Dangerously Creative

An unsustainable investment bubble is building in the “creative” end of the infrastructure boom, which will inevitably burst with dire consequences, according to Peter Morgan, investment director of 452 Capital.
Morgan, Perpetual’s star investment manager until he set up 452 Capital, sees parallels with the build-up to the 1987 market crash, with too much liquidity and too much financial creativity.

In today’s video interview, he pulls no punches in questioning the structures paying dividends out of revaluations. “The leverage being put into some of these vehicles is incredible,” he says. “At some stage there will be creativity that goes too far and the bubble will burst. I honestly believe there’s a bubble developing at that end of the market.”

Morgan’s caution comes as Sydney’s Cross City Tunnel proves to be something of a lightning rod for both a public and investment reappraisal of infrastructure projects. The Cross City could prove to be a toll too far for the NSW Government – but it’s also unpopular with some investors. Our interview with the MTAA’s Mike Delaney showed Australia’s most successful superannuation fund and major proponent of infrastructure investments did not think the numbers on this one added up. Check our archives for the full transcript.

Peter Morgan happily confesses that he’s a pessimist by nature, but he’s also happy to be cautious at what he sees as a cyclical high in our market. He makes his own case strongly as he trawls for investment value at the margins of what he sees as an expensive market – more on that in Wednesday’s Eureka Report with the extended audio interview.

An easy insight into 452 Capital’s thinking can be had through the Century Australia (ASX code: CYA) – the listed investment company (LIC) for which 452 Capital is the investment manager. Like the rest of the LIC sector, Century is trading at a hefty discount to its net asset backing.

At last week’s AGM, chairman Robert Turner had to defend the company’s share price performance. His address provides a worthwhile guide for investors contemplating the LICs and in some ways answers the criticisms of LICs made by Mike Crivelli in Friday’s Eureka Report. You can click on the chairman’s address here:
http://www.asx.com.au/asx/statistics/announcementSearch.do?method=searchByCode&releasedDuringCode=W&issuerCode=CYA

For an investment star like Peter Morgan, underperforming the market is not taken lightly. He admits to being wrong over the past year, but is sticking to his search for value as the present correction “starts to see some rationality return”.

452 Capital misses out on fees from Century unless it beats the market by 3%. Being patient and comparatively overweight in cash has meant 452 Capital has lagged the benchmark, but not by much. Morgan is content to remain patient. In case you’re wondering, the 452 name comes from Don Bradman’s highest score – something achieved with patience and skill.

Disclosure: The Pascoe family have shares in Century Australia.