By Jemima Whyte
If you think picking stocks is hard, try picking charities.
Craig Connelly, the chief executive of the $1 billion Ian Potter Foundation and a former equities analyst, perhaps knows this better than most.
Each year, the private ancillary fund must distribute a minimum of $40 million to different charities and philanthropic projects with the aim of building a fair, sustainable, healthy and vibrant Australia.
For the Ian Potter Foundation, that means backing projects from Watertrust Australia – set up as an independent source of water and catchment policy advice – through to helping fund an Indigenous publishing cadet program at Western’s Australia’s Magabala Books, or helping bring child meditation app Smiling Mind to the ABC.
“We tend to channel our energies into improving the quality of grant-making … we just want to do that the best we can,” says Connelly.
But he also has to protect and grow the $1 billion corpus. And for years, that been done, to a large degree, by investing in listed investment companies such as Mirrabooka, Australian United Investment Company, and Diversified United Investment Limited.
More recently, the foundation has also bought into Geoff Wilson’s Future Generation Investment Company and Future Generation Global Investment Company.
The listed investment companies were among the earlier listed local impact investing models. Under the structure, fund managers waive fees and 1 per cent of the funds’ net tangible assets is directed to charities chosen either by the board, or for larger investors, such as the Potter Foundation, to a charity of their choice.
Future Generation has invested $11.7 million this year, bringing the total social investment since inception to $52.9 million.
For Connelly, that’s an appealing model because it means the Ian Potter Foundation can elect to return the 1 per cent back to its own charity. “That’s a very effective and low-cost way of maximising the value of the foundation’s investment,” he says.
Adding the fund’s retained earnings to smooth fully franked dividends is also an important element in its investment decision.
Connelly says the Future Generation companies also provide access to some of the best fund managers locally and globally; the Wilson Asset Management team critically reviews and evaluates the performance of managers. “We rely on and trust those processes, it’s not a set and forget,” he says.
As for the fund managers investing money from the Ian Potter Foundation and others?
AFR Weekend asked 10 of the Future Generation fund managers to nominate a long-term stock pick, as well as a charity they support that particularly resonates with them.
Many found it hard to pick just one, though most did, but Future Gen director Gabriel Radzyminski declined on the basis it was impossible to choose only one!
Sage Capital – Kelli Meagher, portfolio manager
Temple & Webster (ASX: TPW)
“The online retailer has enjoyed a surge in growth in the past two years as the pandemic and lockdowns drove more shoppers online, and an elevated level of spending on all things home-related. However, even after this surge, less than 10 per cent of furniture and homeware sales in Australia are online, compared to over 20 per cent and growing in the UK and US.
“As Australia plays catch-up, the overall category is set for continued rapid growth for years to come. The company has a great track record of executing its growth strategy and continues to widen the gap between itself and the competition. On a short-term valuation multiple, Temple & Webster looks expensive as the company is cycling the huge profit growth achieved during COVID-19, and it is to be expected that there will be a period of consolidation before profits accelerate again.
“However, given the long-term industry growth, its strong balance sheet and good management track record of profitable growth, we believe Temple & Webster offers an attractive investment opportunity over the long term.”
Which charity has caught your eye?
“Beyond Blue would be my favourite. During lockdown, seeing the impact of the deterioration in mental health in teenagers particularly, has really hit me hard, and we’re going to see the next pandemic is the depression pandemic post-COVID. It’s a really important thing to put funding towards.”
Magellan – Adrian Lu, investment analyst
Microsoft (Nasdaq: MSFT)
“It is one of only three ‘hyperscale’ public cloud vendors outside of China through Azure, which is expanding rapidly and used by 95 per cent of the Fortune 500 companies. Microsoft is building a powerful ecosystem of technology on top of this cloud. It is also a leading provider of software for servers and PCs, which have seen usage rise since the pandemic began, and it owns a strong productivity franchise in Office 365, which has close to 90 per cent market share yet continues to expand.
“In an industry that demands fast-paced innovation to stay competitive, Microsoft has proven adept at not only evolving its business models but also in recognising and capturing new opportunities, including some that may not be fully appreciated by the market. Business process modernisation, security, analytics, collaboration, and consumer franchises, such as gaming, are examples of where greater upside could be realised. The company is well run by a strong management team who have been good stewards of capital.”
Which charity has caught your eye? (Frank Casarotti, Magellan)
“The beauty of the model is that responsibility is outsourced to the experts in Future Generation. Emily Fuller is across the strategies around the selection, ongoing monitoring, performance and assessment. It really is about ensuring they are performing with the capital and the donations that we are making to them. The personal favourite is the Kids Helpline, founded on this opportunity to hear directly from the kids themselves. Something like that just puts everything in perspective. To quote Geoff Wilson, ‘if we can save one life, everything we’ve done will be worth it’.”
