Can you describe your investment strategy?

Leonardo da Vinci once said “simplicity is the ultimate sophistication” and so I always say that I am very sophisticated! My strategy is to run a relatively concentrated portfolio of 20-40 stocks, typically focused on companies valued at US$15 billion or below. These companies get far less coverage by analysts and so there is more scope to unearth value. The real sweet spot for me is the US$2-8 billion range, where companies can double or even treble over time as their businesses grow, giving you real upside potential. I also try to find great companies that are going through price discovery ‘catalysts’, such as a corporate restructure, spin-off or management change. These events create uncertainty and the markets hate uncertainty. When the share price falls, you can get in at a lower price – then sit back and watch the catalyst bear fruit.

Have you changed your investment style since joining Ellerston in 2015?

I haven’t changed my fundamental investment style but two things have changed. First, I have formalised my ESG approach which was basically already in place, as I invest based on my personal values. For example, my minimum test is that the company does no harm, and I look for great companies that are also doing good for society or the environment.

Secondly, I have adapted to the volatile macro environment by adopting a barbell strategy, which means I have a balanced portfolio containing both growth and value stocks. Like a barbell, the weights of these stocks will hopefully counterbalance for adequate exposure to both. I am not going to end up concentrated in Tech stocks and losing 30-40 per cent when the market tanks. I don’t want to play that game!

You mentioned the current market turbulence both here and overseas. What is your outlook for markets over the next 1, 3 and 5 years?

There are so many moving parts that I don’t spend my time worrying about what I think the markets will do. I mean, who could possibly have predicted the pandemic or the Russia-Ukraine conflict? Instead, I focus on a company’s long-term prospects to make sure that it can thrive in different market scenarios. What we have found is that in times of market and operational stress, strong companies emerge even stronger because they have gained market share.

Are global equities looking expensive at the moment or is there still value in the small to mid-cap space?

We have definitely entered a paradigm shift in terms of inflation and interest rates. Investors haven’t experienced high rates or high inflation for ten years and this will create new pockets of value and new pockets of expensiveness. Small to mid-cap companies haven’t looked this cheap relative to the large caps for a long time.

How does the current uncertainty around geopolitics and monetary policy inform your medium and long-term investment decisions?

Recent geopolitical events – like the US-China trade war, the pandemic and the Russia-Ukraine conflict – have put a huge spotlight on supply chains. Companies are all having to ask themselves, “Where do I get my raw materials, how do I manufacture them and how do I ship my products?” This is driving the trend towards on-shoring and deglobalisation.

This is a major structural shift and it is not going to change any time soon. It’s something we have been watching for a long time and we are constantly making sure that the companies we invest in are not only going to survive these changes, but are going to benefit from them.

When it comes to monetary policy, the impact is so much harder to predict. So again, I just focus on companies with strong balance sheets, strong cash flows, and strong underlying businesses.

What are the best investment lessons you have learned?

I’ve been in the markets for 24 years now and the best lessons I have learned are the ability to say no, the importance of patience, and the need to understand risk. I look at hundreds of companies each year, so I obviously need to be able to say no to a lot of them.

Having patience is also critical, especially when it comes to periods of market turbulence. A stock can go down over a month, a quarter or even a year, but the only time you lose money is if you sell out. If you have patience and hold your nerve, you typically get your money back – and more. I have never been as inactive in terms of trading as I am currently because I have conviction around my investment story and so I am just tuning out the short-term noise.

Finally, you need to understand risk and take on measured risk in order to generate returns over the long term. People get really tied up in the short term and forget about the benefits of compounding over the long term. Look at how the bear market roared back to life after the early days of the pandemic. Those who were underweight didn’t benefit from the upswing. As Howard Marks, the co-founder of Oaktree Capital Management said, “Risk control is the best route to loss avoidance. Risk avoidance, on the other hand, is likely to lead to return avoidance as well.”

Bill also spoke to the Sydney Morning Herald.

Back to blog