Collopy and Prunty know better than most that it can pay big dividends to avoid thinking like the herd.
Theme 1: The hunt for income
Prunty: “Certainty of yield is important, and the market is willing to pay up for increasing certainty, which is a trend in big caps and small caps.”
Prunty emphasises that his fund looks for companies that are growing dividends, rather than the headline yield provided right now. Because of this Ausbil Dexia's small cap fund is protected if growth does emerge in the economy, and there are inflation concerns.
It is also crucial to recognise whether a company can support that growth, which is why Perpetual and Ausbil Dexia's funds pay a lot of attention to a company's debt levels, according to Collopy.
Theme 2: Scarcity of growth
Collopy: “Once the market thinks a stock has big growth, it gets very expensive, very quickly.”
Many of the well-known online service providers like Seek.com are trading on multiples over 20 times, which implies earnings growth of 20 per cent a year for the foreseeable future. If there is a hiccup in their earnings, watch out!
Perpetual avoids these stocks for this very reason, while Ausbil Dexia has a stake in online travel agency Webjet.
Theme 3: The stimulus rally
In mid-September the US Federal Reserve Governor Ben Bernanke announced his government's decision to effectively print money and buy US$40 million ($38 million) of mortgage-backed securities every month until it sees an improvement in the jobless rate.
Bernanke & Co have effectively guaranteed returns in the short term. It's especially positive for the miners of hard commodities such as gold, copper and oil and gas that rely on global economic growth for price rises.
Since the announcement, there has been a massive “stimulus” rally in gold and small resources companies where collectively these stocks have outperformed industrial companies by about 10 per cent.
Will it keep going? Those ASX-listed resource companies with US operations will certainly be hoping so. Over the long term, however, such “quantitative easing” produces massive inflation, which is disastrous for everyone.
Theme 4: Prepare for an Australian dollar fall/US dollar rise
The factors involved here are anticipated aggressive cuts to the official interest rate by Australia's authorities and the view that the US will not fall off the so-called “fiscal cliff” early next year, and that its economy will continue to show signs of growth, albeit slowing growth.
Ausbil in particular has built into its portfolio an exposure to industrial and resources stocks that have US earnings, which will be big beneficiaries if this happens.
Theme 5: Green shoots pointing to an economic recovery
Prunty: “We are seeing the embryonic signs of a return to corporate activity. There are tentative 'green shoots' if you will, in both takeover activity, secondary raisings and placements, although we haven't seen any IPO [initial public offer] activity.”
Such activity underpins value in the sector and can lead to some big returns. Both Prunty and Collopy believe that the obvious areas for corporate activity are in the mining and mining services sector.
This week, shares in one of Under the Radar's stocks, oil rig services provider Neptune Marine, spiked 60 per cent. It has been made an offer by 19.5 per cent-holder Singapore-based MTQ Corp, which lobbed a cash offer of 3.5¢ a share.
We will conclude with the remaining 5 Big Themes on Wednesday. Hopefully you will be reading them after a big Melbourne Cup win. This column is not sponsored by Tom Waterhouse.
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