“The market is expensive.” – a remark I am often confronted with, and followed by the question: “Should I sell my shares (equity holdings) and take profit?“
In the asset management industry, you can either follow a passive or active strategy or a combination of the two. A passive strategy approach replicates index funds – meaning you get exposure to all the shares in that specific index without any selection criteria. An active strategy strives for returns on stock picking, setting specific conditions for stock selection and following that process to select shares to be included in the portfolio. Autus Fund Managers (AFM) follow a stock-picking strategy or process. To answer the question above, it is necessary to understand how the team manages share portfolios.
I will explain this by using one of the research models used by the team to manage the Autus Prime Global Equity Fund. The analysis of 9 633 companies is available using the model’s stock screener. (see below)
If we select the following conditions, the numbers decline as indicated:
- Mega & Large companies = 1580 shares
- Strong buy = 315 shares
- Smart score of 8 to 10 = 175 shares
- Upside potential > 10% = 118 shares (or only 1,22% of the shares covered)
Now, if you ask me if the market is expensive, I still don’t know but could consider at least 118 shares that seem to offer value over the medium term and meet our conditions.
By managing the Autus Prime Global Fund, we set different conditions to lower the risk to a specific company’s share and diversify the portfolio to cover the market.
As indicated, we currently hold 42 shares in the portfolio with a maximum holding of 6,5% to further counter risk and ensure diversification into various sectors. Our exposure to technology covers 18 shares, of which the top 5 is indicated in the graph.
Our top 10 holdings are indicated in the following table.
However, asset management is not that easy. This research is based on fundamental historical data, integrated into AFM’s process, and other non-measurable conditions to enhance the decision-making process is added. We also take into account some of the following data:
- The global footprint and earnings base of the company. The future expectations of that company’s industry and the position of the company in the sector.
- How experienced are the management team, and are they aligned to shareholders interests?
- Are we prepared to hold the share for more than seven years?
The alignment of the analysis between the three models we use to do research could be summarised in what we call a snowflake analysis. This picture is a summarised indicator of the company’s historical data, future expectations, dividend policy, expected value and health of the company.
“Is the market expensive at present?”
We honestly don’t know, because we don’t buy the “market”.
Starting with analysing 9 635 listed shares and ending with a prospective 118 to invest in, we do not analyse the market’s value but focus on selecting shares (42 stock-picked shares in the portfolio). We follow a process to find value for our investors by stock-picking and believe in our process to achieve that. Apart from all the above mentioned, we also consider world economic indicators, for example, expected growth (GDP), employment (or in SA, unemployment), inflation, interest rates, manufacturing and disposable income.
We are not speculators but long term investors and we might not see short term returns, sometimes we have to wait for the results we anticipated.
“Although it’s easy to forget sometimes, a share is not a lottery ticket. It’s part ownership of a business.” – Peter Lynch