MoneyTalks Year In Review: The seven lessons about stock investing we’ve learnt from fund managers in 2021
As Totus Capital’s Ben McGarry told us in November, “you certainly have to kiss a lot of frogs as an investor to find your prince or princesses” – but how do you find them?
In 2021, we’ve spoken with dozens of fund managers and analysts about their investing philosophies and their hottest stocks.
While a handful of companies were picked multiple times, most only made the list once. And everyone had different priorities when looking for stocks.
But ultimately they all have the same goal, to gain a return on the stock they have invested in.
And there were seven key ideas (lessons) that consistently stood out among all these experts’ individual quests.
Fund managers often meet management of companies face to face before making the decision to buy or not to buy the companies.
They like to see that they have skin in the game, look after their customers and staff well and are listing or are listed for the right reasons.
One manager mentioned multiple times was Simon Henry from chemicals, logistics and waste management company DGL (ASX:DGL) which has nearly tripled since listing.
Eley Griffith’s Nick Guidera noted he owned 100% of equity at the time of listing, raised capital to grow the business and deployed it quickly after listing.
“[He’s a] passionate founder, he wants to build the business and has clear vision for what he wants to do, as opposed to a financial vendor who wants to exit the business,” Hayborough’s George Capozzi said.
But sometimes, as Spheria’s Adam Lund said, founders aren’t the right people to manage the transition to the ASX and they need to make way for a more experienced public company founder.
In which case you look for executives with a proven track record in the industry.
But either way, they might have to make difficult decisions for the long term which might mean sacrificing a short-term share price gain – and with it short-term compensation.
Totus Capital’s Ben McGarry pointed to Jeff Bezos at Amazon as an example where he decided to wear short-term cost inflation pressures.
“They chose to take a lower margin to buffer that impact for customers and try to build that trust and gain market share that’d pay off in the long term,” he said.
“I suppose management teams with a shorter-term focus might’ve just raised prices to offset that cost inflation and potentially damage business in long term by taking that easier path.
“When we look around at businesses we want to own, there’s founders taking long-term decisions where if you’re a patient shareholder it pays off.”
One concern about US tech is just whether or not it can or will get any bigger and if so, it will be anything near as exciting as the last decade.
Chris Demasi from Montaka begged to differ noting many big tech companies had new opportunities at early stage potential and even their established businesses had growth left in them particularly in developing countries.
One example was Microsoft (NDQ:MSFT) which recently surpassed the $2 trillion market cap and, since we spoke with Demasi in June, has grown another 20% to reach $2.4 trillion.
He noted corporate IT spend was forecast to grow by $6-8 trillion over the coming decade and Microsoft was in the box seat to capture a large share of it.
“And yet they only need to capture small fraction of it for that to make a massive difference to their already massive business,” he explained.
“So even though it’s a $2 trillion market cap today, I think that’s the sort of thing where in a few years time we’ll sitting here and talking about the first company to be a $5 trillion market cap and we’ll probably be talking about Microsoft.”
It isn’t a $5 trillion company yet but it is somewhat closer than it was six months ago.
One Australian company which stock investors might be forgiven for asking the “can it get bigger” question is Xero (ASX:XRO).
Hyperion Asset Management’s Jason Orthman said despite Xero’s growth from under $5 to over $130 in a decade, it was still early days for the company, particularly in its endeavours to expand overseas.
“They’re more mature in places like New Zealand and Australia but that product and platform they have is applicable to the whole world, the global addressable market,” he said.
“We think they have decades of growth to go and our view is that Xero will dominate that space – the small and medium business-sized accounting space – longer term.”
But if you can’t handle such big valuations, perhaps you could look for companies with indirect exposure to them.
One megatrend is electric vehicles and while you could buy Tesla (NDQ:TSLA), there are other companies indirectly exposed. Benjamin Bryan from Jennison picked electric utilities company Quanta Services (NYSE:PWR).
“Even before we talk about EVs and renewable energy, the grid was in a position it needed to be hardened and upgraded,” Bryan said.
“And if you think about the fact that EVs in the United States are 2% of car sales today but expected to grow quite quickly, it raises the question of how we can service all these cars, how are we going to charge them to get to carbon neutral environment?
“We need more generation and it has to be wind and solar but a lot of those wind and solar generation facilities are not close to the existing grid.
“They tend to be in rural areas – wind is offshore – so you need to run electric lines from those more remote areas back to the grid.
“Quanta comes in as a trusted partner and can help.”
