Zurich Investments’ Patrick Noble says the performance of equity markets over the first quarter has confounded investor sentiment.
At a time when local shares rallied 9 per cent, the most recent Westpac Melbourne Institute survey of consumer sentiment shows the vast majority of Australians continue to prefer cash as the wisest place for their savings.
According to the survey, a paltry 5 per cent think now is a good time to invest in shares, levels not seen since the 1990s.
To be sure a solid quarter does not make a bull market. Clearly there are plenty of issues the global economy must work through, but with markets selling down to quite reasonable levels, hindsight has shown there was opportunity for investors prepared to look through the short-term macro noise.
Indeed hindsight has shown many things over recent times: timing the market remains as elusive as ever; bull markets can lull investors into a false sense of security; and, because of the GFC and perhaps demographics, investor attitudes towards equities have notably changed.
Notwithstanding cash, there is a growing chorus calling for an increased allocation to bonds. For many, the call is valid, but again only with the benefit of hindsight.
Bonds, of course, have enjoyed a stellar period of returns, more so when compared to equities.
Unfortunately when returns are used to argue a preference to one asset class over another, valuations are typically forgotten.
Bonds may typically exhibit lower volatility, but many don’t scream value right now (dependent on how pessimistic you are for the future).
At the other end of the spectrum, small caps have gone under the radar of late.
The perception of additional risk has undoubtedly turned some away, though this belief is more representative at an index level, neglecting the difference between quality organisations and those that simply purport blue sky.
When analysed appropriately, small companies remain one area of the market where returns compensate the risk taken over a three to five year period.
Australian equity research
In a positive development, the ASX recently announced a trial Equity Research Scheme focusing on small and mid-cap companies.
The proposal will be trialled over an initial 12-month period, funding the production of independent research on companies with a market capitalisation up to $1 billion.
The detail in the reports will be determined by company size, with fact sheets available for companies with a market capitalisation below $50 million up to a comprehensive institutional report for companies with a market capitalisation between $200 million and $1 billion.
While more information will be available, not all of it will be readily accessible, with only fact sheets offered on the ASX website. In addition, stock recommendations will only be provided for institutional reports.
Investors will still need to understand the intricacies of any report and be responsible for their decisions. Furthermore, the coverage of the some 1800-strong stock universe will remain limited, at least for the immediate future.
For many investors, this means professionally managed funds look the best option in the small-cap space.
At a time when investors are questioning the value they get from active management, the best small-cap managers have demonstrated their ability to not only outperform the benchmark, but also the broader market, over a number of time periods.
A high-conviction approach strategy that leads to a portfolio of quality companies selected on merit rather than relative to the index should deliver compelling risk-adjusted returns to investors.
While 95 per cent of investors will seemingly disagree, an attractively priced company in a volatile market is preferable to one that is expensive when conditions seem benign.
Patrick Noble is a senior investment specialist at Zurich Investments
