Antipodes Partners: A long-short global strategy
As Chief Executive and Chief Investment Officer of Antipodes Partners, Jacob Mitchell is used to wearing multiple hats.
At the moment he's spending a fair bit of his time in the fund manager's London office, building up a team of investment analysts and allied professionals. But he also has his eyes focused on global investment opportunities, seeking out undervalued stocks to place into the firm's high-conviction portfolio.
These are held through the company's ASX-listed investment company, the Antipodes Global Investment Company.
We caught up with him in Melbourne, where he outlined some of the sectors currently on the Antipodes' radar. These include technology, natural gas and select telecoms. Mitchell talks about the challenges and opportunities in all three, and names some of the companies where Antipodes has taken positions.
Listen to our podcast, or read the full interview below.
Tony Kaye: Hello, I'm Tony Kaye from InvestSMART. I'm talking today with Jacob Mitchell from Antipodes Partners. Welcome Jacob.
Jacob Mitchell: Thanks Tony.
Tony Kaye: Jacob, you're the Chief Executive and Chief Investment Officer.
Jacob Mitchell: Yeah.
Tony Kaye: Welcome to Australia, because I understand that you're currently based between Australia and London.
Jacob Mitchell: Yeah. Basically, I've done global equities for I think it's coming up to 17 years primarily out of Sydney. And now it's an opportunity, given Antipodes has a London office, to really make sure that office grows to critical mass. We have three investment staff there, and we'll continue to build that out. It's a great opportunity to help that over the next six months.
Tony Kaye: What are you actually doing in terms of your investment focus and strategy?
Jacob Mitchell: Our focus is very much on trying to drive risk-aware returns from clusters of opportunities. What does that mean? We prioritise our research around areas in the market that we think are cheap, but with an awareness that it's more than just the multiple. Lots of stocks trade on low multiples because they're at risk of disruption, and because of the super-low rate interest rate environment combined with technology change. A lot of those disruptive threats are real. We call it pragmatic value. Find the winners in neglected areas, but with an awareness around both structural and cyclical change.
Tony Kaye: Let's maybe talk about some sectors where that may come into play.
Jacob Mitchell: It's hard not to talk about technology, because it is so dynamic. I think I'll give you an example there. Maybe we'll talk about something in natural gas, and then finally in a sector that's clearly a value trap, if you believe the market, telecoms. In technology, we don't believe we're in a 2000 type scenario, where there's an obvious bubble in tech valuations. Yes, they look like they're about a standard deviation expensive, but that's a fairly moderate re-rating versus what happened in 2000. Their profits are growing. A lot of the performance is just profit growth.
The move to the cloud has been very constructive for companies like Microsoft. You've got the growing emergence of these very strong platform businesses, and our biggest holding there at the moment in that software cluster is Cisco, because we think Cisco's earlier in that transition than Microsoft, and hence it trades on a more attractive valuation for a company of not equal quality, but it's not significantly different. Software-defined networking is re-energizing Cisco. Cisco's customer base is the more Fortune 1,000 corporates which have been slower to move to the cloud.
Those companies are now having to respond to the threat of disruption. A lot of corporate America has focused on profit maximisation, buyback maximisation, and it's allowing companies like Amazon ... let's think about Amazon versus Walmart. Walmart has to pivot towards online, and hence it has to start investing again. That's great, we think, for Cisco, because they'll benefit from a lot of that investment.
At the opposite end of the spectrum, as these platform businesses get stronger I think you're getting opportunities on the short side from software companies that do something very narrow. For example, there's a company that does subscription-based video conferencing, 75 per cent of their profits. What Microsoft is doing with Skype for Business is clearly just targeting that and bringing it into a platform at no incremental cost to the customer. I think in technology we're generally long, but we do definitely see some short opportunities.
Tony Kaye: I guess that's one of the challenges in technology, isn't it, that when you're up against these massive companies like Microsoft they quite often add on a component to their system which is free. It's hard to compete against that.
