Last week I sat down with two well-known LIC managers and two not so well known LIC managers. In the well-known category we had John Abernethy from Clime Capital Limited (CAM) and Chris Stott from Wilson Asset Management (WAM, WAX & WAA). From the not so well-known camp we had Sebastian Evans from NAOS Asset Management (NCC & NAC) and David Kirk from Bailador Technology Investments (BTI).
The four different managers brought with them some great insights and I have sifted through to pick out the highlights and need to know information.
Abernethy’s global macro outlook
John Abernethy’s strength is his macro overlay. If you have ever seen one of his presentations you will know they are very heavy on the broader macro environment. When he joined us last week with international portfolio manager Pieter Fourie it was no different. Abernethy was able to paint a picture summing up the volatility global markets have experienced recently, Australia’s difficult growth outlook and why he thinks our market is screening as value now.
Pieter Fourie, based in London with Sanlam Private Investments, was in a unique position to provide deeper insight into the European economy and its gearing to emerging markets. Fourie also nominates locations where he sees opportunity, including continued good growth in the US.
Glencore made global headlines last week and a global resources sell off took place after it dropped from almost 100 pence to 70 pence. Fourie gave us his take on the situation with Abernethy chiming in with his view on the resources sector in Australia: He thinks the time when it will look oversold is approaching.
The big four banks only make up 12 per cent of the Clime Capital portfolio with NAB being the highest weighted of the lot based purely on valuation. Abernethy is holding onto the banks now and is happy to pick up the new capital issues along the way.
Chris Stott’s stock calls
Chief investment officer at Wilson Asset Management Chris Stott joined us last week to provide an update on the group's suite of LICs including Eureka’s LIC model portfolio holding WAM Research (see Geoff Wilson's mid-cap play, August 3).
Core holding McMillan Shakespeare (MMS) has in the past been very susceptible to regulatory changes seeing its share price fall by more than 50 per cent when the previous Labor government threatened fringe benefits tax changes. This is a key area for concern for MMS shareholders. Stott and his team say any change really hinges on Labor getting back into power and at this point the odds are stacked against them... literally. Stott says betting agencies are a great indicator of this, with Sportsbet currently having Labor a heavy underdog to win the next election at $4.
One of WAM’s best performing investments has been intellectual property business IPH Limited (IPH). Stott has held IPH since listing and has enjoyed a considerable appreciation in the share price. Stott says the business is very solid and due to the nature of the intellectual property business earnings will be impacted less by bigger macroeconomic movements. Stott expects to see the growth of IPH continue. (Simon Dumaresq recently sat down with IPH’s managing director David Griffiths and the full interview is available here.)
Stott is a big believer in the saying “let your winners run” and this is exactly what the WAM team is doing with the runaway share price of core holding Blackmores Limited (BKL). Stott says Chinese consumers will continue to drive growth in the vitamins manufacturer and distributor and this is the main catalyst the team has identified.
Typically you will not find a biotech stock in the WAM stable due to the binary nature of the businesses. One exception to this is Sirtex Medical (SRX). Why is the team more confident about SRX? Unlike most biotechs SRX is profitable. The catalyst driving Stott’s investment decision was the sharp drop in the share price in March with the team believing it was oversold.
Sebastian Evans and the NAOS process
Sebastian Evans is the CEO and chief investment officer of Sydney based funds management company NAOS Asset Management who operate two LICs. Both the NAOS Emerging Opportunities Company (NCC) and the NAOS Absolute Opportunities Company (NAC) have a micro to small cap focus.
The NCC portfolio is a highly concentrated portfolio with the ability to short sell but historically has been predominantly long with the exception of short selling some mining services companies.
For an introduction to the small cap investors here is Evans detailing the background and investment philosophy of NAOS and their two LICs and the benefit of the closed-ended structure for the manager, their investors and the companies they invest in.
Bailador’s unique opportunity
Last week Australian IT company Atlassian made headlines with its intention to list in the US. It highlighted the opportunity out there for Australian investors, although this opportunity is out of reach for most SMSFs.
Last year David Kirk and Paul Wilson listed Bailador Investment Technology (BTI). This is an LIC with the specific purpose of investing in unlisted IT businesses in the growth phase – that is, companies that are already operational. BTI does not fund ideas in the startup phase but gives investors the opportunity to invest in companies that are already profitable and looking to grow. Kirk and Wilson take a proactive approach with the companies they invest in and offer their services to help these businesses grow.
BTI’s largest holding is a cloud-based hotel booking system called SiteMinder which makes up 36.8 per cent of the portfolio. Below Kirk talks about SiteMinder's growth potential, which attracted him to the business. He also discusses Standard Media Index which is 8.1 per cent of the portfolio.
Currently BTI is trading at a 17 per cent discount to the last reported NTA. Kirk admitted initially the team was a lot more focused on getting the portfolio set up and had dropped the ball on shareholder engagement and sharing the BTI story with the market. They are now proactively addressing this. Of course performance of the underlying investments will go a long way to help close the gap.
Additionally the underlying companies are valued once when the investment is initially made and then again when other investors buy into the businesses later. This will lead to lumpier increases and decreases in portfolio value than other LICs which may make some investors wary.
Disclosure: Eureka Report and Clime have a formal association with Stocks In Value. Mitchell Sneddon was a Clime employee until June 30 this year, he now works full time at Eureka Report.