The article was first published by Tom Richardson in The Australian Financial Review on 25 July, 2022.
Antipodes founder and chief investment officer Jacob Mitchell says the iconic, giant technology companies that dominate the US sharemarket are in healthy shape, but will likely lag different breeds of blue-chip growth businesses in the decade ahead.
The so-called FAANG grouping of Meta, previously Facebook, Apple, Amazon, Netflix and Google, which trades as Alphabet, soared early in the pandemic, but fell heavily in 2022.
Many companies in growing areas like enterprise software, decarbonisation and green metals now offer a stronger investment outlook than the FAANGs, he says.
US database provider Oracle and software group SAP are top 10 holdings in both of Antipodes’ funds, partly because they trade on relatively cheap multiples at around 15 times profits, according to Mitchell.
“They can absolutely outperform the FAANGs,” he says. “What we see is companies that went through a period of investing aggressively. Let’s call it over five to 10 years in transitioning their offering to become cloud ready, and that’s what they’re selling.”
Since its launch in 2015, Mitchell has built Antipodes into an $8 billion global equities manager with 39 staff across Australia and London. Mitchell is the lead portfolio manager for both the Antipodes Global and Global Long Short Fund, which have around $2.7 billion and $680 million in assets under management, respectively.
Mitchell, who worked in equities research at UBS before joining Platinum Asset Management where he worked for 14 years, places a meticulous emphasis on portfolio construction and risk management.
He says the long short hedge fund will typically contain 60 long positions in heavily researched clusters of eight to 12 industry sectors, with short positions making up around 15 per cent of the fund’s exposure and tail risk hedging 5 to 10 per cent.
Companies like Oracle and SAP that offer enterprise software now make up some of the long positions that Mitchell expects to outperform the FAANGs in the years ahead.
“What I think the market is missing is the utility of what they [SAP and Oracle] provide is going up as it shifts to the cloud. Not only is there a cost saving to the clients, but the software company takes more revenue,” he says.
“We think the adoption of ERP [enterprise resource planning] in the cloud is early in the cycle as customers transition from on-premise. ERP software can run the backbone of your business, the financial ledger, receivables, payables, payroll, supply chain. It has an amazing level of complexity,” he says.
ERP technology also allows customers to upgrade their systems in real time, so clients can avoid “a massive upgrade every time you rework it,” which will further bolster the appeal of such services.
Shares in $US200 billion database giant Oracle are up 49 per cent over the past five years. SAP, Europe’s largest software company, boasts a market capitalisation of $US112 billion.
Mitchell says the transition to the cloud means both companies can now target smaller businesses as clients, which expands their addressable market and revenue opportunity.
Short positions
The long short fund also has holdings in pharmaceutical and healthcare giants Merck and Sanofi among its top long positions, alongside Japanese auto giant Toyota and computer-chip star Taiwan Semiconductors.
Mitchell doesn’t disclose any specific short positions, but says the fund’s short book successfully navigated the whipsawing pandemic, which included record money printing, a dramatic reversal in the interest rate cycle, and Russia’s invasion of Ukraine.
“With our short book we’ve actually transitioned,” he says. “We had a lot of shorts around conceptual growth stocks that we didn’t think were resilient in a tough economic environment and those shorts have worked. But now, we’ve transitioned a fair share of our short book to weak cyclical businesses everyone piled into during COVID, businesses like a traditional bricks-and-mortar retailer.
“Some of the department stores in the US, all of a sudden, investors rediscovered them as structural growth stories. And guess what? They’re not. They’re still what they were and still struggling to differentiate themselves in a highly competitive retail market in the US.”
Mitchell says short ideas often come out of the same fundamental industry research Antipodes does on longs, which helps the fund manager find natural pairs within a cluster of longs.
“We think that provides another layer of risk management that is often missing in portfolio construction,” he says. “We’re really looking for non-correlated [investments] as much as we possibly can.
“The average short position is smaller than our average long position because you just need a high level of diversification. Shorting is always going to be much more, let’s call it, timing sensitive.
“You’ve got to leave yourself more room in a short like-for-like versus a long to naturally add to it if it goes against you,” he says. “Obviously, the position is getting bigger as it goes against you, which is the opposite to what happens in a long if it goes against you.”
The other part of the risk management and portfolio construction process is what Mitchell calls tails risk hedging, where the fund manager buys insurance against macroeconomic, credit, or sector-specific market risks, for example.
Mitchell says tail risk hedging can equal around 5 per cent to 10 per cent of the portfolio’s exposure.
“Let’s call it a panel of risks or tail risks that we think are in play in the market,” he says. “And if we think the insurance on that tail risk is cheap, we’ll buy it. You need to think about that before the tail risk is on the front page of the paper because at that point the insurance isn’t going to be cheap – in fact you’ll probably be closing it out.”
Over the June quarter the long short fund returned 2 per cent, versus a 7.9 per cent fall for its benchmark the MSCI All Country World Index, net of fees and in Australian dollar terms. Since inception in July 2015 the fund has returned 7.9 per cent per annum net of fees, versus 8.7 per cent for the benchmark.
The global long-only fund lost 2.3 per cent net of fees over the three months to June 30, versus a 7.9 per cent fall for the benchmark. Since inception in August 2015, it has returned 8.8 per cent per annum net of fees, versus 8.7 per cent for the benchmark.
Decarbonisation
Mitchell is also bullish on companies positioned to profit from the world’s mandated transition to renewable energy sources over the decades ahead.
He says the recent fall in the copper price to near $US7600 a tonne, versus highs above $US10,000 a tonne earlier in the year may be an opportunity given long-term demand for the metal should be fuelled by the energy transition.
“We wouldn’t be against the idea of a super-cycle {in copper and decarbonisation] over the next 20 years,” he says. “But you’ve got to be very mindful of your entry point. I think you’re getting a more reasonable entry point now, because of the sell-off you’ve had.”
The investment super-cycle in the energy grid and green power in Europe could equal about 2 per cent of the continent’s gross domestic product over the next two decades, according to Mitchell.
The fund owns companies like electricity generators and renewable energy traders RWE and EDF in Europe, with US player Fortis on the transmission side.
Europe’s scramble to reduce its reliance on Russian gas may prove a boon to renewable energy giants in Europe over the long term, according to Mitchell.
The fund manager prefers gas to oil investments because he believes gas is a credible transition fuel. “Gas replacing coal in the production of electricity cuts your emissions roughly by 50 per cent.” he says.
NYSE-listed US natural gas producer, EQT Corporation, is a top pick as gas prices surge and the world searches for alternatives to Russian supply. As such the long short fund is overweight energy, with a focus on natural gas.
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