Jacob Mitchell: I think that's definitely a trend that gathers pace at this point.
Tony Kaye: Those companies just get bigger and bigger. You were also talking about some other sectors, LNG.
Jacob Mitchell: Yeah. I think what we're seeing in natural gas, Antipodes Partners has had a decent exposure in this area. It's a great example of what we call multiple ways of winning. Our core thesis hasn't really played out, but we've actually been able to capture a decent amount of alpha for tangential reasons, namely the stocks we were investing in were very cheap. Now, I think the core thesis will play out now, and I think you see China really pushing towards a higher quality of growth, more focus on reducing pollution, and we think that means switching baseload power generation and heating fuels away from coal towards either alternatives, nuclear, and also LNG.
As they do that, I think North America becomes a natural supplier, because a lot of LNG is linked to oil. As the oil price goes up, that means a lot of the gas that comes out of Central Asia or goes into China via LNG market starts to go up in price. At the same time the oversupply in North America means that there's gas available at roughly a quarter of the price. It's very economically rational for China to start importing that North American gas. That means a whole lot of LNG terminals will need to be built, export terminals will need to be built there, and you can invest in the technology and construction companies exposed to that trend, companies like JGC in Japan or Fluor Corp in the US, as well as the producers which have had a tough time in North America, because gas prices have been so low for so long.
Now, the reason the thesis was delayed, if you like, is because the rebound in oil means you get that rebound in associated gas production. But I think we're at that point now where we need just those producers that just produce gas in North America to actually get some relief from a higher price so they can start investing again, so companies like CNX. That's definitely a part of our portfolio which is starting to perform.
Tony Kaye: And what was the third sector you were going to talk about?
Jacob Mitchell: Telecoms, I think, is a good example of where we think in many ways the market in terms of its extrapolation has probably got it roughly right. It's been a sector that's been de-rating versus its long-term history. Remember, this is a sector that historically has paid pretty reliable dividends. Even in an environment where you've had yield chasing, these stocks have underperformed. What are the key concerns? I think the market sees increasing competitive intensity. We see it here locally, but you go to the US and the two big telcos AT&T and Verizon arguably are over-earning.
You've got the potential merger between the weaker three and four player there, which will see a stronger competitor emerge. On top of that the cable companies like the broadband companies look at mobility as an opportunity to grow their businesses. As we go to 5G, data becomes even more a part of what we're really doing on mobile networks, which means you need very high-capacity back haul. Investment is going up, and I think you're going to see prices falling. That's typically not a great environment to be exposed to.
We've done our global survey, which is our style. We like to start broad and then ultimately end up deep, because that's the depth of your research process which ultimately minimizes the number of mistakes we make. Where we've ended up is in markets like Korea where we see actually already you've got a fairly stable competitive dynamic. There's roughly equal market shares across the three players. They each have a very strong position in mobile and broadband. The actual performance of the networks are world-leading. I think regulators are pretty comfortable that the consumer is getting a great outcome. That's all as the result of effectively over-investing.
On a backward-looking basis, the fact that these stocks trade very cheaply. They trade roughly at a third of the multiple to the global peer group. It's not right on a forward-looking basis, because you're at that point now where cash flow growth accelerates. Now, if we get better behaviour around pay-out ratios which are currently low, and we think there's a good top-down reason in Korea to think that should happen. This is a rapidly aging society that desperately needs income, and there's not many opportunities in fixed income, so it's going to have to come out of their equity portfolios. That means the nation pension scheme, I think, will be much more aggressive in the way that they interact with their companies in pushing those sorts of outcomes.
Dividend growth will definitely reignite investor interest. Our big position there is Korea Telecom, KT.
Tony Kaye: As a fund manager, what are the key challenges that you're encountering at the moment or seeing at the moment, I suppose?