Just how did A2 Milk (ASX:A2M) fall from grace as fast as it did? The answer is softening demand, something which Omkar Joshi from Opal Capital Management said could be seen after the infamous episodes of panic buying in March 2020, which is why he shorted it.
“You could see the trends were getting worse, you could track the data, and it was a strong performer on the short side given there were challenges but it was not being reflected in the share price,” Joshi said.
“And as it started to come through you saw series of downgrades and it hit the share price.”
Joshi did stress his decision had nothing to do with legal allegations against the company.
“We simply believed that the share price at the time wasn’t reflecting the reality of the outlook for the business,” he declared.
While many fund managers we spoke to were bullish on the ability of some big companies (particularly US tech) to get bigger, Investors’ Mutual’s Lucas Goode was skeptical.
“Your return on any security is a function of only two things: entry and exit plus dividends you get along the way. If you pay too much at entry you’ve blown up your returns,” he said.
“I’ve heard [said], ‘I would’ve been saying I over-payed for tech in 2000, but if I bought Amazon or Google I’d still be pretty happy’ but I’d say ‘If you bought Amazon in 2000 you probably also bought Pets.com and mind you, it took Amazon 10 years to get to its pre-bubble peak’.
“So I don’t know about you but I wouldn’t buy a stock if you think it’s going to do nothing for 10 years – entry point matters and that’s why we maintain our discipline.”
But the importance of entry price can work in a positive way as well. Opal’s Omkar Joshi dismissed the common adage that airlines were bad buys, noting at the right price, anything was a good buy – although at the wrong price it wasn’t.
The IPO market has been particularly hot in 2021 with well over 150 new listings. The average return is just over 18% but the performance has varied from gains of several hundred percent to retreats of two thirds.
As Eley Griffith’s Nick Guidera noted, it can be a risky game but it’s possible to find good companies.
“IPOs without the track record of being a listed entity, without historical financials and without the comfort of a good listed board, they are ultimately a high risk proposition,” he said.
“But when you see a good company – and there’s certainly been some absolute crackers in the last few years – we’ve backed them abundantly and built our conviction in those positions as they come to market.”
And yes, sometimes finding good IPOs means buying on Day 1.
“Even if that stock is up 20-30-40-50% we will have conviction over where that business will go over long term and often that’s the best day to do your buying,” Guidera said.
Guidera says it’s important to assess IPOs with the same rigour you would an already listed stock. And it helps that you get a 150-page prospectus to help you plus access to management if you’re an institutional investor.
“I think if you can back the management teams you think are aligned with you and have a five-year journey, not cashing out on day one, and then relying on the market to fund the growth going forward, I think you can back some winners,” he said.
“There is art to it [finding good IPOs] but to be fair it’s just work and preparation that goes into it.
“And I think not just doing work prior to IPO but once the company is listed, spending the time with management, doing industry calls, getting up to speed on a part of business you’re less familiar with, will set you up for success in the long term.”
ESG investing has grown exponentially as a result of COVID-19. Some say it is people becoming more aware of underlying issues such as climate change due to extreme weather events and the pandemic.
But even dedicated ESG fund managers says it wouldn’t have happened if the economics did not make sense, although it is increasingly becoming the case.
“I think if you look at alternative energy, the economics make sense and that’s been driving the growth more than anything,” Mirova’s Amber Fairbanks said.
“There’s been rhetoric and concrete actions by governments but I think at the end of the day it’s the economics that drives them more so than government policies.
“Similar with electric vehicles, they’re better cars and there’s interest in that perspective as opposed to the virtuous ‘saving the environment’ perspective.”
And Nanuk’s Tom King said the same things that are compelling ESG opportunities now might not be down the track.
“When you look at what’s likely to happen in terms of changes, they need to be pervasive and they need to deal with making industries more efficient, more environmentally sustainable and resource efficient over time,” he said.
“And the shape of the portfolio as you see it in the top 10 today is not what it has always looked like. The way we invest: we are bottom-up stock pickers, we are opportunistic in nature, the shape of portfolio shifts dependent on where we see better opportunities.
“If you look at the things that’ve paid off for us they’re quite varied in nature [and sector] but ultimately the performance, where it’s happened for the right reasons, is because we’ve been able to identify rudimentary economic drivers of businesses or industries that haven’t been properly understood, appreciated and priced in.”
The views, information, or opinions expressed in the interviews in this article are solely those of the interviewees and do not represent the views of Stockhead.
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