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The Buy Side Brief collects a range of fund manager views on important investment questions.
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Q. In your opinion, what is the #1 risk Australian equity investors should be concerned about and how is this impacting your portfolio positioning?
 

Four reasons why key risks are borne in the US
Romano Sala Tenna, Portfolio Manager, Katana Asset Management
 
In essence, the primary risks to the Australian market are either made in China or born in the USA. On this occasion, we see the USA as being front and centre. To begin with, the NASDAQ has risen approximately 340% from its low of 1108 in October 2002, and the S&P500 has risen 170% from its low of the same month. This in itself is ‘manageable’ in a historical context, except that the primary drivers of these rallies (being QE 1-3) have run their course. Next, the $US is at a 12 year high to its cross-currency basket, which effectively leads to exporting jobs off-shore. Thirdly, US interest rates are on the cusp of turning up. While initial rises will not materially impact business activity, they will impact the comparative attractiveness of equities where the yield has already been compressed to distasteful levels. Finally, let’s not forget the US debt ceiling! We are, therefore, overweight cash but happy to increase our equity exposure on any correction.
 
Raising cash as a hedge against seasonal volatility
Don Williams, Chief Investment Officer, Platypus Asset Management
 
A change of monetary policy in the US is the biggest risk to equities globally. Despite being well flagged, the first increase in US Federal Funds Target Rate will add to market volatility. On May 21, 2013 Bernanke the then Chairman of the US Federal Reserve first flagged the notion of gradually reducing the bond purchasing (Quantitative Easing) program. The volatility spike, famously dubbed the ‘taper tantrum’, which followed saw the S&P 500 pull back 7.5% and our market give back 12.5%. It is entirely conceivable that we see a similar reaction from the market in the middle of the year, when the Fed is expected to raise rates for the first time after a six year easing cycle that included unprecedented use of unconventional policy tools. Carrying higher levels of cash into May/June this year, which is a seasonally volatile period for equities, would be an effective hedge against this risk.
 
Fed moves will overshadow those of the RBA
Nick Leitl, Senior Portfolio Manager, K2 Australian Fund
 
K2 continues to believe the number 1 risk to equity investors in the Australian market is the likely impact of US Federal rate hikes in 2015. The US Fed first took the Federal Funds Rate to 0% in mid-December 2008 – some 6 ½ years ago, since then we have seen three rounds of QE in the US alone. The unprecedented level of monetary accommodation has had a profound effect on global markets. However, the question of ‘How do we extricate ourselves’ remains. If the consensus proves correct, the Fed will be the only central bank this year to raise rates – globally. In comparison, Europe has recently announced a massive fiscal stimulatory package, and many investors in Australia are expecting further interest rate cuts. The Fed hikes, we believe, are likely to overshadow any further rate cuts from the RBA. The demand for yield stocks on the ASX200 has been driven largely by globally low rates, and the flagged increase is likely to put pressure on some corners of the local market. K2 is currently holding 15-20% cash to soften the volatility surrounding these risks.
 
Investors are overlooking value
Mike Taylor, Founder, CEO & CIO, Pie Funds
 
Overvaluation in crowded trades. Investors are fixated on yield and growth, forgetting about value. In our opinion paying 50x FY15 for companies like DMP is excessive
 
The chase for yield will compromise returns over time
Chris Prunty, Equities Analyst, Ausbil Investment Management
 
The chase for yield has lifted valuations in some sectors such as property and healthcare to multiples of earnings as high as they’ve ever been. Relative to interest rates, however, these valuations don’t look as extreme. Over the short term the drivers of this behaviour, lower interest rates, are likely to continue to support valuations. In the medium to long term these high valuations will cause the returns on these sectors to be lower than they might have been. One of the benefits of playing at the smaller end of the market is that there is rarely a shortage of new ideas in a relative and absolute sense. To this end, we are focusing the portfolio on a number of undervalued growth companies that are likely to experience earnings upgrades.

Unwinding of the yield trade is the key risk
Jason Orthman, Portfolio Manager, Hyperion Asset Management
 
The key risk over the medium term is the unwinding of the global yield trade as US interest rates potentially normalise. We are wary of the large re-ratings that have occurred in low growth, domestic yield stocks such as Telstra. We are focussed on quality companies with above average organic growth options, which are less sensitive to movements in discount rates. In the long term, value is created by earnings growth.
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This is general investment information and does not take into account your objectives, financial situation or needs. Before acting on the information or advice, you should consider the appropriateness of the information or advice in relation to your objectives, financial situation or needs.
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