How important are investment fundamentals?

Anthony Rayner

Premier Miton Macro Thematic Multi-Asset Team

A broad ranging and perhaps controversial question, but a timely one, as we’re knee deep in the middle of the corporate earnings season. Textbooks suggest that the price of an equity, for example, is driven by company fundamentals, such as cashflow, return on assets, gearing, etc.

Indeed, analysts spend their time pouring over accounts, reading company research, visiting companies and listening to company calls, with the ultimate aim of assessing whether a company is correctly priced or not.

Company fundamentals are indeed one of the main drivers, especially during a quarterly corporate earnings season. Here, companies get a reality check, with management announcing their results and revisiting their guidance (not that management know what’s around the corner much more than anyone else).

Indeed, many fund managers invest using a stockpicking/bottom up approach, and many have been very successful. However, what drives the price of an investment, whether it’s equities, bonds, currencies, property or commodities, isn’t always the fundamentals. For example, the price of financial assets is also always driven by human psychology such as greed, fear, complacency, etc., to some degree or another.

There are also extended periods when the Fed is the main driver of assets; it might not even be through actions, it might just be words, and often nuances. Of course, this is less binary than it might seem, as the discount rate, and borrowing costs, are also very important for the fundamental outlook of an investment.

Another recent example is geopolitics, though, again, some of the Russia/Ukraine conflict can be brought back to fundamentals, such as lower volumes (supply chain disruption) and margin pressure (higher input costs). Nevertheless, the analysis of the geopolitical environment can be invaluable, certainly more than a narrow assessment of the investment fundamentals.

Of course, some of it is down to definition. Many stock pickers will argue that their analysis includes an assessment of the broader environment, and few seasoned and successful investors believe that it is all just about the theory.

At the minimum though, there’s more than one way to skin a cat. Our approach, for example, is to invest in a range of macro and thematic ideas, getting exposure by holding small individual positions in a larger number of investments which all link back to that idea. This limits risk to the individual positions but increases factor risk, in this case to macro or thematic ideas.

Take resources as an example, an area we like as we believe inflation will be more persistent (see later). We have exposure to baskets of mining and oil equities, and also more directly to the price of agricultural commodities, gold and industrial metals via ETCs. The equity baskets spread risk by company, whereas the ETCs reduce exposure to the volume constraints and margin pressures felt by many commodity businesses, as the exposure here is simply to the commodity price.

This approach has implications for how we spend our time. As a result of materially reducing company specific risk, we don’t visit companies, helping us to remain objective. Meanwhile, our assessment of company fundamentals is more due diligence than forensic in nature. We appreciate that this is tantamount to heresy in some investors’ minds. Instead, though, we focus our time on analysing macroeconomic trends, as well as understanding how resilient some of the long-term themes will be, such as renewables and health tech. In short, we focus on the ideas, more than company fundamentals, as that’s where we are taking more risk.

More generally, we look at the hierarchy of risk across assets from the top-down, rather than bottom up. Currently, our base case is for an inflationary environment and hawkish central banks, particularly the Fed, which leads us to believe that stagflation risks are on the rise. In practice, we believe that this will be the defining environment for investments in aggregate over coming months, overshadowing investment fundamentals, such as a company’s underlying progress. For us, this base case explains clearly the material moves higher in government bond yields, the stronger US dollar and the less favourable environment for technology companies.

That’s not to say that fundamentals won’t have periods where they reassert themselves, just that the nature of the dominant risk is ever changing. There will be extended periods when fundamentals will be less powerful, as they are now, with economic and policy risk so elevated.

How would you rate the information in this article?

Click on a star to rate it.

We are sorry that this post was not useful for you.

Write your comments here:

Tell us how we can improve this post?

Risks

The value of stock market investments will fluctuate, and investors may not get back the original amount invested.

Commodity prices can fall and rise sharply depending on supply and demand, the economic background and financial market conditions. Exposure will never be direct to any commodity.

Forecasts are not reliable indicators of future returns.

IMPORTANT INFORMATION:

For Investment Professionals only. Not for onward distribution. No other persons should rely on any information contained within this document.

Whilst every effort has been made to ensure the accuracy of the information contained within this document, we regret that we cannot accept responsibility for any omissions or errors. The information given and opinions expressed are subject to change and should not be interpreted as investment advice. Reference to any particular stock does not constitute a recommendation to buy or sell the stock.

All data is sourced to Premier Miton unless otherwise stated. Persons who do not have professional experience in matters relating to investments should not rely on the content of this document.

For your protection, calls may be monitored and recorded for training and quality assurance purposes.

Issued by Premier Miton Investors. Premier Portfolio Managers Limited is registered in England no. 01235867. Premier Fund Managers Limited is registered in England no. 02274227. Both companies are authorised and regulated by the Financial Conduct Authority and are members of the ‘Premier Miton Investors’ marketing group and subsidiaries of Premier Miton Group plc (registered in England no. 06306664). Registered office: Eastgate Court, High Street, Guildford, Surrey GU1 3DE.

006541/050522

Stay up to date

Sign up to receive the latest articles straight to your inbox

Disclaimer

This section of the website and the content it contains is for retail clients only and by persons who are resident in the United Kingdom [who are not US persons]. Professional advisers should refer to the Professional Advisers site.

The content of the pages of this website is for your general information only. It, and the products and services described within it, are subject to change without notice. We shall not be liable to you, or any third party, for any amendment, modification, suspension or discontinuance of any product or service described on our website. Neither we, nor any third parties, provide any warranty or guarantee as to the accuracy, timeliness, performance, completeness or appropriateness of the information and materials made available on this website.

