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Published 29 November 2012 05:17, Updated 29 November 2012 06:00
Anton Tagliaferro is at the top of his game. The founder and investment director of Australian equities fund manager Investors Mutual, Tagliaferro achieved a 21 per cent return in the 12 months to the end of September.
According to investment consulting firm Mercer, Tagliaferro achieved a better result for his clients than all other long-only Australian share managers.
The reasons he did well offer important lessons for other investors.
“We bought stocks 12 months ago that we were confident could deliver earnings,” Tagliaferro explains. “There was a feeling that there was a recovery coming along but we were a bit sceptical.”
Tagliaferro avoided several stocks that appeared cheap before they became even cheaper such as Harvey Norman and Ten Network Holdings. The difference between cyclical and structural downturns is crucial, he says.
“On top of having a weakening cycle in Australia, you also have some big structural changes happening in the media and retail sectors.”
When stocks appear underappreciated by investors, you have to determine the reasons why and whether these are likely to change, Tagliaferro says. “If you can’t, you should stay away.”
Investors Mutual was also underweight resources at a time when the mining boom was starting to slow down.
The head of Mercer’s investment business in Australia, Simon Eagleton, says macroeconomic factors have recently played a bigger than normal role in determining whether stock pickers have done well.
“It has been a challenging period for active managers,” Eagleton says.
Mercer’s survey suggests that most active share managers failed to beat the market over the past 12 months.
While the S&P/ASX 200 rose by 14.8 per cent in the 12 months to September, long-only domestic share managers’ median result was 14.7 per cent. Index managers had a median result of 14.5 per cent for the 12 months, according to Mercer.
Just 10 per cent achieved returns of 19 per cent or more.
Beating the market in the next 12 months won’t be any easier. Low interest rates here and overseas, tepid demand and concerns about the US and European economies make it a difficult time to buy.
“The market has had a big re-rating,” Tagliaferro says. “We are a little bit cautious because the market has risen pretty strongly.”
He says stocks with strong dividend yields, such as Telstra, remain attractive because of low interest and bond rates.
The relatively poor performance of many active managers in recent times has led to a rise in the popularity of passive managers who base investment decisions on a predetermined index rather than forecasting future performance.
Eagleton from Mercer says a bigger than normal influence of macroeconmic factors has created a challenging period for stock pickers.
“We believe in active management but at the same time you have to have enough skill to overcome the transactional cost headwinds,” he says.
While many investors have fled to passive managers in an attempt to reduce costs, Tagliaferro insists there is still plenty of value to be found.
“A couple of popular active managers have been a bit disappointing in the last couple of years, not including ourselves,” he says.
Tagliaferro, not surprisingly, believes active management of stock portfolios remains the best way to generate a market-leading return.
“I don’t think passive management in this environment is the right way to go,” he says. “We still think it is a market for stock picking.”