Index funds operate against the most basic investment principles.
Interview with Chris Inifer by Jonathan Jackson
Nobel Prize in Economics winner, Eugene Fama has argued since the 1960s that financial markets are efficient and that stock-price movements are unpredictable. Fama concluded that investors would be better off in low-cost funds that track the market’s performance. According to Professor Fama efficiency of the financial market meant asset prices already reflected all relevant information. Thus it followed that trying to beat the market was an exercise in futility.
There are differing opinions of course. The market is a moving beast. It fluctuates. Dips. Rises. It is influenced by economics, politics, company performance and even the weather.
So perhaps it is wise to deviate from normal investment tropes. Chris Inifer, head of retail for Allan Gray certainly thinks so. He refutes Fama’s assertion that trying to beat the market is futile. To do so however, requires a patient, active approach rather than the passive, top down method that many fund managers follow.
Indeed, an active bottom up approach invites better results.
“Most fund managers start with the market as their entry point,” Inifer says. “They examine the industry and the economy as a whole instead of looking at specific companies, which can take time and patience. However, to outperform the market, it is worth asking yourself, ‘what you would do as a business owner, how you would act as a business and what would you own?”
It is a risky deviation from a whole of market approach. To negate the risk the fund manager’s role should be to ensure that clients understand the philosophical nature of the investment stance: bottom up or top down – active or passive. It is to also ensure that fund managers are not incentivised just to sell the assets they have and educate the client about the strategic approach.
An active investment strategy does not necessarily follow the old cliché of time in the market; it is more about paying the right price.
“Although it matters more at individual stock level, the price that you pay matters enormously because that dictates how much you make in future,” Inifer says. “The price you pay is close to the number one thing that protects you from loss.”
Inifer says the most effective way to avoid overpaying for stocks is to conduct specific research into an organisation. It is to make sound decisions based on a thorough review of a particular company and to become familiar with the company’s products and services, its financial stability and its research reports.
“What you are trying to do is think as the business manager thinks. If you were to buy or takeover a business what questions would you ask and how much research would you do? What is the valuation you want to apply? You will make assumptions, but you can protect yourself by making conservative assumptions. Take iron ore for instance. If you were to value iron ore companies using iron ore prices over the 10-year period to 2010, analysis would determine that the current value of those companies may be understated. However, if you go back 30-40 years, you will find a more true cycle and discover what the real average margins are to be able to determine what these companies are worth.”
By adopting this longer-term approach, Allan Gray believes iron ore companies are still largely overvalued.
To understand the philosophical line you are taking is a key to success in the markets and loyalty to a fund. This means understanding the difference between bottom-up and top-down and knowing when a fund manager is a quasi-stock follower or someone who plays the long game.
After all, an approach that involves beating the market, on average, over time will deliver very solid returns; by coming out on top by just 2.3% every year for 30 years you will more than double your retirement income.
Chris Inifer holds a Bachelor of Business Economics and Finance (RMIT University) and a Postgraduate Diploma (with Distinction) in Financial Planning.