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Waiting for the weight to shift: Atrium
Anomalies in the market can play havoc with sound investment strategies, but fundamental valuations and patient adherence to time – or the “weighing machine” as Atrium Investment Management calls it – will eventually shift companies back to their intrinsic valuations according to the multi-asset fund manager.
In a recent note on the importance of timelines, the investment group explained its risk-targeted, valuation-based ethos regarding Australian equities, with a focus on periods of volatility when norms are bucked and fundamentals thrown out the window.
“Given the future is often impacted by a range of factors both within and outside of a company’s control that are often difficult to predict, an investment thesis can change and/or take time to play out,” the note stated.
A value manager can attribute all the qualities to a business it’s looking for, such as a competitive advantage, cash flow predictability, solid management and culture, but when markets take an unpredictable turn, as they did with the tech boom and bust of the late 90s or the resources boom in the mid-2000s, fundamental valuations can get flipped on their head.
This is where an adequate timeline becomes crucial, the manager believes. Atrium quoted the Warren Buffett maxim to make the point that value often takes time to play out over sentiment.
“As Warren Buffett says, in the short term investment markets are voting machines, but in the long term, they are weighing machines,” the note stated. “This is essentially saying that in the short term, investors can often get caught up in noise (the voting). However, a quality business which continues to grow its profits year on year should tend towards its intrinsic value (the weighing).”
Looking to invest in “outstanding companies at attractive valuations”, Atrium said its method is to ignore the noise and apportion capital to the businesses that have quality designations with a negative delta in the market pricing. “Then we wait for the weighing machine to begin!”
Those periods of atypical volatility have another plus side, the money manager added, which was evidenced during the tech and resource booms.
“These times often also create the opportunity as many traditional (but highly profitable) businesses suffered during this period and were trading at a material discount to their intrinsic value (even at times of heightened volatility).”
Atrium used the 2016-2017 period as an example of what can happen when not everything goes according to plan for investors.
“This period saw an outcome in markets where many lower quality companies (i.e. highly cyclical companies, including many with unreasonable amounts of debt) performed very strongly, and higher quality business (such as healthcare, infrastructure and industrials) performed relatively poorly,” the note states. “As expected in this environment, our performance versus the benchmark suffered… while others prospered.”
A market correction, however, is rarely a match for disciplined investing and, crucially, adherence to lengthy timelines. “Having a fundamental valuation based investment approach which is proven to stand the test of time is what investors should be searching for.”
