This article was published by Future Generation. Antipodes is a pro-bono asset manager for the Future Generation Global LIC (ASX: FGG).
Can you describe your investment style?
JM: We have a pragmatic value approach – that is, we look for resilient businesses across the growth spectrum that are also attractive from a valuation standpoint. This isn’t always easy because the best businesses are rarely misunderstood by the market. Often you have to wait until something changes and there is, what we call, “irrational extrapolation”. This could be the perception that there are cyclical changes, structural changes or something going on at the macro level that is impacting a particular business. Sometimes the market is right and there’s a permanent change that makes a business less attractive going forward. But sometimes the market gets it wrong: it’s something short term that passes. When you see points of maximum uncertainty, you often see great opportunities to buy businesses that are fundamentally attractive and also very cheap.
Have we reached that point of maximum uncertainty, given markets are pretty spooked?
JM: We see these points happening regularly, not just at a big picture macro level, but across industries and sectors and different times. To answer your question though, what we’ve seen recently is a macro-driven drawdown. We had really low rates and low real yields and when we eventually had a return to normalisation, this impacted growth stocks that were trading at very high multiples and may not actually have been resilient businesses. They had just benefited from structural tail winds and, arguably, were supercharged by COVID in some way.
Whenever you have a cycle of disruption, you’ll get a small number of businesses that survive and remain great businesses, and a lot will just fall away. And that’s what’s just happened. You’ve had a shift in the macro environment to a less favourable environment for discount rates – and you’ve seen a group of stocks that are very sensitive to discount rates sell off. Most companies, even structural growth businesses, will have some sort of sensitivity to the economy. The pragmatic value approach is to invest across the spectrum of growth – from low cyclical growth to high structural growth – but to make sure you’re paying the right multiple relative to that growth. For us, growth and value are joined at the hip; they’re not separate concepts.
What is your outlook for markets over the next 1, 3 and 5 years?
JM: The simple answer is that we think the outlook over multiple time periods – including those 1, 3 and 5 years – is very similar. We think we’ve fundamentally shifted to a different regime, from one where the policy toolkit was quite blunt to one where governments have embraced fiscal activism. Fiscal policy is taking over from QE (Quantitative Easing) and QE-targeted asset prices.
This will mean a shift from a very low volatility economic environment – which favoured growth assets because of the perceived lack of economic growth – to one with a higher level of nominal growth. Some of that will come from higher inflation, but it could also come from a higher level of real growth in the economy due to fiscal stimulus. Secondly, there will be more volatility in economic growth.
So, point to point, I think you’ll see a relatively flat equity market – but with a fairly wide amplitude. In order to navigate this environment, investors will have to be more circumspect and more disciplined around the multiples they pay and they will also demand a higher equity risk premium. Even though there will be largely flat returns, there will still be some great buying opportunities.
You structure your portfolio into thematic clusters. Can you explain what those are and give us some examples?
JM: For us, the clusters are really just a group of stocks, where the investment case is essentially sourced to a common piece of industry research. We lead with the industry research and we may end up with a portfolio of around 60 stocks, but we actually think about them as 8-12 separate clusters.
One example is that we have a “reopening” cluster, which is a group of industries that are benefiting from the swing back to normalisation post-COVID. For instance, the travel sector is going to be a big beneficiary of the reopening. So, we look at the travel industry globally and try to pick three or four really resilient businesses that became cheap because their end market collapsed and hasn’t fully recovered.
Decarbonisation is another of our clusters. We’ve been working in this area since the inception of our firm seven years ago, so it’s not just about us jumping on the ESG bandwagon. We see decarbonisation as a multi decade investment cycle, requiring a huge amount of capital.
Our decarbonisation exposure is split into three key sub clusters – capital providers, materials companies and enablers.
Capital providers are the power companies that are deploying renewables and will get paid a good return for greening the grid. We see a huge increase in the demand for electricity under Europe’s ‘New Green Deal’ – whether that’s coming from EVs (electrical vehicles) or reducing fossil fuel-based home heating and power generation.
The material companies stand to benefit from higher demand for materials that are key to decarbonisation and electrification. For instance, aluminium is used as a lightweight metal in electric vehicles and copper is use in the grids and turbines needed for renewable generation.
Finally, there are the “enablers”, the companies that are actually taking all those materials and using them to make the turbines, grid equipment and factories.
By splitting our exposure across these three sub-clusters, we have a robust overall exposure to a key long-term structural trend, while still achieving a protective form of diversification.
Apart from the environmental side that we have just spoken about, how did you incorporate ESG into your investment decision?
