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Best ideas from John Pearce, Leah Zell, Kerr Neilson, Geoff Wilson

These are presentations from the Sohn Hearts & Minds Investment Leaders Conference in Sydney on 11 November 2016. Each high-profile portfolio manager is given 10 minutes to explain their investing strategies and include one major investible insight.

John Pearce (pictured on home page)

John is Chief Investment Officer of UniSuper. He has over 25 years’ experience in the financial services industry both in Australia and Asia, including 7 years at Colonial First State, and 3 years as Head of Global Asset Management for Ping An, China's second largest insurance company. He is also a non-executive director on the Treasury Corporation of Victoria Board.

Best idea: Transurban

In the last three months, the previous success of the so-called ‘yield trade’ has been a dumb investment as long-term interest rates have risen. But where to from here? Investors should look through the current volatility and accept that low interest rates will continue. The world economy is still recovering from the GFC, US debt to GDP shows a massive buildup, and US deleveraging has barely started. The yield curve delivers a message of ongoing ultra low interest rates.

Powerful deflation forces such as technology and the demographics of aging are also pushing down prices, meaning inflation will also remain low.

We are at the start of the yield trade not the end, and I can’t go past Transurban. It pays a yield of over 5% with long-term concessions on monopoly assets. Management remuneration is set based on results. Even if there is inflation, Transurban can increase tolls, and it has a strong management team.

Since Unisuper is the largest shareholder in Transurban, I could be accused of talking my book, but I won’t be the only one here.

Leah Zell

Leah is Founder and Portfolio Manager of Lizard Investors, and launched the Pengana Global Small Companies Fund trust in 2015 with Lizard as the investment manager. She was a Co-Founding Partner and Portfolio Manager at Wanger Asset Management, a global small-mid cap equity specialist, for 13 years. 

Best idea: BIM stores (a Turkish company)

(Leah’s investment idea was the most successful from last year’s London conference).

Much of the Turkish economy is controlled by powerful families with dominant shareholdings, but this company has one business line and one class of stock. 71% of shares are free-floating. BIM stores slogan is “retail at wholesale prices”.

BIM earns a 46% return on capital, has had 26% revenue growth per annum over last 10 years and the balance sheet has net cash. It now has over 5,000 stores in Turkey.

BIM delivers a basket of groceries at 30% cheaper than the competition. It sells a limited range of basic goods that sell fast, uses private labels and no frills premises and does no advertising. It has one brand of sugar, three blends of coffee, five types of jam.

Few retailers in the world manage their businesses with such low costs. It follows Aldi’s play book but it is not a stepchild. In Turkey, the market is still unorganised and fragmented, but continued modernisation will allow growth in home territory. It’s now in Egypt, Morocco and Chile.

BIM is not cheap, it trades at PE of about 20, but based on reasonable assumptions, it has potential to double by 2020. BIM checks the investments boxes.

Kerr Neilson

Kerr has over 40 years' experience in financial markets both in broking and funds management. Kerr founded Platinum Asset Management in 1994, and was Chief Investment Officer until 2013. Kerr remains Chief Executive Officer and Portfolio Manager for the Platinum global mandates.

Best idea: 58.com (NYSE code WUBA)

58.com operates the largest online marketplace in China serving merchants and consumers. It allows members to connect, share information and conduct business, giving a massive network effect. It is growing rapidly in ‘verticals’ such as property and jobs and as it grows, its costs barely move.

The largest 25 cities in China have more people than the whole of the US, and the country is fast-changing. 58.com wants to aggregate as many viewers as possible and they already have 400 million visitors a month and over 1 million merchants. There are 4 transactions per visitor per year, but they expect to reach 12 as they learn more about their consumers. Merchants pay fees to participate.

The real money spinner comes from merchants trading up to higher profiles on the site, pay for real time bidding or priority placing.

58.com has 16,000 people pounding pavement recruiting clients and over 1,600 in the telecentre signing up people.

There are a number of negatives affecting the company at the moment. Transaction values are small, the company is only breaking even and sales in sectors like property are cyclical. They need to manage false listings and the stock has fallen significantly recently. A big positive is that the Founder has stayed with the company since inception.

We expect more merchants, more verticals, and strong network effects as mobile phone usage grows.

Geoff Wilson

Geoff has over 36 years’ direct experience in investment markets. He founded Wilson Asset Management in 1997, and is currently Chairman of four WAM group companies and the Australian Stockbrokers Foundation. 

Best idea: Armidale Investment Corporation

The pain gets closer every week and every day, as equity valuations are at unsustainable levels. Risk is being mispriced and we are close to an adjustment or significant equity market fall.

We believe that eventually, a company’s share price will reflect its fundamental value, but timing is crucial. Many smart people have mistimed the market and have gone broke in the short term although they were right over the long term. We do not want to be fully invested in the market all the time, and our current cash levels are 41%.

We look at four elements in any investment decision:

  • Management
  • Earnings
  • Valuation
  • Catalyst

We all want to own $1 for 50 cents, but we especially want to become a part owner of a business. On the final point above, we want to see a catalyst that will lead to a rerating that moves the market price.

Armidale Investment Corporation is listed on the ASX. It’s an integrated financial services company, a pure play on asset finance broking, which is much like mortgage broking was 10 years ago. Armidale will be the biggest consolidator. Management owns 20% of the business, giving good alignment. EPS growth over the next two years will be 20% plus. The rerating will come when the market realises this is an investment company becoming an operating business, and we expect recent acquisitions will give earnings upside surprise. But the full potential will take 5 to 10 years to fully realise.

Our priority is to manage by not losing money, and we don’t care about relative performance. An investor should always be happy to hold cash.

 

This is general information and the investments may not be suitable in many portfolios as the personal circumstances of investors are unknown. Cuffelinks accepts no responsibility for the performance of the investments and this is the author's version of the talks.

 


 

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