While much ado is made of the science that goes into fund manager research, real assessment puts comparable weight on the art as well according to investment leaders.
While financials and materials dominated trades leading into 2024, the popularity of other sectors like healthcare and information technology followed generational, and even demographic, lines.
The answer to the Magnificent Seven’s ‘really difficult investment problem’
It’s pretty rare to see the equity market rise 30 per cent in one year, and any investor that’s stayed in the Magnificent Seven stocks (Apple, Microsoft, Alphabet, Amazon, Meta, Nvidia and Tesla) has been richly rewarded.
But that’s almost all on expectations, Lazard global listed infrastructure portfolio manager Warryn Robertson told The Inside Network’s Equities and Growth Symposium – except for Nvidia, which is growing earnings at an astonishing rate.
“But for the other six it’s all in expectations of future earnings because their actual earnings didn’t really do that much; it’s all been multiple rewriting,” Robertson said.
That doesn’t detract from their performance; it’s a “great achievement”, and their investors have been richly rewarded. But now it’s time to make the true investment decision, Robertson said.
“Do you bet on black and roll the dice? Or do you take the expectations of those future earnings at some time in the deep, dark distant future and capitalise that by putting it in something today?”
Generally speaking, the Magnificent Seven have an amazing earnings outlook, but they’re a “really difficult investment problem to solve” – the poster child of which is Tesla.
“I don’t think anybody can tell you what it’s worth in 10 years’ time because I don’t think Elon knows what it’s going to be in 10 years’ time,” Robertson said.
So investors can try and solve that problem – and potentially get it wrong – or get paid today by investing in listed infrastructure stocks like National Grid or Transurban, where the variability around their earnings in 10 years’ time is much tighter.
“My job – all day, every day – is to forecast earnings and put a multiple on it and come up with a valuation,” Robertson said. “If you can find a group of businesses that are much easier to predict the cashflows of you’re more likely to get that valuation problem right.”
“So I’d encourage you to be brave and take some of the profits you’ve made out of the Magnificent Seven and reallocate them into much more surer, short-term cashflow generative assets today where you’re much clearer on what they look like in a decade.”