Jacob Mitchell: I think they could break down into a few different areas. We're certainly aware of the emergence of various style biases in the market. The obvious one at the moment is the market's preference for both high quality and high growth companies. Whilst that's rational to a point, we'd argue it's not rational at any price. At the moment we seem to be in an environment that any price or any valuation can be justified for that type of company. Antipodes, whilst we need to be aware of those biases, we want to benefit them in a very risk-aware way. The way to do that is to buy affordable quality.
I think Cisco is a great example of affordable quality. It trades on roughly a 30 per cent to 40 per cent discount to its value. If we were to characterise, it's really a top decile type company, if you're using profitability as a proxy for quality. It's trading at a big discount to the average valuation being applied to that decile. Be aware of these biases, but don't chase them in a momentum sense. Look for affordable ways to get exposure to them. By the same token, I think the market is being quite dismissive of companies that maybe have cyclical challenges in their business. I think that's giving us opportunities to take advantage of that.
I think markets can be somewhat short-sighted in the way that they think about the current winners versus the current losers. Often those companies that are labelled as cyclical can become more structural when their industries recover, or something fundamentally changes in the environment. Let's face it, in 2007 the market after a seven-year bull run in commodities there was a lot of discussion around the super-cycle, and how the structural nature of the super-cycle and Chinese iron ore demand. The market clearly got it wrong. Maybe the market's making the same errors around things like the shift to cloud computing.
Let's face it, once the shift to cloud computing is done, then those companies will actually behave in a fairly cyclical manner. Yes, we need to be aware of these disruption, but we need to be very rational in the way we think about the opportunity set, and not get carried away with the current momentum.
Tony Kaye: At some stage all disruptors ...
Jacob Mitchell: If they're successful, they become mainstream.
Tony Kaye: Become mainstream, and then there's another batch of disruptors behind them.
Jacob Mitchell: That's right. It's interesting, isn't it? Some of the things that you see happening at the moment whether it's ... The success of some of these, these big platforms, I think, ultimately will open up another round of disruption.
Tony Kaye: The space you're in obviously is a very competitive space and there's a lot going on in investor flows. I'm only talking about retail investor flows here, but retail investor flows, and institutional flows, I suppose, into products such as LICs, exchange traded funds. Now, you're in the LICs area yourself. Is that an ongoing challenge for fund managers?
Jacob Mitchell: I think broadly speaking innovation in terms of how to access active management in a very frictionless way, if you like, is great for our business. The LIC is a very old structure, but anyone who has had to fill in a PDS to access an unlisted fund knows it's got some benefits being able to phone up your stockbroker or point and click and get exposure to a strategy. Regardless of what vehicle our investors access, including our global long-short fund, we manage the strategy pari-passu. So whether it's unlisted, or in the LIC, we have the name. Our Antipodes Global Investment Company is definitely an easy way for investors to access our global long-short strategy.
Jacob Mitchell: In the next couple of months we'll bring our global long-only strategy to the market as a EQMF, which is a bit of a mouthful, but equity quoted managed fund. Something similar to an ETF, i.e., unlike the LIC where you can have premiums and discounts to NTA, you have a assigned market maker who keeps the price in line with the underlying NTA.
Tony Kaye: Yeah, a different structure, but with the same benefit of being able to access it on the market in one trade.
Jacob Mitchell: I think that's the way of the future. It's the future, I think. Yes, we certainly want to be there.
Tony Kaye: Most definitely. Well, thanks very much for joining us today, Jacob.
Jacob Mitchell: No problem. Excellent. Thanks. Thanks.
Tony Kaye: We'll talk again soon.
Jacob Mitchell: Okay. Cheers.
The Intelligent Investor Equity Income Portfolio is now available as a listed fund trading under ASX code: INIF. Holdings in the Fund will mirror the Equity Income Portfolio, has the same low costs, but you can buy it on the ASX. You can save yourself the broking by applying during the initial offer. Offer closes Friday, June 8, 2018. |