Australian investors must exercise patience while navigating a market dominated by high-frequency trading and speculative short-termism, according to Schroders fund manager Frank Thormann.
Thormann argued that while technology has accelerated markets, the fundamental drivers of long-term wealth creation remain unchanged and that investors chasing quick gains are
simultaneously turning away from consistent returns.
“You can’t expect to outperform the consensus when you are blindly following it. The good news for Australian investors is that they don’t have to,” Thormann said. “Competing with these new players on their terms, like algorithmic trading, is a losing game.”
He explained that traditional, fundamentals-based strategies continue to offer a clear path to outperformance, noting that institutional investors with the longest holding periods outperform their short-term counterparts by about 3 per cent per year.
Long-term stock prices typically follow corporate earnings and that between 80 and 90 per cent of long-term equity returns are due to the compounding power of earnings growth and dividends, according to the fund manager.
“Markets ultimately reward those who can resist short-term noise and fall back to genuine patience,” Thormann said.
“This is also why fundamentals still matter above almost everything else. Investors who scrutinise a company’s balance sheet, the quality of its management, its competitive advantage and its valuation discipline are the ones best positioned to win over time.
“By analysing a company’s earning potential over the next three to five years, rather than just the next 12 months, investors can identify significant ‘growth gaps’ where the market’s short-term expectations aren’t aligned with a company’s long-term potential.”
Thormann added that identifying companies with wide “economic moats” (competitive advantages that protect market share) remains a key strategy for long-term success.
“Think of a company with an unmistakable brand, patented technology with the potential to change the world, or even those with exclusive regulatory licences,” he said.
“These moats create a higher barrier to entry and investors that own them tend to enjoy more stable returns.”
He further highlighted earnings persistence as a critical factor, observing that companies with a track record of consistently growing earnings significantly outperform their peers.
“Portfolios structured around companies with high cash flow-to-earnings ratios consistently deliver abnormal returns of about 10 per cent per year, compared to those that just appear profitable on paper.”
Thormann suggested that the principles of long-term investing have never been more relevant for the Australian market.
“Markets have become faster, but those who can look beyond the daily noise and focus on true value creation will continue to uncover opportunities that others miss,” he said.
“Companies with genuine profitability are the ones that, time and again, reward patient investors. This won’t change.”
