A global view: Antipodes Partners

This week's fund manager interview is with Jacob Mitchell, the Founder, Chief Investment Officer and Portfolio Manager of Antipodes Partners.

Jacob started the business in 2015, and came out of Platinum working for Kerr Neilson. He brought a group of people with him and now he’s grown that team from 6 to 20 – he’s obviously going very well.

They’ve been performing okay; a steady 3.5% over the past three years above their own benchmark which is the MSCI All Country Index, but he’s had a bit of a difficult year, so he's underperformed this year but is saying that everything’s going to be okay.

It's interesting to listen to Jacob’s views on the world and also a bit of detail about his own business. 

Here’s Jacob Mitchell, the Founder, Chief Investment Officer and Portfolio Manager of Antipodes Partners. 

Jacob, just before we get into discussing the specifics of the funds, I note on your website when you go to the home page, it says “you can win a $5,000 investment in our new active ETF”.  So that’s an unusual approach; I haven’t seen that before.  Tell us about why you’re doing that.

Look, it’s an offering of our Antipodes Global Fund, our long strategy.  It’s a way of getting exposure to a high conviction portfolio of companies around the world that we think are not just great companies, but they’re great investments.  What does that mean?  Well, they’re trading at a discount, their margin of safety and the way that they’re being valued by the stock market.

No, but I’m just wondering – just the business about having a competition where you can win $5,000!  That’s an unusual thing to do.

Well, I think the opportunity or the idea there is to get initial interest.  What you call active ETFs or exchange – effectively the difference to an LIC is that this fund is open ended so investors can effectively buy and sell and through time we have a market maker that keeps the price very close to the actual NTA and there are benefits to getting some early size in the fund and we thought this was just a novel way of attracting some early interest in Antipodes Global shares.

Is it working Jacob?

Yeah, look I think so.  It’s a quoted managed fund.  There’s not many of them, it’s a relatively innovative product but we think it’s definitely the way the market’s moving.  As you’re aware, especially from self-managed super funds, having access to effectively managed funds via the Australian Stock Exchange, effectively they can just point and click, they can invest or they can divest very easily I think is the way the market’s moving.  Certainly, as an active manager, we want to make it as frictionless as possible for the end investor so it saves cost, it’s more convenient and I think it’s essentially the future.  I think this is where the managed funds industry is moving.

Are the portfolios in the LIC and the active ETF identical?  Is it the same portfolio with different ways of entering them?

The LIC is the long short strategy.  We typically run that at about 60% net; that’s our long minus our shorts.  As a result of that, it tends to have a lower volatility than the market.  Whereas the active ETF is essentially just the longs of the long short strategy.  It will tend to be, you are getting more exposure to the market.  We still invest on the long side with the same focus on capital preservation.  Philosophically it’s coming out of the same investment process but it doesn’t have quite the same downside protection as the long short strategy in the LIC has.

Right, okay.  Just on the company, you started the company in 2015 I think and you’d come from Platinum.

That’s right, yes.

I think you brought some people from Platinum with you, is that right?

Yeah when we started building the investment team there were 6 of us who were ex-Platinum and we’ve also been joined by some other senior investors along the way.  We’re up to over 20 now on the investment team.  We’re much more than just an ex-Platinum breakaway and we think we’re doing something, not just in a local sense quite different, but also in a global sense.  Trying to get the best out of a fundamental stock picking approach, but then adopting quant tools to make us even better stock pickers and ultimately build the portfolio from clusters of stocks which where we can see, if you like, different clusters behaving in different ways.  So we get, if you like, a diversified outcome, but still with a relatively concentrated portfolio.

It sounds complicated but it’s actually, when the research team is finding interesting ideas and usually that means it’s an industry that’s going through some type of change where the market’s becoming irrational, we often find we can allocate not just find one stock, but we can find a whole group, if you like, a rich band of opportunity because that irrationality will be impacting a whole sector.  We want to take that and spec it in a high conviction portfolio.  But then we will limit that exposure to being no more than 15% and in the LIC we’ll use shorts to also, we’ll look for pair opportunities; we’ll be looking for ways we can offset the long risk we have with shorts.

And then we’re moving onto the next idea.  Where can we find the next cluster?  It will be something quite different.  In the portfolio today, for instance, we’re seeing opportunities still in software names, but we’re in some of the higher quality, lower multiple software names.  We’re seeing great opportunity for shorts with the very high-flying, relatively narrow, feature set companies which have been lauded by the market.  They may do one simple thing, like call centre management, but they’re trading on a really, quite crazy multiple.  Low and behold, companies like Microsoft and Google are rapidly commoditising a lot of these features.  They’re bringing them into their platform and effectively giving them away to the end user.

