Top fund managers: PM Capital Global Companies Fund

This week we profile a fund with over 30 per cent financial stocks but not a single share in Australian banks.

Summary: PM Capital’s Global Companies Fund has posted a 15 per cent outperformance compared to the MSCI All Country World Index over three years. The fund buys quality businesses at the centre of a crisis, then reduces its holding as the crisis normalises. The fund also takes a long-term view and is looking for long-term investors.

Key take out: The fund has a global focus, saying companies in the US, Europe and the UK are cheaper than their Australian counterparts.

Key beneficiaries: General Investors. Category: Investment portfolio construction.

Ashley Pittard and his team managing PM Capital’s Global Companies Fund don’t panic when the market hits crisis point – it’s a part of their strategy.

Instead they take the opportunity to invest in sectors that are out of favour – like commodities after the Asian crisis, banking after the GFC or property after Greece.

The fund has over 30 per cent invested in bank and financial stocks but not a single share in Australian banks. In fact it holds no Australian companies whatsoever with the view that within the next 10 years Australia will be an opportunity.

Ashley co-founded PM Capital in 1998 and describes the team as old-fashioned stock-pickers that focus on individual returns of businesses as opposed to tracking an index or benchmark.

The fund has delivered a 15 per cent outperformance compared to the MSCI All Country World Index over three years. It currently has $266 million in FUM. 

PM Capital’s long-term performance is the reason it has made it on to brightday’s Featured Fund list.

PM Capital co-founder Ashley Pittard. Source: PM Capital

DD: Can you tell us a bit about the fund?

AP: We buy quality businesses at the epicentre of a crisis that are near-term out of favour, and then over the coming decade as that crisis normalises we reduce our holding over time.

So, when we started the firm 17 years ago we invested in low cost mining assets in the commodities space which was the epicentre of the Asian crisis. By 2007 we had sold all of our mining companies and we started to buy financial companies which were at the epicentre of the financial crisis – the regional banks in the US and also the UK.

Over the last two years we’ve been investing in European financial and property assets and European exporters, because that was really the epicentre of the recent crisis which has predominantly been in Greece, Spain and Ireland.

As a generalisation we are 100 per cent net invested in equities and we have 100 per cent US dollars. We think the US dollar is still fundamentally cheap and we’ve had that position for the last five years.

How do you determine a business that you wish to buy?

You will never see us a buy an airline, an auto or a tobacco company, because their returns are garbage. We only buy the number 1 or number 2 market share leaders, so with commodity businesses, they have to have the lowest cost mine, beer companies have to be a duopoly and technology companies have to have the largest market share in a space.

When we buy a company it has to be effectively below replacement value or below book value – they are basically poor. Since we’ve been around most sectors have had times where they’ve been in or out of favour. So we’re just very patient and prudent.

As an example, over the last two years we’ve been buying property in Ireland and Spain, before that in 2009 it was in Las Vegas. The whole sector was out of favour and people couldn’t afford their mortgages so everybody was effectively going bankrupt. We were able to buy quality assets that were trading below replacement value – which in this case means we were buying them below the cost of building a new house. Our property investments have always been focused on getting the land for free.

Your current focus is banking and financials, which make up 34 per cent of the portfolio. What can you tell us about the sector and what would be the catalyst for you to shift out of it?

We were able to buy all of our banking positions below book value – on average about 0.7 times. We thought even if they never gave another loan and they liquidated their business we would get our book value back. In other words we’d get a 50 per cent increase on our holdings.

Where we sit today, on average our banking exposures are trading at book value. Valuations of banking positions over time have traded at book value to 3 times book value and we still think that our global retail franchises have significant upside because you are starting to see them pay dividends out. The dividend yield on a 50 to 60 per cent payout ratio is going to be 4 to 8 per cent and they haven’t grown their loans in the last five years. So going forward you are going to see start seeing them grow their loan book, which means their earnings are going to start growing at 3 to 10 per cent per annum.

In terms of getting out, usually what happens in those positions that are out of favour, they peak at about 30 to 40 per cent of our portfolio, and then over the next decade they are either rerated or taken over and dramatically get reduced.

With our current financial holdings, over time as the economy improves and the businesses grow their earnings and give the money back via dividends, we expect them to trade at 1.5 to 2 times book value and when they get to 2 times book value that’s when you’ll start seeing us reduce our holding over time.

You don’t own any Australian companies. What do you see happening in the Australian market over the next decade?

Primarily we don’t own anything in Australia because it is either overvalued or we can’t find relative value here at all. It’s a time issue. We are going to be patient and we know over the next 10 years there will be a crisis in Australia, and you will be able to pick up quality assets significantly below replacement value.

It doesn’t matter what Australian company you look at, I can buy an equivalent company in the US, Europe or the UK that trades on average 30 to 50 per cent cheaper for effectively the same business.

Take CBA, it trades at 3 times book value, which we think is excessive. It has a market share of 25 per cent and is predominantly a retail – mum and dad – type of bank. I can buy Lloyds Banking Group for 1 times book value, a PE of 8 to 10 times and it’s got exactly the same market share. CBA’s got a PE of 16. So I’m effectively buying Lloyds for a half price of what I could buy CBA here and it hasn’t had the loan growth like CBA has had for the last 15 years. CBA has grown its loan book at about 6 to 10 per cent per annum which to me is crazy.

What are some of the stocks that you hold that you like at the moment and why?

With Lloyds it’s effectively trading at book value. It’s on 10 times earnings and is the largest bank in the UK – virtually double its nearest competitor. They are going to start paying out a 60 to 70 per cent dividend yield, which means in around 2 years’ time we’re going to be getting a 6 to 8 per cent dividend yield. Plus, there hasn’t been any loan growth in the UK for the last five years.

We also like the real estate agents in London: LSL Property Services Group and Countrywide. They are trading at 10 to 12 times earnings, are debt free and paying four per cent dividend yields. The market in the UK has thousands of mum and dad real estate agents. They are consolidating their business into these bigger brands, which we think will be able to grow their earnings by about 6 to 10 per cent per annum over a longer term period.

What percentage of a portfolio would someone invest in a fund like this?

A lot of people have a global index fund and some active funds. We look at our portfolio as a satellite as a part of someone’s global portfolio. What that means is it’s more than 5 per cent but probably less than 30 per cent. People need to invest with us for a 5 to 10 year time horizon or we really don’t want their money.

Ashley Pittard joined us for a video interview earlier in the year. You can view the interview and read more about the fund’s style and performance here.

Daniella D’Ambrosio is a writer at brightday. The Global Companies Fund is available on the brightday platform.

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