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1) It's another solid day for the S&P/ASX 200 Index (ASX: XJO), up 27 points or 0.38% on Thursday afternoon.
In what feels (to me at least) like the year from hell for stock market investors, the ASX 200 is down just 1.9% over the past 12 months. By contrast, on Wall Street, the S&P 500 Index (SP: .INX) has fallen 14%, with the Nasdaq Composite (NASDAQ: .IXIC) down almost 29%.
The resources sector has been powering the ASX 200 index higher, with coal and lithium the standout commodities. The Whitehaven Coal Ltd (ASX: WHC) share price has soared more than 255% over the past year, while the Core Lithium Ltd (ASX: CXO) share price has jumped 160% in the same period.
You have to go all the way down to the 18th best ASX 200 index performer over the past 12 months to find a non-resources company, that being Computershare Limited (ASX: CPU), its shares rising by 41%. Bringing up the rear is poor old Magellan Financial Group Ltd (ASX: MFG), its shares crashing 71% over the past year.
Therein lies the tale of the tape for investors… great for commodities, awful for many industrials and most technology shares, including those who invest in US markets.
Count me in the latter group, despite some individual success, like the takeover of MSL Solutions Ltd (ASX: MSL) at an 80% premium, and my largest position – Warren Buffett's Berkshire Hathaway (NYSE: BRK.B) – being up 10% over the course of the last year.
2) Still, I live to fight another day. I hold a decent cash balance, and hold out recovery hopes – over the next three to five years – for my beaten-down ASX growth stocks.
In these times when the macro – particularly inflation and, therefore, interest rates – is driving the direction of the markets, it's easy to get caught up worrying about the next day or week, rather than keeping your investing eyes on the horizon.
Howard Marks of Oaktree Capital is one of Wall Street's legendary investors. In his latest memo, Marks tells us mere mortals…
"The vast majority of investors can't know for sure what macro events lie just ahead or how the markets will react to the things that do happen."
He basically says – for any number of reasons – that investors should pay little attention to macro events. He also reminds us that volatility – effectively, the short-term movements in share prices – is just a temporary phenomenon, and that most investors shouldn't attach importance to it.
As markets continue to gyrate mostly to the tune of the words of central bankers, particularly the Federal Reserve, Marks reminds us "what really matters is the performance of your holdings over the next five or ten years".
"Invest in companies that will become more valuable over time," says Marks. It's as simple as that.
3) The Hyperion Small Growth Companies Fund has had a rough 12 months, down 27% as fast-growing stocks have been taken to the woodshed.
In February 2021, Morningstar selected Hyperion Asset Management as the overall Fund Manager of the Year, and over the long term, the fund has soundly outperformed its S&P/ASX Small Ordinaries Accumulation Index benchmark.
Writing in its October update, the Hyperion Small Growth Companies Fund says that, while they are seeing "persistent short-termism from market participants", they remain confident in the "strong fundamentals and sustainable competitive advantages" of the companies in their portfolio.
Hyperion's base case is that lower growth and lower inflation appear to be the most likely long-term scenario, an environment they believe their portfolio companies "will produce materially higher earnings growth than the broader market over the long term due to their superior value propositions, strong pricing power and low penetration rates".
You have to admire the fund's conviction, with its top five holdings making up more than 50% of its portfolio, being Wisetech Global Ltd (ASX: WTC), Fisher & Paykel Healthcare Corp Ltd (ASX: FPH), Xero Limited (ASX: XRO), Domino's Pizza Enterprises Ltd (ASX: DMP), and Lovisa Holdings Ltd (ASX: LOV).
None are cheap, even after the share prices of all apart from Wisetech and Lovisa have taken a pasting this past 12 months, yet the fund is clearly backing them all to deliver in the years ahead, damn the short-term volatility.
I'm hoping the Hyperion Small Growth Companies Fund is right, not least because I have a similar investing style and own some of the same companies (check disclosures below).
For growth investors, these past 12-18 months have been tough to watch and tougher to invest through as we've watched the value of our portfolio wither away, sometimes quickly, other times by way of slow death.
Taking lessons from above, as we look forward, here are three things that give me comfort…
- The huge winners of the next 12-24 months are rarely the same companies that have just seen their share prices shoot to the moon. In particular, I'm looking at the air coming out of many ASX lithium stocks, and I wouldn't be surprised to see much tougher times ahead for many ASX coal stocks. When everything resources goes up, it's worth remembering they are called commodities for a reason.
- Although mindful that Howard Marks says we should pay little attention to the macro, I'm willing to stick my neck out and say I think most of the pain from interest rate rises is already behind us. There will still be bumps ahead, and potentially recession in the US, Europe and New Zealand (but probably not Australia), but I don't think we'll see huge falls in quality growth stocks going forward.
- Over the long term, profit growth drives share price growth. Not valuation. Not interest rates. Not Putin, Trump, the RBA or the Federal Reserve. Hyperion is backing its top five holdings to keep growing for many years to come. Do that, and today's lofty valuations will be largely meaningless… over the long term.