Centennial Asset Management – Matthew Kidman, portfolio manager
Envirosuite (ASX: EVS)
“Envirosuite provides technology solutions to a range of industries to improve their ability to manage environmental conditions. These industries include airports, mining, water, construction and waste.
“Recently appointed CEO Jason Cooper has turbo-charged the overall sales team and is very confident that it can grab a major slice of the environmental technology market in the company’s designated industries. The company recently also announced a major collaboration with global water consultancy group GHD to generate sales. We would expect more such tie-ups to take place in the future as consultancies search for technical solutions to the issues their clients are confronting.
“With a market capitalisation of $260 million and more than $20 million of cash on the balance sheet, Envirosuite is poised to accelerate its growth in the coming years. It’s very rare to find a global leader that is still in its infancy of market share gains.”
Which not-for-profit has caught your eye?
“We are excited to support Don Spencer’s Australian Children’s Music Foundation. One of our key staff members, Michael Carmody, sits on the board. The group provides weekly music education and instruments to disadvantaged children throughout Australia. The group fills a void in the education curriculum in schools, juvenile justice and hospitals. Music is shown to stimulate and excite kids, helping them to attend school and overcome their challenges. At Centennial, we love music and believe that it is critical that everyone gets the chance to learn an instrument and simply enjoy the magic of music.”
Paradice Investment Management – David Moberley, lead portfolio manager
IDP Education (ASX: IEL)
“Despite having significant competitive advantage through technology and reach, IDP Education still only has market share in student placements in the high single digits. This is an industry with a long tail of very unsophisticated operators that is in the process of being institutionalised.
“A lot of people see IDP as purely a reopening beneficiary. This is no doubt true – the company will benefit as borders reopen – however, the medium-term investment case and upside is more about the opportunity to gain share. I see the opportunity for the company with a leadership position to increase market share from high single digits to something in the 20s over the next three to five years in student placements. I think this is lost on most investors that focus on the very short term.
“There is a similar opportunity in the testing side of the business. IDP recently bought out distribution partner British Council from the incredibly attractive Indian market, which significantly increased their market position and scale. I see upside risk to the synergy opportunities here. Further consolidation opportunities exist for IDP and British Council in markets where they compete to do similar deals, which would be a win/win for both operators and provide meaningful scale benefits over time.”
Which charity has caught your eye?
“I think the Cerebral Palsy Alliance is an amazing organisation that does great work, particularly with early intervention.”
Marsico Capital Management, Brandon Geisler, portfolio manager
Shopify (NYSE: SHOP)
“We see the shift to online commerce continuing even after the dramatic shift forward of e-commerce during the pandemic. Shopify sits at the forefront of this shift and appears likely to grow multiples faster than e-commerce growth as it enables smaller merchants to take share from legacy ones. More so, as younger future generations age into the workforce, their consumption power should further propel this digital shift as their preference to shop online is much greater than that of older generations.”
Which charity has caught your eye?
“We don’t have a favourite non-profit in the program. We are excited to support the range of organisations, all focused on the needs of the children and youth of Australia.”
Tribeca Investment Partners – Jun Bei Liu, portfolio manager
Cochlear (ASX: COH)
“The stock is well off its highs due to concerns over the impact of the pandemic on rates of surgery and perhaps concerns competitors are clawing back some share. In our view, these are short-term issues and so now is a great opportunity.
“Cochlear is one of the best long-term stocks on the market. It is a clear market leader with a large untapped market opportunity which should support double-digit growth for at least another five to 10 years. Beyond this, there is an enormous opportunity for further growth in developing markets where adults with profound hearing loss go largely untreated. We see few technology risks from alternate therapies and Cochlear’s R&D program is larger than any of its rivals; hence, we see limited risk of a competitive challenge.
“And finally, we foresee consistent supportive funding from both governments and individuals, with clear evidence healthy hearing has benefits for both the individual as well as the productivity and wellbeing of the wider society.”
Which not-for-profit has caught your eye?
“Raise Foundation. It’s a mid-sized charity. They are trying to help find mentors to high school children. They are one of the very few doing it. I feel strongly about education. I have two young children myself, one is going into year six. I feel very strongly about education and our future, especially for teenagers in that growing up phase. It’s so important, particularly now that we saw all these challenges in COVID. I feel the foundation has provided the right support and platform for these people to find the right mentor.”
Eley Griffiths Group – Ben Griffiths, managing director and portfolio manager
PlaySide (ASX: PLY)
“PlaySide is Australia’s largest home-grown video game developer with a substantial library of self-published games, as well as a growing repertoire of development work for industry majors, including Hollywood studios. Global video gaming industry revenues are tipped to approach $US220 billion in 2024, up from about $US180 billion ($252 billion) in 2021, dwarfing cinema and music industries. It is estimated there are two billion gamers globally.
