Fund managers have taken advantage of a spike in sharemarket volatility to pick up bargains this month, coinciding with the S&P/ASX 200 Index hitting its lowest level since February.
Perpetual, Allan Gray, BT Investment Management, AustralianSuper and Arnhem Investment Management are among those establishing substantial positions in stocks or topping up their stakes.
The buying signifies confidence in the outlook for Australian equities and is a powerful counterpoint to the more bearish views emerging as the outlook for global growth deteriorates.
Perpetual portfolio manager Nathan Parkin said it was critical to be selective. "There are pockets of value and everything's a little cheaper than it was. Yet there are some stocks that are a lot cheaper than others where sentiment is very poor still. They are the hardest ones to buy."
Mr Parkin added that trading updates through annual meeting season showed conditions had not deteriorated since August. "If you've done the right amount of work on the balance sheet, that can embolden you to say, 'well some of these are cheap now'."
The fund manager has been active in JB Hi-Fi, for example. "We didn't hold any shares six months ago, but that's been emerging value."
The long-term approach
Clime Investment Management chief investment officer John Abernerthy, who added to his stake in The Reject Shop, referenced the king of value investing, Warren Buffett, in explaining his investment strategy.
"As Buffett says, you don't want to be buying when everyone else is buying, you want to be buying when there is general negativeness around the stock," Mr Abernethy said.
The Reject Shop has been out of favour with investors. In a trading update last week, the company confirmed that in the first quarter of 2014-15 it experienced a decline in sales of 5.4 per cent on a comparable store basis. Sales have since flattened.
"The business is fundamentally sound," Mr Abernethy said. "There's a new MD, management changes, we would expect that he be working on the business and by this time next year you should see improvement."
In January, the stock was trading at about $17. On Thursday, it closed at $8.13.
"Yes, there's been a downturn in profit, but to throw the stock out now, you'd have to say the issues in that company are not solvable," Mr Abernethy said.
"We're seeing growth over three years, better management focus, margin improvement, some hard decisions being made by new management . . . that adds up to us as an interesting two-, three-year story."
Not all unloved stocks are attractive, Mr Abernethy warned. "You want to be careful that you're buying opportunity, not hope, and we're buying Reject Shop on opportunity."
The fund manager said value investing was sometimes a lonely place to be.
Carsales.com's strategy
Even some of the high price-earning stocks have been vulnerable in the broad market sell-down, including the online darlings.
Arnhem Investment Management's Theo Maas has used the weakness to return to a substantial position in Carsales.com.
He does not believe the market fully appreciates the diversification effort that management has undertaken, instead focusing overly on the company's domestic business.
"First of all, they've made some very interesting international acquisitions, and we're especially interested in the ones they took in South Korea and Brazil," Mr Maas said.
"Then there's the domestic position, which they've diversified as well."
Carsales.com has invested $60 million in a controlling stake in Stratton Finance to get into the vehicle financing game and, separately, stakes in iCarAsia and a partial stake in the online assets of SK Encar.
Its Brazilian asset is Webmotors.
"The market is sort of looking in the wrong direction here," Mr Maas said.
"They obviously have a very strong [domestic] market position, it's always hard to defend a position like that . . . in the meantime, they've diversified the business quite a lot. You can almost compare it to what Seek has done."
Mr Maas said the downturn in sentiment towards the high P/E online sector had contributed to price weakness in Carsales.com.
It peaked at $11.96 this year and closed at $10.06 on Thursday, but was as low as $8.76 in February.
Arnhem has also used price weakness to buy some Trade Me.
The ASX 200 has appreciated 1.7 per cent since the start of October, but advanced only 0.6 per cent for the calendar year.
The benchmark closed at 5383.1 points on Thursday, losing 2.8 points, after adding more than 1.1 per cent on Wednesday on optimism about further stimulus from the European Central Bank.