There’s been such a big venture capital bubble across software, a lot of these newly listed software as a service offerings will we think go the same way that many of the dot coms went in the early 2000s.  So there’s a great long and short opportunity in software.  But then we go onto another cluster in the portfolio, it’s very, very different which is what we’re seeing in the energy space.  Where we think, whilst you’ve had a correction in the oil price, we think the big growth in energy investment is going to be much more geared towards natural gas as the fuel of the future.  As we iterate towards EVs, we’re using more power, electricity each year.  There’s a real focus on renewables but there’s still major cost issues around replacing all of your baseload power with renewable power.  Hence, demand for gas is structurally growing.

You’re going to need investment in LNG and LNG assets are actually quite cheap.  With the correction in the energy market you are able to buy these sort of exposures and one of our top ten stocks is a company called INPEX.  It sells natural gas, it’s pricing is linked to oil but it’s far less volatile than oil.  At a $50 oil price, we still see a pathway to a double digit cash flow multiple for the company with a very long duration asset. 

INPEX is a Japanese business is that right?  INPEX?

Yeah, INPEX.  It’s listed in Japan and I think that’s one of the reasons why it potentially trades at a bit of a valuation discount because there’s not many energy analysts based up in Tokyo.  But basically, it’s major asset is an Australian natural gas LNG Project.  So a very safe jurisdiction, I think we count Australia as being relatively stable, although obviously that doesn’t apply to our government but from a perspective of legal certainty and tax certainty, it’s a place which we put, from a sovereign perspective, we certainly don’t have concerns.

Just back on software for a minute, just before you move on, just on the software you were talking about that’s changed and you’ve been shorting.  Did you actually pick the pre-October top?

Well we’d like to say yes, but whilst we did okay in the long short fund in the month of October, what we made on some of our growth shorts, we certainly gave up some of that in some of the more cyclical parts of our portfolio.  Energy obviously had a big reset and we had some shorts on energy but we were more long than short and generally speaking, as a value manager, we haven’t seen a significant rebalancing between growth stocks and value stocks.  Some of the lower quality growth names have been questioned, but at the same time, we haven’t seen significant outperformance from some of the traditional value sectors like financials or energy.  From a regional perspective, our portfolios are certainly we see more value in Europe where we’re in domestic stocks and we also have some Chinese domestic stocks – a mix of financials, utilities and telcos.

There hasn’t been much of a rotation out of the US.  We’re still up against a fairly resilient US market and currency, probably more importantly, a relatively strong US dollar versus the Euro, and as you know, that weighs on equity returns.  Now, I don’t think that can last because I think a strong dollar is not good for US corporate earnings.  The Fed is tightening, you have building cost pressures, you’re running twin deficits, interest rates are rising.  US corporate earning growth in our view has peaked.  I think also in response to tariffs, a lot of US corporates have pre-ordered to avoid that cost increase.

I think when you’re looking forward to next year we wouldn’t be surprised if there was relatively weak data coming out of the US from a domestic perspective.  Many of the domestic stocks like the banks and some of the broader consumer services companies like retailers and property – all of that more household-exposed part of the stock market in the US, generally speaking is on a significant premium to similar companies that you can find in Europe or in most parts of Asia and emerging markets.  That discount I don’t think will stay forever.  I think it’s somewhat driven by the recent earnings momentum but we all know, that can reverse in a tougher economic environment.

The question is does Europe, does China stabilise?  I think somewhat, when you’re investing, the question always is as an investor, what’s in the price?  When we look at our European financials or our Chinese telcos, we’re seeing such low valuation.  As an example, China Mobile, China Telecom – these stocks trade on half the multiple of t he equivalent business in the US and they’re in a much better position because they have really put the money already in the ground, they are 5G ready.  Whereas in the US, the leading telcos don’t really even have the spectrum to be able to rollout 5G, let alone the base stations or the fibre in the ground to be able to basically carry the load of data.  There’s going to be an explosion in data with the rollout of 5G and it takes telecommunications from being a consumer service or a business service to being an industrial service.

The growth in sim cards will be machines talking to machines and we’re aware, when we look at our big investments there in Korea Telecom, KT, and China Mobile, China Telecom, we actually see a lot of that capex has already been spent.  The actual rollout of 5G base stations will be done in a fairly capital efficient way and we’re going to get growth.  What investors don’t remember or don’t appreciate I think with what’s coming, is that these relatively boring businesses can actually not only produce cash flow as essential infrastructure, but they can actually grow.  They can grow because their customer base is increasing.  They’re moving into a totally different customer base and one which governments are far less worried about in terms of regulating pricing. 

We understand that governments sometimes need to protect certain parts of society but when it comes to selling a sim card to a business, we think pricing is going to be highly set by the market.

Jacob, your biggest long position is electricity to France, tell us about that?

