It's generally acknowledged that there are three kinds of edges in investing.
One is the behavioural or time advantage. That is, having a five to ten-year time horizon allows you to weather short-term volatility and is a more certain way to make great returns than having a monthly or quarterly time horizon.
Another advantage is the analytical advantage - can you interpret the available information in a better way, or have you created a process that allows you to identify winning names and styles?
Then, there's the third and most important kind of advantage - the information edge. Put simply, it's all about what you know (given it doesn't tread into the realm of insider trading) and more often than not, this is one advantage that has traditionally been held by fund managers and hedge fund investors.
There are stories of analysts counting cars in parking lots or breaking down trade data in an attempt to work out where retail sales are going (and which companies stand to benefit the most).
MarketMeter runs research twice a year, asking fund managers and analysts from over 130 firms to rate ASX-listed companies on a bunch of metrics. At Livewire, we're fortunate to have exclusive access to all of this data - the kind of data that can help open up the information edge that fund managers have always had.
In this piece, I'll show you how much an information edge can make a difference to your investing with the help of a model portfolio.
MarketMeter is an interactive market insights platform that measures and benchmarks institutional investor perceptions of Australian listed companies, who find it is a reliable risk management tool to understand their performance in the eyes of institutional investors.
The platform enables institutions to score companies from 1-10 on a range of factors. Participants are then able to see how their views compare to those of other professional investors. Companies are evaluated across 27 factors grouped in categories of financials, ESG, management, strategy and engagement.
MarketMeter's first-half calendar year 2023 research saw 138 institutions participate, including buy and sell-side organisations - many of whom feature on the Livewire platform.
Using a combination of quantitative and qualitative research (in other words, both numbers-based and non-numerical) insights, MarketMeter helps gauge the sentiment of these professional investors.
The data collected by MarketMeter is used by the Australasian Investor Relations Association (AIRA) every year for their Best Practice Investor Relations Awards - over 150 of the ASX200 are members of AIRA. It is also supported by super funds including Aware Super.
MarketMeter founder Nicholas Coles shared with us the 10 ASX 100 companies that recorded the highest average scores across five of the 27 factors in the MarketMeter research library.
The five factors in question were rated by the participating fund managers and analysts as the most important factors in their investment process. They are as follows:
Execution of Strategy
Effectiveness of CEO
Clarity of Strategy
We have previously written about these factors in the following:
The list, in and of itself, makes for interesting reading.
If the assumption is that the fund managers participating in the research rank the stocks that they hold in their portfolios the highest across the factors that they think are most important (not exactly a stretch), then it stands to reason that the list below contains, collectively, some of the highest conviction stock holdings across the 138 institutions that participated.
A nominal and hypothetical $10,000 was then invested in these companies as of 1 September 2022 to track their share price performance up to 1 September 2023.
The idea is to measure the correlation between the five most important factors according to the fund managers and the top 10 stocks across those factors, and the share price performance of the 10 companies in question.
Now, we're acutely aware that this is a limited data set and a one-year sample is also problematic, but we're hoping to replicate this study every six months and report the findings to you. Ultimately, we want to answer whether there will be an ongoing correlation between the top 10 stocks and share price performance.
Fisher & Paykel
The hypothetical allocation of $10,000 for each of the 10 stocks would have a current balance of $117,018 (+17%).
Of the 10 stocks measured, only two had negative performance over the period, and only three underperformed the ASX 200 return on 5.49% over the specified period. Also, the collective performance of 17% significantly outperformed the index.
The experiment proves that "quality" companies, as defined by strong management, clear business strategy, and earnings growth, make quality returns - or at least they have over the past 12 months.
As noted above, while this is a limited data set and a very simplified experiment, it does prove (at least in principle) that the funds management consensus is capable of identifying winners.
As noted above, we'll be looking to provide analysis of the research every six months, based on the MarketMeter data which is collected biannually post-reporting season.
The current data sample is accessible for fund managers and brokers to score the stocks they cover via this link.
The data gathering closes at the end of October.
This article was first published for Livewire Markets on Wednesday, 11 October 2023.
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