Dominic Fisher describes himself as an "old-fashioned" value investor. He likens himself to the Warren Buffett of yore, who stuck to stocks which looked underappreciated by the market, rather than the Buffett of today who will seemingly pay any price as long as a company's cashflows are neverending.
The strategy has paid off. Fisher's Thistledown Income fund returned 25% last year and is up 6.4% year to date. The fund has a five-star performance rating.
But Fisher admits that the trouble with this pure value approach is that you will have periods of underperformance, and indeed times when you struggle to find any potential investments which fit the philosophy. This is one of those latter times.
"It is not so much about identifying great businesses - there are plenty of those around. Buffett 2.0 likes companies with strong competitive advantages, or moats, companies which are cash generative. With hindsight you can tell these are the Googles, the Walmarts, the Amazons," he said. "The problem is that high quality is expensive and if you buy at that price you're giving yourself a big hurdle as an investor."
Fisher explains that stocks which fall into the cheapest 10% of the market on average outperform those most expensive stocks at a rate of 5% extra share price growth a year. "I would rather fish in that pool of stocks," he adds.
Avoid the US Stock Market
It is not just the cheaper stocks which outperform the more expensive ones - the cheaper stock markets on average outperform those which are overvalued. Fisher calls the US stock market "extremely expensive" at the moment, and expects volatility to pick up from its current low levels soon.
"The cheapest five stock markets will outperform the five most expensive ones by 11% a year according to historical data," he said. "Large cap US stocks are at very high valuations and I am finding hard to find any value in that market."
Prepare for a Market Downturn
The feeling of unease is not a new one. While he put some money to work in the sell-off following the Brexit vote, Fisher has begun to close some of those positions, as even those stocks which were priced at 20% down after the referendum are now back to all-time-highs. Fisher has not bought any UK stocks since that post-Brexit dip.
Much like Sebastian Lyon at Troy, Fisher first warned about toppy markets three years ago, and admits taking a cautious stance back then has cost him some gains. He says that that market timing is near impossible to call, but he is now positioned for a severe correction.
"I don't know whether the correction will happen in six months, one year or three years," he said. "But I have 42% of the portfolio in short-dated bonds and cash, it is very liquid. Markets are incredibly expensive... the UK and Europe are cheaper compared to the US, but if there is a major sell-off in the US it will be amplified by other markets. Nowhere is safe."
Fisher predicts the S&P 500 could fall as much as 60%, he says: "I don't really want to be right, but the market has been overvalued for four years. It is only a matter of time".
Japan is one of the few markets he is finding compelling investments in, in part because it is less correlated with other global markets.
