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By Ashley Gardyne, Senior Portfolio Manager
07 February, 2017
Did you hear the one about the hedge fund using satellites to spy on car parks to gain an investment edge?
Sorry, there's no punchline; that was a genuine question. The hedge fund is fighting to remain one step ahead of competitors by using satellites to check car park occupancy at retailers like Walmart. The gist is they are willing to do anything to get a better read on quarterly sales and position their portfolios accordingly. While this could work for a couple of quarters, it won't be long before competitors replicate the first mover's advantage, install the same technology and compete those gains away.
It's not just hedge funds that engage in this short term gaming. As investors increasingly focus on quarterly results, the pressure on CEOs to deliver earnings growth rises every quarter and there are numerous examples of companies demonstrating the same short-sighted behaviour.
The shocking part is that time and time again we have seen this end badly. Before the global financial crisis, we saw it with banks — loosening lending standards for homeowners to drive short term growth — we know how that played out. Closer to home we saw this with Woolworths in Australia. After years of steady growth and margin expansion, it turned out this was at the expense of refreshing their stores and keeping prices sharp. Ultimately, it resulted in an uncompetitive business, market share losses, and a dramatic drop in its earnings and share price.
In contrast, Port of Tauranga invested heavily to deepen its shipping channel and expand the port — allowing it to attract larger ships and take market share. Michael Hill is rolling out its new Emma & Roe interchangeable jewellery offering, leveraging its expertise to target a new and rapidly growing market opportunity. Infratil has set up new platforms in renewable energy, data centres and student accommodation to provide the next leg of growth.
To generate an investment edge you don't need to correctly pick quarterly earnings. On the contrary, we seek to identify factors that are missed by short term investors and look for superior business models, long growth runways and management teams with a long term focus.
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