October 2023

From Paul Moore, founder and Chief Investment Officer, PM Capital

25 years of identifying valuation anomalies

I founded PM Capital in 1998 with a clear goal: to build wealth for clients by identifying valuation anomalies through a long-term investment framework.

Our team’s core approach hasn’t changed over 25 years. The investment process I used when I began my professional investment career in the mid-80s – and have refined over almost four decades – guides PM Capital today.

The firm’s unique investment style continues to deliver an attractive rate of return for our clients, from the Global Companies Fund, the Australian Companies Fund, and the Enhanced Yield Fund. Since inception, these three Funds have produced peer leading returns and exceeded their benchmark indices and the cash rate over a long time horizon. More information on our strategies is available on our website. 

Experience is a great teacher. Our firm’s investment skill has been honed by investing through a range of market conditions over many decades. To deliver consistent peer-leading returns, professional investors need to have invested successfully through multiple market cycles. That is true of PM Capital’s senior portfolio managers.

Over the years, we’ve learned that simple, repeatable investment ideas are best. Yet many investors favour complex companies that look good on paper but are difficult to value.

Great ideas are hard to find. That’s why the Global Companies Fund typically holds 25-40 stocks based on a small number of themes. When we identify a promising theme – such as underinvestment in commodity supply – we look for the stocks best leveraged to that theme across markets. 

In interest rate securities, the Enhanced Yield Fund holds a concentrated portfolio of corporate bonds, hybrid securities and other yield opportunities, to deliver regular income and attractive returns with low volatility.

Capitalising on opportunity 

PM Capital scours global markets for valuation anomalies. These can occur when asset prices trade too far above or below their true value. Anomalies are hard to find but can be the source of attractive long-term returns.

Valuation anomalies form in different ways. In our experience, it’s often due to investors having a short-term focus. For example, when prices fall, investors often can’t see long-term value because they think a company’s problems are permanent. The valuation falls too far, creating the anomaly.

Fear also fuels anomalies. We have invested through the sharemarket crash in 1987, the Asian Financial Crisis in 1997, the tech bubble in 2000, the Global Financial Crisis in 2008-09, the European debt crisis in 2011-12, Brexit in 2016 and the COVID-19 pandemic in 2020. During each crisis, excessive market fear delivered outstanding investment opportunities in equity and interest rate securities.

Distraction is another source of valuation anomalies. Market ‘noise’ from so-called experts, commentators and central banks leads to bad investment decisions. People rely on macro-economic forecasts that are invariably wrong. There has never been as much dangerous market noise as there is today. 

Our firm’s biggest learning has been the importance of valuation. In our view, buying assets when they trade at bottom-quartile valuations is the key to producing attractive, long-term returns. Owning undervalued assets is also the best way to protect your capital and reduce portfolio risk. 

Patience is needed. It is one thing to identify and buy undervalued assets. It is another to have the discipline to wait for an asset’s full value to be realised. It can take a number of years for an undervalued company to move to fair value, and then for it return to favour as the market re-rates the stock.

This approach sounds easy in theory. In practice, focusing on valuation and long-term investing is difficult. Exploiting valuation anomalies often means owning badly-out-of-favour assets. Rarely is it easy buying companies or interest rate securities that everybody else is selling, has given up on, or has forgotten about. It is more comfortable standing with the investment ‘in-crowd’ and owning popular assets. But that’s where wealth is destroyed rather than created.

Growing wealth this decade 

PM Capital’s approach has never been more important for our clients. Investment dynamics have undergone a seismic shift in the past two years due to high inflation and interest rates. The easy gains are over. 

We believe that investors can no longer rely on low interest rates to lift all boats. No longer can they invest in passive funds and expect similar returns to what they have become accustomed to, investors will need to be more discerning as to where they allocate their capital. This is an active manager’s market.

In our opinion, the key risks this decade are investors not achieving an acceptable return, and erosion of purchasing power due to inflation. High interest rates will dampen the average market return from equities and high inflation will eat into the real return from portfolios. 

As people live longer, they will need their retirement savings to last longer as living costs rise. But it will be harder to build wealth this decade than in the past when inflation and interest rates were lower. 

PM Capital believes two responses are required. The first is to have a narrow focus on undervalued assets within markets. The second is to use fund managers who are genuinely active investors. These investors embrace volatility, in contrast to many who conflate volatility with risk, and avoid it. Volatility can result from short-term price action and is a source of opportunity for long-term investors. An ability to capitalise on volatility distinguishes successful investors from the rest. 

Clearly, investment challenges this decade abound. But with the right asset manager – and the right investment approach – attractive returns are possible. 

We firmly believe that the consistency of PM Capital’s investment process, people and performance is rare in this market. Our team has significant experience, depth and long combined tenure at the firm. Our senior leaders are also significant co-investors in PM Capital’s funds, meaning our outcomes are aligned with those of our investors. 

I’m fortunate to lead a great team – and work closely with other leaders within our firm - and will do so for many years to come.

We encourage you to read the information on PM Capital’s website about our approach and subscribe to our market and company insights. 
 

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This insight is issued by PM Capital Limited ABN 69 083 644 731 AFSL 230222 as responsible entity for the PM Capital Global Companies Fund (ARSN 092 434 618), the PM Capital Australian Companies Fund (ARSN 092 434 467) and the Enhanced Yield Fund (ARSN 099 581 558), the "Funds". It contains summary information only to provide an insight into how we make our investment decisions. This information does not constitute advice or a recommendation, and is subject to change without notice. It does not take into account the objectives, financial situation or needs of any investor which should be considered before investing. Investors should consider the Target Market Determinations and the current Product Disclosure Statement (which are available from us), and obtain their own financial advice, prior to making an investment. The PDS explains how the Funds' Net Asset Value are calculated. Past performance is not a reliable guide to future performance and the capital and income of any investment may go down as well as up.