You acknowledge that such information may contain inaccuracies or errors and we expressly exclude liability for any such inaccuracies or errors to the fullest extent permitted by law. Your use of any information or materials is entirely at your own risk, for which we shall not be liable.

The information contained on this website does not constitute an offer or solicitation to sell or purchase shares in the funds or portfolios or to provide you with other products or services. Any application or investment must only be made on the basis of the relevant documentation of the investment, such as, for example, terms and conditions. The information on this website does not constitute any investment, tax, legal or other advice. Persons who do not have professional experience in matters relating to investments should always consult with an independent financial adviser before making an investment decision. Any opinion expressed on individual funds, services or products represent the views of the individual at the time of preparation and should not be interpreted as a personal recommendation to buy or sell or otherwise trade all or any of the investments that may be referred to.

Website terms of use: Please ensure you have read and accept the full 'website terms of use' before continuing.

Read the full 'website terms of use' >

Disclaimer

This section of the website and the content it contains is for professional financial advisers only and should not be relied upon, or circulated to, retail clients. Retail clients should refer to the Private Investor's site.

The content of the pages of this website is for your general information and use only. It, and the products and services described within it, are subject to change without notice. We shall not be liable to you, or any third party, for any amendment, modification, suspension or discontinuance of any product or service described on our website. Neither we, nor any third parties, provide any warranty or guarantee as to the accuracy, timeliness, performance, completeness or appropriateness of the information and materials made available on this website.

You acknowledge that such information may contain inaccuracies or errors and we expressly exclude liability for any such inaccuracies or errors to the fullest extent permitted by law. Your use of any information or materials is entirely at your own risk, for which we shall not be liable.

The information contained on this website does not constitute an offer or solicitation to sell shares in the funds or portfolio or to provide you with other products or services. Any application or investment must only be made on the basis of the relevant documentation of the investment, such as, for example, terms and conditions. The information on this website does not constitute any investment, tax, legal or other advice. Persons who do not have professional experience in matters relating to investments should always consult with an independent financial adviser before making an investment decision. Any opinion expressed on individual funds, services or products, represent the views of the individual at the time of preparation and should not be interpreted as a personal recommendation to buy or sell or otherwise trade all or any of the investments that may be referred to.

Website terms of use: Please ensure you have read and accept the full 'website terms of use' before continuing.

Read the full 'website terms of use' >

The content you are trying to access is intended for investment professionals only.

Please use the button below to return to the hompage.

Disclaimer

This section of the website and the content it contains is for retail clients only and by persons who are resident in the United Kingdom [who are not US persons]. Professional advisers should refer to the Professional Advisers site.

The content of the pages of this website is for your general information only. It, and the products and services described within it, are subject to change without notice. We shall not be liable to you, or any third party, for any amendment, modification, suspension or discontinuance of any product or service described on our website. Neither we, nor any third parties, provide any warranty or guarantee as to the accuracy, timeliness, performance, completeness or appropriateness of the information and materials made available on this website.

You acknowledge that such information may contain inaccuracies or errors and we expressly exclude liability for any such inaccuracies or errors to the fullest extent permitted by law. Your use of any information or materials is entirely at your own risk, for which we shall not be liable.

The information contained on this website does not constitute an offer or solicitation to sell or purchase shares in the funds or portfolios or to provide you with other products or services. Any application or investment must only be made on the basis of the relevant documentation of the investment, such as, for example, terms and conditions. The information on this website does not constitute any investment, tax, legal or other advice. Persons who do not have professional experience in matters relating to investments should always consult with an independent financial adviser before making an investment decision. Any opinion expressed on individual funds, services or products represent the views of the individual at the time of preparation and should not be interpreted as a personal recommendation to buy or sell or otherwise trade all or any of the investments that may be referred to.

Website terms of use: Please ensure you have read and accept the full 'website terms of use' before continuing.

Read the full 'website terms of use' >

Disclaimer

This section of the website and the content it contains is for professional financial advisers only and should not be relied upon, or circulated to, retail clients. Retail clients should refer to the Private Investor's site.

The content of the pages of this website is for your general information and use only. It, and the products and services described within it, are subject to change without notice. We shall not be liable to you, or any third party, for any amendment, modification, suspension or discontinuance of any product or service described on our website. Neither we, nor any third parties, provide any warranty or guarantee as to the accuracy, timeliness, performance, completeness or appropriateness of the information and materials made available on this website.

You acknowledge that such information may contain inaccuracies or errors and we expressly exclude liability for any such inaccuracies or errors to the fullest extent permitted by law. Your use of any information or materials is entirely at your own risk, for which we shall not be liable.

The information contained on this website does not constitute an offer or solicitation to sell shares in the funds or portfolio or to provide you with other products or services. Any application or investment must only be made on the basis of the relevant documentation of the investment, such as, for example, terms and conditions. The information on this website does not constitute any investment, tax, legal or other advice. Persons who do not have professional experience in matters relating to investments should always consult with an independent financial adviser before making an investment decision. Any opinion expressed on individual funds, services or products, represent the views of the individual at the time of preparation and should not be interpreted as a personal recommendation to buy or sell or otherwise trade all or any of the investments that may be referred to.

Website terms of use: Please ensure you have read and accept the full 'website terms of use' before continuing.

Read the full 'website terms of use' >