Well, a combination of, once again, relatively cheap infrastructure.  It’s a combination of the French national grid and the majority of the French fleet of generation assets, so in this case, the majority of which is a combination of nuclear and hydro.  We’ve been looking at this market for a number of years we see in the classic Antipodes way, a situation where on the continent of Europe, you’ve got a rationing of supply of electricity because electricity prices are so low that the less efficient power stations which were initially gas and then some of the older coal plants, older gas plants had to shut down; they had no choice.  They were effectively cash flow negative, couldn’t afford to keep up with their maintenance costs.

That has led to the inevitable rebalancing.  The first step in making money in the ETF was simply that power prices were so low, they couldn’t go lower, they had to go up in order for supply to meet demand.  Now we’ve had that initial move.  The second thing that’s happening on the continent is the European regulators have really taken the necessary steps to fix the carbon market.  Europe has had an Emissions Trading Scheme for some time however the price of carbon collapsed to the point where the ETS wasn’t really serving its purpose; there was no cost to being effectively a high emitter of carbon dioxide. 

Cutting a long story short, that has been fixed so a proper price has now been put on carbon in the daily options in the ETFs, carbon prices have moved to the point where it’s starting to once again, favour carbon efficient generation like hydro, like wind, like nuclear where you have no emissions and once again getting the benefit of that.  That’s a real step-change in the profitability and the cash flow generation potential of this asset.  Very, very interesting, big change in the market and it’s important to be on the right side of those changes and it’s a great example, I think of our approach to finding truly idiosyncratic opportunities.

Just before we finish, Jacob, I just wanted to get some more details on your funds.  Tell us about your fees because you’ve got performance fees, but I’m just trying to look at them now.  You’ve got, I think, is it 1.1% or 1.5% base fee and 15% performance fee.  Is that right?

Yeah, that’s right.

So what’s the base fee?

It’s 1.1% on what you’d call the active ETF or the quoted managed fund.  It’s 1.1 base and the performance fee is 15% of the net return over the benchmark and the benchmark in this case is MSCI All Country World Net Index in Aussie dollar terms.

And what sort of performance fees have you been getting since inception?  What’s been your outperformance?

On outperformance, you put me on the spot.  I’ll talk about it in general terms because I don’t have the hard number right here in front of me but the long only strategy has been humming along at Index at roughly 3.5% per annum above the index since inception, inception being the beginning of July 2015.  That’s, I’m quoting a number after fees.

So that’s correct, according to your monthly, it’s 3.7% so that’s correct.  But the last 12 months or at least year to date it’s been under benchmark, 4.9% versus 6%.   What’s been happening this year?

Yeah, look there’s two areas that have hurt us in the long only fund and one would be the China internet space and the second simply more broadly speaking, some of the global cyclical exposures that we’ve had. If I was to nominate a third area, it would simply be financials.  Now all three of these areas we would argue are great value.  So whilst in the short term they’ve hurt us we ultimately don’t see those permanent loss of capital.  As always we ask ourselves is the conviction what it was, have we made an error of judgement here or do we actually still see the value that we saw higher up.

I think certainly in the energy space we are of the view it’s the gas story, the structural story and you need investment in this.  This has been a capital starved part of the energy market and you will see a rebound in the investment.  On the financials we would argue that whilst when you’re buying a strong bank and you’re paying half book or less than half book, a lot is priced in and that is what you are paying for.  You know, the leading banks in Italy are trading at those prices and we don’t believe Italy is on the cusp of a crisis.  All of our tail risk monitors where we sort of look for build up of macro risk, for us it’s not Italy.  You haven’t had an explosion in Italian debt.  If you want to look for an explosion in debt, go to Northern Europe, Scandinavians have had a classic household credit cycle, Canada.  If you look at government debt the US has had a very big cycle in building up government debt, as has Australia.

We understand the absolute level of government debt is relatively high in Italy, but we think it’s manageable.  It’s producing current account surpluses, it’s internally funded and if you want to go and have a look at a society that runs a significant amount of government debt, go and have a look at Japan.  Internally funded systems can tolerate a relatively high level of debt and that government debt is not repeated at the household level.  Italian household debt is low.  We think those financials can make us money.  Then we look at those Chinese internet stocks.  I think the issue is a little bit like what we see happening in some of the software space where you’ve had this big, big cycle in venture capital funding of start-ups and now some of those start-ups are coming to compete against the big guys, whether it’s Alibaba or Baidu.

The market at the moment is nervous that some of the start-ups are going to take a chunk out of the business.  We’re open to that, we’re certainly looking more closely, re-examining the case, but when we look at Baidu, we don’t see any real substitute in the core search business and that is an incredibly strong business.  You’re paying, on our numbers, a 30-40% discount to what you’re buying that exposure for that same business in the case of Google.  Now I think you probably need a slightly better macro environment for the market to re-assess these businesses but that doesn’t mean there isn’t an opportunity now to invest.

Okay, we’ll have to leave it there Jacob.  Thanks very much, it’s been great talking to you.

Excellent, thanks, Alan.

That was Jacob Mitchell of Antipodes Partners.