The Bull

Monday 17

December, 2018 6:32 PM


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The paradox of the bull

 The paradox of the bull

By Expert Panel 05.11.2017

Would it surprise you to hear that we are now in the eighth year of a bull market in Australian shares? There’s always plenty of doom and gloom in the media about the current state of markets, but the All Industrials Accumulation Index is up over 3 times from its post-GFC hangover.

That’s the good news. The paradox of a being a value manager is that when the bulls have been running for a long time, we think it’s often a bad time to be fully invested.

For us, the best opportunities to buy companies occur during periods of panic affecting either a specific company or the market generally. At periods of peak negativity most investors don’t have the inclination – or the cash – to capitalise on these opportunities. We keep our powder dry and our cash high so we can buy bargains.

Out of favour – but in the money

In the past twelve months the Perpetual Pure Equity Alpha Fund has benefitted from investments in high quality companies with good management and a solid balance sheet but which for one reason or another were well and truly out of favour with the market. Three examples of this include:

    •    Alumina Ltd (ASX:AWC) which was up 56% over the FY17 financial year

    •    Sims Metal Management (ASX:SGM) up 66% over that year, and

    •    Nine Entertainment Company (ASX:NEC) which was up 43% over the same period.

We invested in these companies at the lower end of their respective cycles. They had suffered negative earnings revisions and analyst recommendations were mostly negative. The respective sectors (Free to Air TV, US scrap metal and Alumina) were on the nose and extremely unpopular with the herd. When we were buying these companies, it was a pretty lonely experience.

Fast forward to today and companies like Sims and Alumina are now market darlings. But you’ve got to exercise your value discipline when share prices are on the way up as well as on the way down, so we have now sold out of Sims and materially lightened our position in Nine Entertainment.

Needles, haystacks

Given the strong stock market and lack of volatility there is a limited number of companies or sectors which are now out of favour and representing good long term value. However, there are a handful of decent companies where we have recently used short term negative sentiment or cyclical issues to find a good entry level onto their share register. Being patient, staying liquid and moving quickly when we identify these opportunities is important for us. Just as important is maintaining a disciplined selling strategy when we believe the price of a company in our portfolio has outstripped its earnings potential.

We’ve been applying our value investment philosophy for over 50 years and have, time and time again, proven to add value through market cycles.


This article has been prepared by Perpetual Investment Management Limited (PIML) ABN 18 000 866 535, AFSL 234426 and issued by Perpetual Trustee Company Limited (PTCo) ABN 42 000 001 007, AFSL 236643. The views expressed in the article are the opinions of the author at the time of writing and do not constitute a recommendation to act. The author is an employee of PIML, the issuer of the products. Any information referenced in the article is believed to be accurate at the time of compilation and is provided by PIML in good faith. It is general information only and is not intended to provide you with financial advice or take into account your objectives, financial situation or needs. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. A Product Disclosure Statement is available by calling 1800 062 725 or by visiting our website and you should consider it before making any decision about whether to acquire the product. No company in the Perpetual Group (Perpetual Limited ABN 86 000 431 827 and its subsidiaries) guarantees the performance of any fund or the return of an investor’s capital. Past performance is not indicative of future performance.



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week 21 December 2018
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    • ABS June quarter population estimates | 9:00 AM
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