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Investment commentary
Investment talk
17 Oct 2008
Over the past few weeks CareSuper has had a series of very experienced, talented fund managers telling us that there are some great opportunities out there and they have never seen assets (shares, bonds) as cheap as they are in this current market. They are all very excited and can’t wait to get the opportunity to earn the fantastic returns that inevitably occur after such turbulent conditions in financial markets. But is this a fact, or simply some over-zealous fund managers who are yet to face up to the reality of a changed world and an environment that will demand greater return for the risks undertaken? In other words are the ‘easy’ gains over?
We have moved from an investment world where markets were delivering double figure returns year after year to one where we now face extraordinary daily movements, the like we have never seen before. Added to this volatility, most of the daily movements are down, which is of course very disappointing. In any market, human emotion plays a huge role in determining direction. Currently fear is the controlling force. So it should be remembered that the current volatility has often nothing to do with the underlying fundamentals of the businesses on the stock market - it is purely a reflection of the fear and uncertainty driving the actions of the market participants. This dynamic will reverse once confidence in the system returns and the markets once again focus on the fundamentals that drive valuations and stock prices. Unfortunately the path to get to this point can be painful and disconcerting. But we will get there!!
But what is CareSuper doing about these current events and how do we approach the new and ‘exciting’ opportunities presented by our fund managers? The answer is ‘we are sticking to our fundamental philosophies’! The main goal of our investment approach is to preserve capital and achieve a return greater than inflation over the medium to long term. We can only do this by seeking investments that will perform over the long term.
The current events, while potentially distressing in the short term, can be seen as part of the investment cycle. We have just gone through 4 years of stellar returns where the Balanced option produced 12%, 14%, 15% and 15.5% from 2004 to 2007. The fifth year (2007/08) delivered -4.5%, which, while disappointing, needs to be seen in context. Our records show that the average return of a Balanced fund in Australia since 1900 has been 9.4% per year. Over the past 5 years the Balanced option has averaged 10.4%; more than the long-term average, and this includes the negative return of 2007/08.
With these facts in mind, we see the current market situation as part of the inevitable business cycle, albeit at the very extreme end. Markets do reflect the extremes of human emotion and swing from euphoria when the belief is that nothing can go wrong, to total despair, when we believe everything that can go wrong will and so fear rules our every decision. Ironically it is when fear rules that the best buying opportunities inevitably appear. To quote Warren Buffet, considered to be one of the world’s most successful investors, ‘We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.’
So while we recognise that these are extremely tumultuous times, which can be bewildering, we also know that now is not the time to lose focus on the long-term objectives of CareSuper and our members. And, while we monitor our fund managers regularly, as well as revisit our risk and liquidity controls, we do not believe this is an opportune time to make major changes.
So, to those fund managers who are hammering the door down saying how wonderful their ideas are, we remain cautious, believing that at a point in the future there will be some excellent buying opportunities, but we want to be assured that stability returns to all markets and the fear that currently rules market action each day dissipates.
Greg Nolan, Manager – Investments, CareSuper