“PlaySide was recently awarded its largest ever contract of work with 2K Games (owned by US company Take Two Interactive), a group boasting its largest ever development pipeline. Latterly, Facebook also extended works under their agreement with the company. There are strong secular trends in place for the global games market and participants in this industry. The broadening demographic, rise of mobile/tablets/smartphones and the interplay of gaming influencers and social media networks will underpin these trends for many years to come. PlaySide has established an R&D capability to explore how best to exploit opportunities unfolding within the metaverse, essentially a successor to today’s internet.”
Which charity has caught your eye?
“I suppose the charity that I was most excited to support was the Diabetes Kids Fund. Having personally been touched by this insidious disease, it is great to see a fund dedicated to supporting children who are afflicted with this condition. Life is hard enough for a child in good health let alone one that has the complications of multiple daily blood tests, insulin pumps and strict diet adherence. Sturt [Eastwood] and the team at Diabetes NSW do an exemplary job, and it’s great to make a modest contribution to this effort.
Cooper Investors – Tom Hickmott, analyst, Global Equities Fund
Ferguson (LON: FERG)
“Ferguson is the market leader in plumbing and heating products distribution in North America. It plays the vital role of aggregating and selling products manufactured by an incredibly fragmented supplier base. Ferguson’s trade customers tend to be frequent purchasers; they often need products delivered at short notice and need advice on product selection.
“Ferguson converts its value proposition to customers into significant value for shareholders, driven by economies of scale and efficiently run operations. Its market is still fragmented and Ferguson has the opportunity to continue taking market share both organically and through targeted, bolt-on acquisitions. This is supported by a positive macro backdrop in the US, with household balance sheets in good shape. Despite all of this, Ferguson’s stock trades at a discount to its US listed peers, which we think is partially a function of its heritage and primary listing in the UK.”
Which not-for-profit has caught your eye?
“We are particularly inspired by the team at Orygen, led by former Australian of the Year Patrick McGorry. They provide mental health services to young people in metro Melbourne and are also engaged in mental health research. It’s an area of healthcare that impacts so many of us – one in five young people experience a period of depression before they turn 18. The need for the work done by Orygen has only become more important during the pandemic. We’re proud to support Orygen by participating in the Future Gen LICs, as well as through other philanthropic efforts at Cooper Investors.”
QVG Capital – Chris Prunty, portfolio manager
Hansen Technologies (ASX: HSN)
“Hansen Technologies provides billing software company for telcos and utilities. Founded in 1971 by the CEO’s father, Hansen is an overlooked Australian technology success story. It is headquartered in Melbourne but is global, with 1500 employees and customers in 80 countries.
“Hansen is overlooked as organic growth is not as fast as most of its sector peers. When the market thinks about tech stocks, it typically wants those with organic growth well north of Hansen’s 3-5 per cent. We’re not too fussed about the low organic growth, as the company has a great track record of supplementing this growth via acquisitions. And with Hansen’s balance sheet in the best shape in years, there is plenty of firepower to fund future deals.
“Hansen has a good track record of acquiring businesses and getting margins up. All of this shows up in a very strong return on equity of above 18 per cent. For all this, you’d think you’d have to pay a premium multiple, but Hansen trades in line with small industrial PE of 21 times, and at a discount when you factor in its low gearing and higher cash conversion.”
Which not-for-profit has caught your eye?
The Butterfly Foundation is one that resonates with me. They provide counselling to people with eating disorders. This is of interest because my wife – Martine – is a clinical psychologist who trained at Westmead Children’s Hospital and specialises in this area, so I feel like I’d get in big trouble if I didn’t give them a shout out for the good work they do!
Sandon Capital – Gabriel Radzyminski, founder and managing director
A2B (ASX: A2B)
“Some shareholders, including Sandon Capital, are very dissatisfied with A2B’s performance and its strategic direction. A2B, formerly Cabcharge, aspires to be seen as an innovator in payment solutions and communications platforms. We believe these aspirations are misguided. As a sign of shareholder frustration, A2B received a rebuke from shareholders at its recent AGM, with more than 50 per cent voting against the remuneration report and more than 42 per cent of votes cast against the re-election of the chairman. We believe changes at board level are necessary to preserve long-term shareholder value at A2B.
“If it were to abandon its technology aspirations, and devise a strategy focused on the core taxi service business combined with shareholder-friendly capital allocation, we believe A2B can be worth at least $2.50 and $3 per share. A2B also reports 27¢ per share in franking credits, which could support some form of dividend-based capital management. A2B also has significant property holdings, which when combined with its net cash position, underpins the current share price. In effect, investors are getting the rest of the company – the taxi service business – for free. This is a business that generated $35 million in annual EBITDA prior to the onset of the pandemic, and should be able to return to similar levels of earnings now that lockdown measures appear to be in the rear-view mirror.”
Which not-for-profit has caught your eye?
“I’m on the board of Future Gen, so it would be too hard to pick just one. The whole Future Gen concept is an amazing initiative by Geoff, and it’s really good to see so many fund managers get behind it and work for nothing.”
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