Can Mainfreight carry its strong 2020 into 2021? Photo / Supplied
The Herald has asked the likes of Jarden, Craigs and Forsyth Barr for their top five NZX prospects for the year ahead.
But how do retail equity investors see 2021's top performers? Oliver Mander collates picks from his fellow retail equity investors in the Sharetrader internet chat forum - individual punters who put their money where their mouths are.
OPINION:
Once again, the retail investment community has set its expectations for 2021 as part of the Herald stock picking challenge. The rules are simple: pick five shares and see the total return (dividends and capital) eventuate throughout 2021!
This is the fourth year that I've been associated with running the Sharetrader picks, and the first with the support of the NZ Shareholders' Association (where I am now CEO) and Sharesight, a portfolio management tool.
One of the key insights is that there are plenty of shares on the NZX that fall outside the direct visibility of the major brokers in New Zealand, but pique the interest of the retail investment community. For example, Plexure, Blis Technology and Serko featured in the 2020 retail investor selections - all relatively small companies that may not feature as part of the "blue chip" focus for most brokers.
This is a symptom of another issue: the lack of research carried out by brokers on smaller listed companies on the NZX. This was cited by Plexure as one of the reasons for dual-listing on the ASX and was also highlighted by Blis Technology CEO Brian Watson in an interview last year.
For 2021, the retail investor challenge has over 350 entrants – nearly double the 2020 competition. The "top five" selections form the retail "entry" to the Herald picks challenge. Those five selections form a massive 26 per cent of the total selections made by all entrants, with a total of 119 shares selected.
The top 20 picks made by investors totalled nearly 60 per cent of total selections, and include Ebos and Fisher & Paykel Healthcare, both picked by mainstream brokers. This isn't quite the classic 80/20 "Pareto principle", but does indicate more short-term certainty across a smaller range of shares.
Interestingly, there is a big gap between Fisher & Paykel with 3 per cent of selections and the next most favoured share (Steel and Tube) with only 1.8 per cent. The retail investor predilection for small-caps and "turnaround" shares is evident with Sky TV, Air New Zealand, IkeGPS and Serko all feature in this slightly broader group.
When it comes to the top five, the "outliers" compared to the selections made by brokers are Pacific Edge and Oceania Healthcare.
Pacific Edge has had a stellar run during 2020, with its value multiplying by 10 during the year. The retail investment community seems to expect another good year in 2021.
Half of the broker selections featured a retirement sector share – all exclusively focused on Ryman Healthcare. While the choice of sector finds favour with retail investors, Oceania's higher dividend yield relative to share price is an attractive combination.
Steel and Tube has had a recovery of sorts since its Covid-19 lows midway through 2020. Since October, the share price has tracked strongly upwards from 60c to around 90c today – no doubt a factor in the company attracting the focus of retail investors.
Mark Malpass, the Steel and Tube CEO, also gets my award for "Most Committed CEO" for selecting Steel and Tube five times for his five picks. Mark, your board should be proud. (Note: this entry is excluded from the numbers above).
That is a key phrase in the context of this game. In theory, given the short-term nature of the exercise, these selections represent investors' expectations about what may happen over the next 12 months, but it doesn't represent a view on long-term focus.
Yet retail investors have shown some surprising consistency, with their "top five" selections over the last four years. A total of 13 shares have been selected, with four of those being selected more than once (a2 Milk, Heartland, Oceania and Plexure). As well as short-term expectations, does that mean that investors are "baking in" an expectation of longer-term performance as they make their selections? Perhaps not – the game has a tendency to highlight shares that are "top of mind" at the time selections are made. But the degree of consistency is interesting – it may keep a behavioural economics researcher amused for a few hours.
"Diversification" and "long-term" are key phrases associated with any portfolio, an investment strategy well-supported by the NZ Shareholders' Association. A sample of four years may not represent "long-term", but is nonetheless promising in terms of New Zealanders' approach to investment.
There are always some great pseudonyms associated with the retail share picks. Silverblizzard888 won the retail investor game in 2019 and was a creditable 9th with a 53 per cent return in the 2020 edition, with Rakon creating a strong gain in their 2020 selections.
But there's no doubt that the 2020 edition was skewed by the seven people who selected Pacific Edge. When a fifth of your selections multiplies itself by 10 during the year, it tends to knock out anything else.
So, well done to davflaws! An insightful selection of Pacific Edge was ably supported by selections of Blis Technology, Plexure and Summerset Holdings.
Nonetheless, the result highlights the pitfalls of the game format in relation to lack of diversification. While Pacific Edge produced a big gain for 2020, it's always possible for a poorly performing share to move things in the other direction. It is just as instructive to look at the other end of the table, where selections of Sky TV, Vista Group, QEX Logistics and Gentrack wiped out participants' notional returns. The least successful entrant managed a return of negative 41.7 per cent.
First, it is immediately apparent that four of the participants have continued to back Pacific Edge, which brought them much success in 2020. This is perhaps unsurprising, from an emotional perspective at least.
A2 Milk, Oceania (three each) and Plexure (twice) also feature, bringing the selections of this subgroup clearly in line with the bulk of the "top five" selections made.
Overall, though, this selection of last year's winners have selected 17 companies. The lack of commonality should not be a surprise – different investors have different goals and implement different strategies to achieve them. Dividend yield, underlying growth, environmental and social factors as well as timeframes all play a role in the selections that investors choose to make.
In the long term, it's better to be a participant in New Zealand's equity market than not at all. Equity markets have undergone something of a generational revolution over the last year or two, as a younger and more diverse demographic have chosen to look at investing as a way of securing their long-term financial future. The total of investment funds has increased by nearly 70 per cent over the last five years. For KiwiSaver, that same figure is 100 per cent, with funds invested at around $60 billion.
It isn't just the diversity and scale of investment that is changing.
The rise of sustainable investment has also had an impact over the past few years, influenced by new and older generation investors alike. An informal survey across NZ Shareholders' Association members highlighted climate-related disclosures and sustainable investment as key factors in their investment decisions.
During 2021, New Zealand will continue to develop a climate-change reporting framework applicable to all NZX-listed companies and major fund managers, with the earliest possible reporting date likely to be 2023.
For our listed companies, that represents yet another opportunity to "change the game" in terms of their relationship with shareholders. The selections made by retail investors in games like this one are increasingly likely to be influenced by corporate environmental and social responsibility as well as by financial performance.
It's worth remembering that this is a game, with a defined timeline and some very specific rules - essentially a "buy and hold" strategy for a single year, with no opportunity to adjust as events unfold during the year.
Nothing in this article, or the selections made by contestants, should be construed as any kind of financial advice. People should consider speaking to an authorised financial adviser before making any investments of any kind.
- Oliver Mander has a family investment company and is CEO of the New Zealand Shareholders Association.
F&P Healthcare's share price has held despite concerns about the US health sector.