Learn the lessons of history: BlackRock

An asset allocation specialist at a leading funds management organisation has warned financial planners against recommending strategies that attempt to “mastermind” the current Australian equities bull market.

“Don’t risk your business on a low quality bet on Australian equities,” BlackRock head of asset allocation in Australia David Hudson said.

He cited history as the basis for his advice, in particular, the bull market that was experienced in the US during the 1990s and early 2000s, where certain funds managers attempted to take advantage of what they thought was the peak of the cycle and implemented alternative strategies at specific times with disastrous results.

One example he used to illustrate his point was a strategic move made by a global macro fund called the Tiger Fund.

“This fund made a massive bet and went out of all growth stocks and all technology stocks and had a portfolio chock full of value stocks which had been under-performing by miles. In the last six months of the bull market the Nasdaq actually doubled from 2,500 to 5,000,” Hudson said.

“At that point, he said: ‘I don’t understand markets anymore’, and sold off his portfolio and gave the cash back to his investors,” he explained.

According to Hudson, his investors ended up losing twice as they went ahead and reinvested into growth stocks just when the value portfolio was about to outperform due to a market downturn.

As far as the current Australian equities bull market is concerned, Hudson is predicting it will continue.

One reason behind this view is the expectation that the nation’s economic growth will be sustained for a few more years.

“We think there are not the kind of imbalances we would expect to cause a recession in the Australian economy. As a consequence, we think profits can stay at current levels,” Hudson explained.

Another factor to sustain the bull market is the demand for Australian equities that keep coming from powerful sources. These include the Future Fund, superannuation monies and private equity projects.

Furthermore, supplies of equities to satisfy this demand are few in number.

“We had the Telstra issue last year, but outside that it’s very to hard identify any major sources of supply, although I’m reliably informed that investment banks are working feverishly on bringing new issues to the market, but I think that even when they do the demand will comfortably exceed supply,” Hudson said.