The co-founder of one of the nation’s most profitable fund managers, L1 Capital’s Rafi Lamm, has urged investors not to get ‘sucked in by current fads’ such as the explosion of AI.
By Damon Kitney, The Australian
The co-founder of one of the nation’s most profitable fund managers, L1 Capital’s Rafi Lamm, has urged investors not to get “sucked in by current fads” such as the explosion of artificial intelligence, as the firm sees fresh opportunities for gold, energy and copper stocks.
Mr Lamm and his co-founder Mark Landau have made almost $300m in net profits for their privately held firm since 2020, far more than some of the biggest stock pickers in local funds management.
Over the past three years L1’s $3.5bn long-short strategy portfolio has returned 14.2 per cent, versus the 7.3 per cent return of the ASX 200.
In April Mr Landau said that he would take a medical leave of absence for three months, leaving Mr Lamm in charge.
“I think the most important thing is to not get sucked in by current fads. Now, whether it’s AI this year or EVs last year, or cannabis a couple of years ago, try to take a long-term perspective on what the cash flow generation is going to be for companies,” Mr Lamm told Future Generation Australia chief executive Caroline Gurney in a podcast being released on Monday.
Future Generation Australia is a listed investment company that waives its management fees and donates 1 per cent of its assets to youth-focused charities, and L1 is one of its many managers.
“The most important question to always ask is ‘what is already priced into the stock?’ It can be a fantastic company, but if everyone knows that information that’s priced in, there’s probably no opportunity. We always ask that question. If we think we can see opportunities that aren’t priced in, that makes us excited,” Mr Lamm said.
In the podcast Mr Lamm said L1’s long-short fund had recently increased its net long position to gold.
Recent geopolitical developments around the world have provided a significant boost to gold prices, reflecting its status as a safe haven asset and its appeal during periods of low interest rates.
Additionally geopolitical tensions, such as the ongoing stalemate in ceasefire talks between Israel and Hamas and escalating conflicts in regions like Ukraine, have further elevated gold’s appeal as a safe haven investment.
“We invested across a number of names on the long side, but also on the short side. We see gold stocks having some of the best free cash flow yields across the ASX 200, which really attracts us to the sector,” Mr Lamm said.
“In terms of the recent rise in the gold price, it’s always hard to explain or predict gold prices, but a few of the things that we’re seeing in the background include very strong buying by Chinese consumers, very strong buying by Chinese and other emerging market central banks, and very limited production growth. We think all those factors are likely to continue over the medium term.
“We see a higher gold price over the next few years than we’ve come to get used to over the last couple of years. I should also add that we’re seeing increasing nervousness around the sustainability of the US federal government budget. The deficits are massive and they’re set to continue into the medium term. We think this is going to be inflationary and again provide upside contribution to gold prices.”
L1 also has exposure to leading copper stocks. The price of copper has risen 17 per cent this year on fears of shortages, with ageing mines around the world forecast to struggle to keep up with demand.
“We think the market is currently in modest undersupply and we see that undersupply growing between 2025 and 2030, and even beyond. So, we think this investment idea has a very long duration to it,” Mr Lamm said.
One of L1’s top stock pics is uranium producer NexGen Energy, which is listed both in Canada and Australia.
“Uranium is one of those metals that’s been unloved for a couple of decades and so the opportunity is dramatic. There’s been literally two decades of underinvestment in uranium.
“The time delay to get new projects up and running is very long. So that’s the good news. The bad news is everyone knows that uranium is an attractive commodity. So a lot of the shares are priced very much for perfection.”
NexGen’s main development focus is the Rook I project in the Athabasca Basin in Canada, which hosts the Arrow discovery from 2014, considered to be the largest development-stage uranium deposit in Canada.
NexGen shares rose last week after the uranium developer signed a $250m supply deal.
At the same time federal Opposition Leader Peter Dutton is backing nuclear energy to provide reliable baseload power to support wind and solar as Australia transitions from coal and gas-fired plants.
The Liberal Party’s policy includes both smaller modular-type nuclear plants and larger capacity next-generation reactors.
“We definitely think that uranium is a good solution or partial solution for green-based power,” Mr Lamm said.
He said L1 was encouraging mining giants BHP and Rio Tinto to consider brownfield expansions and acquisitions ahead of major greenfield new projects.
“They are to some degree victims of their own success. They’ve become so large and so profitable, the new projects have to be very significant to move the needle. In the case of both companies, while they have excellent management teams, excellent execution capabilities, the challenge is new, large-scale greenfield projects today are very hard to deliver,” he said. “Typically, they run over budget. They encountered many different delays and so it’s very hard to generate high IRRs on such large greenfield projects.”
Last year L1 Capital took an activist position on energy giant Santos, calling for a demerger of its liquefied natural gas assets.
L1 has a number of energy companies in the portfolio, highlighting its relative optimism about the outlook for the oil price.
But Mr Lamm said the firm was realistic about the outlook.
“We think that as oil gets towards $US100 (a barrel) and beyond, you start to see major demand destruction. So we think oil is probably going to stay within the range of roughly $US75 to $US90 or $US95 a barrel over the medium term. We think from an inflation perspective, that’s not going to have a dramatic impact.
“And you should also keep in mind that other portions of the energy universe have been relatively weak or benign. So whether it’s natural gas prices or thermal coal prices, the overall energy complex isn’t particularly inflationary as we sit here today.”
The Reserve Bank last week kept rates at a 12-year high of 4.35 per cent, and while governor Michelle Bullock noted that rates were currently at the right level, she cautioned that inflation risks were on the upside.
But the RBA stopped short of reinstating a tightening bias that some economists had tipped after first quarter inflation and the labour market failed to cool as much as expected.
“When we look at inflation more generally, it’s been very pleasing – the decline in inflation over the past 12 months,” Mr Lamm said. “However, it hasn’t declined anywhere close to where the central bank’s targets are set. Those targets are going to be hard to achieve. And so while we see ongoing progress on inflation normalisation, it’s not quite going to get to the targeted levels. That’s going to mean the interest rates can’t come down as quickly as markets were expecting and as dramatically over the medium term.”
Globally central banks are struggling to get inflation back to target, complicating the outlook for eventual rate cuts.
“We see maybe one or two cuts in the US this year, but only 0.25 per cent cuts. And over the medium term, we see interest rates staying much higher than the levels that we got used to over the past two decades,” Mr Lamm said.
Looking ahead, he said L1 expected consumer discretionary stocks to come under some pressure after a strong couple of years of earnings and price-earnings multiple growth.
“In many cases, they are kind of trading for perfection. But in the backdrop, we can see things are getting more tough for consumers. Higher interest rates for a longer period of time are pressuring consumer balance sheets and mean that discretionary spending will come down in some cases. Also margins are very elevated. They can come down over time also,” he said.
“Another space that we are a little bit less excited about in the broader market is the Australian banks. They’re trading on historically high multiples, but if you look at earnings growth projected over the next couple of years it’s modest, modest to zero.”
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