Crivelli's Call - The Transcript

Michael Pascoe: Are the days of the cashbox over?
Mike Crivelli: Not permanently but I think they are in the short run. Babcock & Brown Capital which raised a billion I think. They reckon the last 100 million I read in the paper flowed like treacle so they were struggling at the end and that was some time ago and the market’s fallen since then, so it will be tough.

MP: But the market also will be disenchanted with the difficulty they’ve had putting their money to work.

MC: Yeah, I think there’s a certain amount of disenchantment. If you read what the brokers are saying and the press are saying yeah there has to be.

MP: There’s a tendency in the market to have its fans. Eighteen months two years ago listed investment companies were all going great guns, fallen in a heap. Then the cash boxes. Is it cyclical or just a lack of corporate memory.

MC: Yes and yes. It has to do with the fact that it’s at the top of markets when things are frothing and fizzy that you can raise money for these things. And if you go back to the last really big downturn which is I suppose the crash of ’87, after that was the right time to raise money in cash boxes and some indeed did. One in particular you might remember was Jamieson although it didn’t raise the money from the market at Stage 1 but then they morphed into Langcorp and then Patricks and that’s been a very successful investment for investors but it was done at the right time. The ones that are being done now are being done at the top of the market for the simple reason that you can do it.

MP: Does that say something about the lack of outlets or the lack of imagination of investors.

MC: I don’t think it’s a lack of outlets. I think they’ve come to believe that the markets will continue to do well bearing in mind that we’re in about the 14th year of an upswing, an economic upswing which is most unusual. The economic cycle is muted, very muted and so people investing in the market have just lost sight of the fact that markets are cyclical. So they’re prepared to take a bit more risk and they are taking more risk in cash boxes. Not so much with LICs because they tend not to be leveraged but cash boxes yes.

MP: Well Listed Investment Companies, LICs most of them now are trading at a discount. What’s their outlook?

MC: Sometimes they trade at a premium and it’s very unusual. I’ve been in the markets for over 40 years now and there will be times which presumably have to do with irrational exuberance when they trade at a premium. It’s not often but when that happens then it makes sense for people'¦ promoters to go into the market and offer investors an opportunity to buy something that they’d have to pay a premium for in the market. So that’s a natural market arbitrage that goes on but it’s rare. It’s very rare.

MP: Are they tempting at the moment given that they are at a significant discount to their NTA’s.

MC: A lot of them. Probably yes in the sense that some of them may get wound up if they stay at a discount for too long but I think there’s a feeling in the market as the market goes into its downswing or stops rising for a while that the discount might get bigger so that stops people from actually going in but 20 years ago you could buy into an LIC at a significant discount in the expectation that the market might take you out through either mutualisation or somebody buying it and selling off the assets but because of the new fee arrangement and management tie ins it’s much harder to do that. So I suspect the discounts will stay there for longer.

MP: With the correction that we’ve seen in the last couple of weeks is that actually a good thing for investor psychology. Brings back a bit more rationality.

MC: I think people stop and think. They tend to be more interested in critical articles, critical broker’s reports. They read them from cover to cover instead of looking at them and saying well that’s negative, they’re wrong so yeah it makes people stop and think and take less risk which at this stage in the market probably isn’t a bad thing at all.

MP: I’m not sure if it’s fair to call the whole Macquarie machine a cash box but is that also coming up for a reassessment?

MC: Yes. I think people are looking harder at it and see Macquarie management being forced a bit more to explain why they’re not more sensitive to interest rates than other banks but they’ve got a very good model, it’s worked really well for them. The assets they’re buying by and large are solid, fairly low risk assets. Infrastructure and so on but it’s what they do after that that you have to look at. What level of gearing there is and so on and it’s that level of gearing that makes them very interest rate sensitive and there hasn’t been a lot of work done on just how sensitive they are to different shifts in interest rates but Macquarie are quite good at structuring things to often give themselves an each way bet on rates.

MP: Macquarie Media offering, is that perhaps a last hurrah for a particular sort of investment with its low hurdle rate and fees that get charges whatever happens.

MC: It’s a case of caveat emptor for the investor. It’s a'¦ do I like the people running it. Can I live with the fees they’re charging. Can I live with the fact that if they do a really bad job and get sacked they’ll still keep getting a fee. That to me, from their point of view is a good thing to have been able to achieve it. From the investor’s point of view it’s not a good thing and it’s difficult to see how they’ll be able to make that type of approach sustainable going forward.

MP: Well what do you expect happens next.

MC: Well I don’t think we’ll see too many more cash boxes, [I’m] decided on that. What happens to the cash boxes depends very much on how it plays out one by one. Allco seems to have fallen on its face, probably set a bit of a bad example for people trying to raise more money that way. I don’t think we’re going to see any of these, or many of these sort of vehicles getting up unless we see another significant upward surge in the market over the next, say, 12 months and given the environment we’re heading into it’s fair to say that we here at Perennial are reasonably cautious about the outlook.

MP: So what’s Perennial looking at now. What do you like most now?

MC: I suppose in our value area we’re coming back to the traditional things we look at which his low multiples. A lower multiple than the market. Higher yield than the market. Better cash flow to the market per share. Things like that, so just stocks that represent good fundamental value. No particular area but just a question of where the stocks are and in the same way the growth guys are looking at value but they look at it from a different perspective. They’re looking very much at'¦can this particular company sustain its growth level. Is it creating wealth or destroying it because as you know, a lot of companies actually their return on capital’s less than the cost of capital so it’s really just back to hard core basics