Can you describe your investment style?
It would probably fit into the category of a GARP (growth at a reasonable price) style, but it’s very flexible. Different markets require different investors and if you’re measured monthly or quarterly, it becomes increasingly difficult to stick to a narrow style.
I feel most comfortable with deep value investing, but you only get that opportunity about once a decade. I have gone through three such periods: at the end of the tech wreck; half-way through the GFC (Global Financial Crisis); and then the 2020 COVID sell-off. Those are the three big bear markets that created opportunities. Even though it’s difficult when the market becomes pessimistic, if you’re willing to battle your way through and defend well enough with your portfolio, there will be an opportunity at the end of it.
From 2015 to the end of 2020 – outside of that COVID sell-off – you had to be very flexible if you invest the way I do. You had to understand that, with interest rates so low, different industries would trade at different multiples and that certain industries would have higher valuations. If you wanted to stay in the game, you had to play the game. You had to look at the tech companies and those companies that were able to take their business model offshore, like retail, and try to pick the best ones. In the past four or five months, that game has ended – and that suits me. I no longer have to push myself to buy companies that look expensive, don’t have earnings, and require capital into the future just to survive. But there was definitely a period where you couldn’t just sit on your hands and say, “I don’t want to play!”.
You make it clear that you were somewhat uncomfortable playing that game, so how did your fund perform during that period?
We did OK. The only time we didn’t do so well was at the back end of the 2019 financial year. We aim for a gross return of 13 to 15 per cent, with the idea that we avoid big draw downs (losses). Since we started in 2015, we’ve been delivering gross returns of between 17 per cent and 18 per cent.
What is your outlook for markets over the next 1, 3 and 5 years?
This year is going to be tough; interest rates are rising and inflation is a big issue globally. At some stage, we will hit a bottom in the market, which will create a buying opportunity. Until then, you’ve just got to play defensively, try to scramble through and wait for that deep value scenario.
If my 1-year scenario is correct, I think we are setting up for a reasonable 3-year period, on the proviso that inflation is kept under control. I don’t think we’ll have the same leadership group. The current trend is for de-globalisation, so you’ve got to find companies that benefit from building facilities and production, either domestically or in a country that is aligned with yours. That’s where I see the opportunity.
As for the 5-year outlook, I don’t feel as comfortable about that. I don’t think the market is so cheap that you can confidently say that a bottom this year will set you up for five years. If we get a really sharp decline that sends prices down a lot, I can see a nice 5 years ahead. But I don’t know when that bottom will be or how low it will go.
Do you see a global recession on the horizon?
Even though the market peaked in early January, a lot of the underlying stocks hit their peaks between the middle of 2021 and that market peak. So while the Australian market is only 3 per cent to 4 per cent off its high, small industrial stocks are down by close to 20 per cent, which is more in line with what’s going on in the US.
The decline has been going on for a while now and I don’t think it’s over. It really depends on what the Fed (the US Federal Reserve) does. If it is determined to get inflation into line and it keeps ratcheting up interest rates, the bottom won’t take place in equity markets until late this calendar year. This means that we will have spent the best part of 18 months in a downward trend. If, however, the Fed slows down the rates trajectory, we might get a market bottom in July.
What would you like to see happen?
As an investor, I’d like to see us put into recession, inflation killed off and rising unemployment because that would push us into another deep value scenario. But that’s a very selfish view! As a human being, I hope the Fed manages to navigate this smoothly. It is never nice to go through a recessionary period. I came out of university in the early 90s and I didn’t even bother looking for a job. I wouldn’t wish that on anyone!
In Australia, I think the consumer is in pretty good shape. House prices are high, there’s plenty of work around, and I’m hopeful that immigration will pick up again, which will boost economic growth. The inflationary pressures that we are experiencing are mostly to do with global issues that the RBA (Reserve Bank of Australia) can’t control – whether its supply chain issues, oil, or war. It’s up to the Americans and the Europeans to get that under control.
