Initially, Peter Morgan is in a jolly mood, perched on a stool on the balcony of his home in Mosman, on Sydney’s north shore. The night before, his team, the South Sydney Rabbitohs, defeated the Canterbury Bulldogs in the NRL Grand Final.
However, the mood darkens somewhat when the conversation turns to financial markets. That Morgan’s private portfolio is about 70 per cent cash investment says it all.
Morgan shot to fame in the 1990s as one of listed wealth group Perpetual ’s star fund managers and then went on to set up 452 Capital with former Commonwealth Bank executive Warwick Negus in 2002.
Eight years later the boutique investment firm unravelled after Morgan had a cancer scare – he had chemotherapy, but found he had been misdiagnosed.
For the past four years, the star stockpicker has been managing his own portfolio. Asked whether he manages money for friends too, he is quick to respond. “No. That is fraught with danger.”
That may be a pity for his mates, as Morgan says he is a smarter investor these days. Without the distraction of having to produce short-term performance figures and benchmark himself against an index, he has time to reflect and join the dots between economies, consumer trends and financial markets.
“I can sit back. I can see things happening now,” he said.
It’s just that he doesn’t like what he sees – although admittedly he is a self-confessed pessimist.
Investors heavy into property
Having lived and worked through 17 per cent interest rates in the early 1990s, Morgan understands the impact they can have on investors’ portfolios. Sure, rates may not be headed anywhere near double digits anytime soon, but the impact of rate rises is likely to be worse than it was 20-plus years ago because investors are so leveraged to the property market.
“A lot of people are building their portfolios around low interest rates. The longer it goes on, the more dangerous it becomes,” Morgan bemoaned. No one is pricing in risk appropriately, he warned.
On top of extremely low interest rates, Australians have become lulled into the sense that property prices only rise. “It’s dangerous,” Morgan said. He has owned investment property in the past, but not now.
Morgan is just as pessimistic about the Australian economy and sharemarket. As for the former, he is concerned that China is stalling and may yet suffer a financial crisis. Its banks, he argued, have huge debts and are not writing off bad loans as they should.
Meanwhile, Australian companies’ operating costs are too inflexible, and state and federal governments have higher levels of debt than they should at this point in the economic cycle. “I do think that Australia is in for a tough time,” Morgan said.
Equity prices, he said, are expensive even after the recent falls. As a general point, the former Perpetual executive argued valuations on the S&P/ASX 200 are being pushed to extremes because of the oversized superannuation industry, which has a preference for investing locally.
That price-earnings ratios are not high in Australia compared with the United States, he said, is an unfair comparison, given that the US indices are home to more growth companies, particularly in the IT sector. “A lot of our big stocks are overpriced,” he argued.
Even after the 6 per cent fall in local shares through September, that remains the case.
Morgan’s portfolio is about 70 per cent invested in cash, including term deposits. He has no holdings in international equities, possibly one of his main regrets. Most of the remainder of the portfolio is invested in a mix of Australian shares and local government bonds.
He has done well out of the latter, having bought them six months ago when the yield was 4.1 per cent. The yield has since slumped to 3.7 per cent, suggesting a hefty price rise.
As for Australian equities, Morgan is not your average punter. Indeed he is living proof that it is possible to have a portfolio devoid of the banks and the big miners.
His portfolio largely comprises small cap stocks that have potentially been mispriced.
A few months ago he bought shares in airline operator Regional Express Holdings at 75¢ (they are at about 94¢) and has dabbled in shares in the listed Future Generation Investment Fund, which invests in a variety of well-known fund managers.
Future Generation is still on his watch list should prices fall further and the shares start to trade at a deeper discount to net asset value. He is also keeping a close eye on a number of resources companies in the event that share prices come off even further.
In the interim, Morgan is happy to “sit back and watch the boats go by”. The stockpicker is mystified as to why other investors are not doing the same.
“A lot of investors are chasing returns and yield. Maybe they should be more interested in capital preservation.”