Some investors describe themselves as “top-down” investors – have you ever wondered what this means?
While the definition of “top-down” will differ depending on who you ask, my explanation is that it is an investor who begins their investment process by considering big picture questions.
These questions (often relating to macroeconomics) will consider issues such as the direction of interest rates or changes in employment levels. These big picture views will often lead to an investor identifying a theme – positive or negative – which will set the tone for their portfolio.
One theme which is popular amongst “top-down” investors at present given the demographics of an aging population is the aged care thematic.
I certainly wouldn’t disagree with the viewpoint that Australia has an aging population and that this will lead to increased demand for products and services by a growing number of elderly Australians.
So growth in the provision of aged care products and services would definitely appear to be a positive thematic, however I’d caution against investors today rushing out to gain exposure.
The horse has already bolted
Consider the share price performance of the following aged care sector exposed stocks over the 2015 calendar year, a period in which the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) fell around 2%.
- Estia Health Ltd (ASX: EHE) increased 49%
- Regis Healthcare Ltd (ASX: REG) soared 45%
- Japara Healthcare Ltd (ASX: JHC) rallied 57%
Now consider this. Over the last 12 months the share price performance of each of the above three stocks looks like this.
- Estia down 21%
- Regis down 11%
- Japara flat
Blindly buying into the positive momentum of a popular thematic can leave an investor exposed to over-pricing if stocks have entered bubble territory. One of the most extreme cases of this was the dot.com boom back in 1999.
It’s also worth remembering that the price you pay will have a major impact on your investment returns, so identifying a theme early can turn out very well, but being late to the party can be a disaster.
Motley Fool contributor Tim McArthur has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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