervading financial markets would make it very hard on a beginner just starting out.
Surely this will be a great time for value investors. I noticed that renowned value investor Maple-Brown Abbott has been busy in the last week picking up shares in Paperlinx, Boart Longyear and Emeco. Another fund manager I keep my eye on is Lazard. They were buying shares in Specialty Fashion Group this week.
While I'm on the topic of fund managers, I noticed that Platinum Capital has announced a 1 for 4 rights issue. Kerr Neilson is a pretty canny investor so I was initially surprised to see him raising capital with the share price so low. But I guess that he must see lots of opportunities right now and will be able to put the new funds to good use.
The last thing I want to mention today is that it is now October. The significance of this escaped me until today. For those that don't remember, the crash in 1987 occurred in October and since that time October has been a regular period of weakness in the Australian stock market. Even more to learn about market psychology...
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