2 lessons learned over 3 decades for all market conditions

Chris Conway

Livewire Markets

When equity markets go sideways, you often hear the expression that it is a ‘stockpickers market’. The insinuation is that if you know how to identify high-quality companies which can endure the market cycle, you will likely outperform over time.

Such a strategy requires a disciplined approach, patience, and the courage of one’s convictions – all three of which, in combination, are not particularly easy to practice in today’s volatile markets. We exist in a world where people want things done yesterday, and there is always a new theme, fad, or idea to chase after.

You couldn’t accuse Stephen Arnold from Aoris Asset Management of such whimsy, however. Having cut his teeth at the side of some of Australia’s most well-known and successful fund managers, Stephen understands the importance of thinking independently and sticking to an investment process.

In this wire he shares with you two key lessons from his mentors and how they have helped to shape his thinking around stock picking and funds management. And it is through this explanation that we learn why Aoris is fully invested and primarily focused on the businesses that it owns, rather than the volatile macroeconomic environment.

Arnold also shares with us his highest conviction holding, as well as one stock on his shopping list that he would like to buy if the price is right. 

Note: This interview took place Wednesday 31 August, 2022. To get Stephen's full insights, you can watch the video or read an edited transcript below. 

Edited Transcript 

Who have been two pivotal mentors in your career? And what have they taught you?

Stephen Arnold: Two names that immediately come to mind are Kerr Neilson, at Platinum Asset Management, well known in the Australian investor community, and Matthew McClennan, an Australian investor that I worked for at Goldman Sachs Asset Management during my years in London. I joined Kerr at Platinum in 1994. I think I was analyst number four or five.

Kerr's an unusually worldly, intellectually curious individual, and he loved to walk the path less trodden. In fact, he was one of the world's first international investors to buy stock in Peru. He loved to go where people aren't looking and haven't been.

And what I learned from Kerr is the value of independent thinking, not being swayed by the prevailing mood of the market, but thinking objectively, thinking independently, and making up your own mind.

And from that, I learned the compounding magic of great quality, growing businesses, and there's 15 of them in the portfolio today. In fact, always remind myself about compounding by looking at my personal fossil collection, which I've got on a shelf at home. And that reminds me of just what time does and how much things change over time. And great businesses are like that. It's the compounding magic. And Matt was a great influencer for me of learning about that.

How do you employ those learnings in your current investment strategy?

If you look at our portfolio today, I think you can see those two things, independence of thought and quality businesses. And by thinking independently, we've been able to stay away from the disruptive tech businesses that markets so fell in love with in 2020 and seemed to be the next big, exciting thing and that have caused investors a lot of pain over the last 12 or 18 months. And so we were never there. And that comes from not being swayed by the prevailing mood of the market.

In terms of quality compounders, as our businesses owns 15 of them, wonderful businesses that have and we believe will continue to compound over time.

You’re fully invested right now. Why?

We don't try and time the market, the inevitable zigs and zags or ups and downs of the market. Believe me, if I thought we could do it well, we would, but I know that we can't. So instead we keep it simple. We have all of our client capital invested in these 15 high-quality, wealth-creating businesses, and we let the companies do the hard work for us.

What is your highest conviction holding right now?

Let me tell you about a business that I think is a large position in our portfolio, but it's a business we think is underappreciated, and that's Accenture (NYSE: ACN), which is the world's largest IT outsourcing and consulting company. And in simple terms, Accenture helps the world's largest organisations deal with change and become more efficient. And there's a few important things that I think will keep Accenture very relevant in today's environment.

The first thing is large organisations want to manage change at probably a faster speed than they might have done five or 10 years ago. 

And Accenture provides what the Americans like to call a soup-to-nuts solution: We'll do it all for you from strategy and conception right through to implementation. Now, I think that's a compelling proposition. 

We've recently done a home renovation, and there's a good reason you give it to one builder rather than breaking the project up into little pieces and giving it to different people. By having it in the hands of one organisation, it's smoother and it's less costly. And Accenture does that.

The second thing is Accenture operates in 180 countries around the world and their large global clients operate everywhere as well. And Accenture's global presence is enormously beneficial to its global clients. And the third thing is Accenture has been able to find new needs, new use cases for its clients, which today might be helping large banks deal with data security. That's so important. And for that reason, Accenture's grown far faster than its peers over a long time. And in the last quarter, they grew by 20%, which tells you that rather than slowing down as the overall economy might have slowed down, their rate of growth has actually accelerated, which speaks to those qualities as a sort of relevance, the soup-to-nuts solution, and the value of their global presence.

Is there a stock on your wish list?

There's a stock that we love that we sold in the early part of 2021, and we'd love to win at again at a lower price. And that's MSCI (NYSE:MSCI). And we see their name in many places when fund managers are referencing a benchmark as we do. It's the MSCI Index that we reference. Well, who owns that index? Well, of course MSCI does. And so they benefit from more and more money being invested globally, as is the case we're seeing in Australia. And they provide the IP, the tools, the reference, the benchmarks to help that process. Another interesting area of growth for them is ESG. They are by far the largest in providing ESG indexes, ESG funds and ESG research. And thirdly, it's a business that's very, very profitable. And as they grow, they become even more so. So that's a business that we love just as much as when we owned it and we'd love to own again at a lower price.

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Chris Conway
Managing Editor
Livewire Markets

My passion is equity research, portfolio construction, and investment education. There are some powerful processes that can help all investors identify great opportunities and outperform the market, and I want to bring them to life and share them...

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