How has your investment strategy evolved over your 20-plus years in the market?
As a professional investor, there are two things to bear in mind. First, the most influential person in your investment career will typically be the first person you work with. He or she will instill in you how to look at stocks and influence the risk management structure you put in place around your portfolio and stock selection. That person for me was Geoff Wilson.
Secondly, you’ve got to find your own personality. I would encourage anyone who wants to be an investor to go to the casino to find out what kind of tolerance you have for losing money. The win rate there is 15 per cent, so you are going to spend 85 per cent of your time losing money. If you’re willing to double up every time that you lose money, you’ve got a different risk tolerance to me. I am the kind of person who goes down $20 and then, if I can get back to zero, I am out!
We didn’t set up Centennial to be big. We started off just managing our own capital. When you do that, it’s not just about stock selection, it’s about asset allocation. You can go to cash when you want to and take as much risk as you like. When we started actively pursuing outside money in 2015, we made it clear that we wanted to stay small and manage the fund as if it were our own money. We have a wide mandate from our investors, so we can still asset allocate; we can go to cash; we can short, which we do sparingly; and we can invest in big companies even though we typically concentrate on small caps. Our number one rule is to try to avoid big draw downs.
What are the two main lessons you’ve learned from your time investing in the market?
First, you don’t ever learn from your mistakes, so you have to put in place a system that prevents you from repeating them. From a portfolio point of view, that means using measures like stop-losses or limits on concentration levels of individual stocks to minimise the damage.
One of the major mistakes investors make is believing that they are right – even when the market is banging them on the head saying, “You are wrong!”. They’ll read a negative announcement from a company and think, “Yeah, but …” or make excuses. But if you have a stop-loss, whether it be 10, 15, 20 per cent or whatever your tolerance is, that will take the decision out of your hands. There’s nothing wrong with being a contrarian, but you’ve got to be able to admit at some point that you are wrong!
Secondly, you’ve got to start your analysis by looking at the balance sheet and cash flow. I learned that lesson early from Geoff. As bull markets run, these fundamental steps tend to fall by the wayside. You’ll start to think, “This company is growing at 40 per cent, it’s got a huge market, it’s on 70 times earnings but it’s going to go to 90.” You’ll fall into the trap of being infatuated by the story. That’s when you’ve got to pull yourself back and say, “Let’s start where we should start.” The story in the end might still be terrific, but you need to start with the right foundation.
The markets are going through a tumultuous time, with uncertainty surrounding inflation, monetary policy and geopolitical uncertainty. How have you positioned your portfolio to cope with this?
I would say that the uncertainty has turned into a lot of certainty. I don’t know anyone who’s bullish on markets at the moment, which, of course, could be the first sign that the market is closer to a bottom than we think!
So how have we positioned our portfolio? Well, we have different levers we can pull. First, we have increased our cash position from around 10 per cent to around 35 per cent. We understand that we are not here to get paid for cash, so this isn’t a permanent solution, but it can be used effectively in short bursts. Since last year, we’ve switched a proportion of our small cap portfolio into larger, more defensive stocks, like healthcare and telcos, which are very liquid.
We are also starting to forage around for small cap companies that have fallen and are starting to represent good value on our metrics. Unfortunately, what I learned from the GFC is that companies can appear to be decent value and you start to invest in them, but they become even better value over the next four or five months.
Finally, we occasionally short stocks but to do that, we have to operate in the bigger end of the market. Borrowing stock for short selling is expensive, or unavailable, at the small end.
Your focus is on small industrials. There is a current dislocation between resources and industrials, so have you adapted your portfolio?
We make it clear to our investors that there are two sectors we don’t really invest in. We won’t go into biotech, full stop, because the sector is too binary for our outcome. And, while we may play in selected resources stocks, they will never be a dominant part of our portfolio.
