The rise of a flood of private equity deals and over-inflated share prices, based on sentiment rather than earnings, have some market commentators arguing the fundamentals of investing are being forgotten.
There has already been plenty of talk about soft landings, interest rate rises, commodity price collapses and general uncertainty about where the market is heading this year.
Due to new superannuation legislation and a rash of private equity deals, there is an increased weight of money ready to be invested in an increasingly cluttered marketplace. According to Morningstar, there are more than 9500 investment options in the managed funds sector, with 543 added in the past year. Of the recent funds, 61 are new investment strategies, with the remaining funds additions to existing strategies for other fund managers’ master trust platforms and investment administration services.
Around three-quarters of the new funds are available to retail investors, while just under half are in superannuation. The most popular fund categories for new launches during 2006 were large-cap blend-style Australian share, Australian listed property and global listed property funds.
Morningstar head of research Anthony Serhan said the number of funds would continue to rise with new and perhaps more exotic options placed in front of investors. “Fund managers are having to attract investors’ attention, so they are looking for more sophisticated products,” Serhan said.
“This is a cyclical thing and reflects the fact that we are at the top of the market. Indeed, we saw a similar thing in the late 1980s with the tech boom and tech funds. It’s because managers are trying to differentiate themselves.”
The funds are chasing money flooding into the market, some of it as a result of recent merger and acquisition activity.
This activity has been driven by the private equity boom that took off in the second half of last year, and while it has been newsworthy, it could serve to mask a more worrying underlying structural weakness in the market.
Its rise appears to have come amid talk about a harsher economic environment, a correction in the resources sector and questions about the sustainability of corporate earnings.
“We are coming into a period where profit growth is not going to be as strong as it has been over the last three years, but we are really noticing that complacency in the market now where everybody is saying it will be alright, as if a company stumbles private equity will pick up the pieces,” Perpetual senior portfolio manager Matt Williams said.
Schroders’ Martin Conlon argues investors and manufacturers alike would do well to get back to basics. Highlighting the market’s recent infatuation, firstly with hedge funds and all things alternative and now with private equity, Conlon said investors should concentrate on investment fundamentals.
“No-one has ever really invented an asset class; there’s debt and there’s equity. I mean, infrastructure as a new asset class – what’s that? We think people should be spending a lot less time trying to identify new asset classes . and spend more time worrying about the underlying fundamentals,” he said.
But the increase of private equity and the resultant loss of companies from the Australian Stock Exchange may cause further headaches for the domestic market and impact on domestic investment to an even greater degree.
HLB Mann Judd head of corporate finance Justin Audent said while the overall number of new companies was increasing, there had been a decline in non-resources stocks, diluting the underlying base of the domestic market.
“With commodity prices hitting record levels, the resources sector increased its dominance in 2006, accounting for 75 per cent of all small cap IPOs [initial public offerings]. This has marked a notable decline in other sectors, with the number of nonresources IPOs falling by 40 per cent in the last two years,” Audent said.
“This is despite the fact that the market, through the weight of superannuation money and private equity deals, is still chasing any available assets to invest in.”
Some say the proverb “may you live in interesting times” is actually a curse. Investors and fund managers should find out in about a year from now whether that is true.
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