JM: We view it as one of the key risks and opportunities that every company faces and treat it no differently to any other analysis that forms our view around how a company is positioned from a competitive perspective. It’s highly linked to our assessment of management capability because, as an investor, we’re relying on management to manage those ESG risks and opportunities.
Our approach is to say, “Okay, for this company in this industry, what would we consider to be a threshold level of behaviour?” If the company is not meeting this threshold, we’re not going to invest. If it is, and we think it’s an attractive investment, then we’ll invest and we’ll also engage. By engaging, we can encourage continuous improvement.
Turning to China, a lot of fund managers have turned their backs on China, but 13 per cent of your portfolio still has exposure there. Why are you holding the line?
JM: Sometimes people use words like “un-investable” and we’re not denying that there are situations, especially around sovereign risk, where a country or a market doesn’t meet minimum acceptable levels. But we don’t think that’s the case here. This doesn’t mean we agree with everything the Chinese government does. We don’t – just as we don’t agree with everything the US government does or our own government does.
Of course, certain parts of the Chinese market – like the property and technology sectors – are going through significant regulatory changes and the economy has slowed substantially. So, in the short term, things appear to be going in the wrong direction.
But, as I mentioned earlier we have to ask if there’s a level of irrational extrapolation here, because we think if you take a medium- or longer-term approach, the opportunities in China haven’t really changed. Will the regulatory environment normalise? Absolutely because the government is very focused now on the economic downside risk and it wants the platform companies to start reinvesting and hiring, rather than firing.
Our aim is to find resilient businesses that are trading on attractive valuations. When you factor in the higher discount rates that are applied to Chinese companies simply because they are in China, then I think a lot of them are still attractive.
At our recent investor roadshow, you offered Siemens (ETR: SIE) and Merck (NYSE: MRK) as your top stock picks. Are there any stocks or sectors that you are actively avoiding?
JM: Yes. If you think about the US, it accounts for 64 per cent of the ACWI benchmark! About half of those companies are multinational, including most of the mega cap tech stocks, and the other half are more closely correlated to the US economy. We are underweight that second category because you tend to pay a much higher multiple for US companies, compared to like-for-like elsewhere. A good example of this is Walmart, in the US, versus Tesco, in the UK. They are very similar but over the past few years Walmart has traded on a PE in the low 20s, while Tesco has been 10-12 times earnings. We don’t think this is explained by a difference in the growth outlook or the quality of the company. In fact, we think Tesco has fewer obvious disruption risks around it because Walmart has three very capable competitors in Costco, Target and Amazon. So yes, we look at the domestic part of the US market and think it looks very expensive.
How has your investment strategy evolved over nearly 30 years in the market?
JM: I was fortunate because I started at Tyndall Australia, which at the time was one of the early adopters of a quantamental approach. They used bottom-up research, but they complemented that with a top-down approach of benchmarking companies against the opportunity set. At Antipodes, we’ve tried to really imprint this approach in the DNA: start broad before going narrower and really understand the industry. Don’t start by saying, “This stock looks cheap therefore I’m going to prove it’s a great company.” Start by thinking about an industry, finding great companies within that industry, and then asking yourself if it is a good time to buy. This helps you to manage that confirmation bias.
Secondly, over time, I’ve come to really see the merits of a strong risk model. We’ve always done the quantamental and the fundamental well, so we’ve always had a great understanding of how our companies ranked on various quant factors. But how companies rank and how they behave can be two very different things. So, along the journey, we realised we had to enhance our risk model. That was a natural evolution.
More recently, we’ve complemented our quant process with an alternative data toolkit – which can monitor things like web traffic, credit card data or app download data, in real time. This allows early identification of “case drift”, where there is evidence that our investment case may not be playing out. This is another tool to help us manage risk.
Why is managing Future Generation Global (ASX: FGG) money important to you?
JM: First, as a firm, Antipodes is focused on supporting youth mental health. We think it’s an area that has tended to be under-funded and so Future Generation Global’s support of youth mental health charities really appealed to us.
Secondly, if I look at what the fund managers bring to Future Generation Global, it’s that (hopefully) we enhance the performance of the vehicle. If we do that and the vehicle grows its capital base, then there will be more money available to fund the charities and the good work they do.
Thirdly, it’s very rare for charities to have some degree of certainty around their funding. Given that Future Generation Global is a closed-end structure, that’s exactly what this structure can do – and has done. That’s why we want to support it in any way we can.
But I do want to put the focus where it matters: on the Future Generation Global shareholders who are supporting the giving. We as fund managers help to facilitate this. But the actual giving is being done by the shareholders.
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