That said, you’ve got to be aware of the trends. Naturally, your portfolio changes a bit depending on what gets brokered to you, whose raising money, and what gets put in front of you. At the moment, of the 40 companies that we are long on in our portfolio, 4-5 are resources stocks. But we will never pretend to be resources experts and it would be dangerous for us to shift half the portfolio into mining companies.
It’s not the easiest market for us when there’s a resources boom on, but I try to see it as a good learning opportunity. This time around, it’s been good to learn more about the inputs to batteries. We all know that batteries will play a huge role going forward, so it’s good to understand more about that and occasionally make decisions in that area.
You went from being a financial journalist to a fund manager. What are the key similarities and differences in the roles?
As a journalist, your task is to collect as much information on a subject, and then work out the two or three key points that make that article relevant and readable. As a fund manager, you sit in the middle of a giant information flow and your job is to work out the two or three key variables that make a stock move.
When I left The Sydney Morning Herald and went to work with Geoff Wilson AO at Wilson Asset Management, it took me a year and a half to use that skill, but change my mindset. For 18 months, I would say, “That would make a great story!” when what I really needed to ask is, “Will it change the value of the company?”
The other thing journalism teaches you is to be sceptical, especially about people and what they are telling you. That’s a good trait. Fund managers will regularly tell you that a person lied to them, or didn’t tell them the complete truth, or let them down. Really, it’s part of their job to be able to work that out. Journalism teaches you that.
On the downside, journalists always look for the negative story and tend to take a pessimistic view. To be a successful fund manager, you really need to be optimistic. I learned that from Geoff. He was always so positive. Negative things would happen and he’d just say, “Righto, that could be an opportunity for us.” He sees everything as an opportunity.
What else is different? Definitely the time frames. In journalism, if you don’t produce something for the paper every day, you feel like you haven’t accomplished anything. In investing, the days you do nothing can be some of your best days. This happens when good decisions you’ve made previously start to bear fruit. There may be a day when you have to be very active and make lots of decisions, and that day can set you up for the next 3-4 months.
Journalism is also a very stressful game. You’re under daily pressure to produce something and you live in fear that you have written something wrong or that your competition on another paper has a story you should have got. This prepares you well for the ups and downs of managing money. There are going to be days when a company announcement sends the stock down 30 per cent and you feel like you could throw up. But you soon realise that the market is very forgiving; there’ll always be another stock that’s moved in your favour. You’ve just got to keep calm and journalism is a good training ground for that.
You are on the Investment Committee which decides the fund managers who get to manage the Future Generation Australia money. How does Centennial fit into that portfolio?
We manage the money as if it’s our own. We try to smooth out the returns so that your drawdowns won’t be as big with us. Because of our natural caution, we won’t be the ones in a bull market who absolutely shoot the lights out. But we hope to deliver consistent returns in the range of 13 per cent to 15 per cent per annum.
I think we fit nicely into the Future Generation model. There are some fund managers who will try to hit the market 100 per cent, there are hedge funds and there are others like us who are more ‘steady as she goes’. I think that provides a good balance and diversification across the portfolio for Future Generation Australia shareholders.
Why is managing FG money important to you?
The social impact side is really important to me. Mental health is a massive issue that affects all of us – and the system doesn’t work well enough. I think Future Generation Global’s support for mental health charities is critical. Then there is Future Generation Australia’s support for youth at risk. I have three kids so obviously that’s important to me too.
But apart from seeing charities get the money they deserve, it’s also just good to be involved with something successful. And Future Generation has turned into an outrageous success. One of the biggest problems for charities is that every year they start from scratch, or close to scratch, when it comes to funds. Future Generation provides this perpetual amount of money which gives charities the chance to focus on planning and get on top of other issues.
I never have any doubts when it comes to Geoff. I have sat in the passenger seat with him and when he says he is going to do something, it is going to happen. In his typical way, he found the quickest way to create Future Generation. He found someone in the UK who had set up a similar structure, he went to see him, he worked it all out and bang, he set it up.
From that moment onwards, it was always going to be a success!
