Fund Manager Q&A

In the second part of our Q&A, Tony Cousins, Chief Executive & Chief Investment Officer at Pyrford International, discusses some Aussie stocks that tick all of his boxes, the positive demographic drivers that the country has going for it, while also lauding the foresight and vision of former Prime Minister and founder of superannuation, Paul Keating.

Q: Looking at the Aussie market from an overseas perspective, how do you see Australia? 

I think Australia in a global context has tremendous advantages going for it. It never ceases to surprise me. When I go down to Australia, and I tend to go about twice a year, how much more negative Australians are about Australia than globally. You haven't had a recession for 28 years or something ridiculous. It's got so much going for it.

It's in the right part of the world – Asia. Outside of Africa and the Middle East, it has the best demographics. It has lower debt penetration. Big populations, growing populations. It's got a lot going for it.

Nobody wants to immigrate to Japan – everybody wants to immigrate to Australia. Again, a highly emotive subject in Australia, but just makes good common sense. When something is scarce, like the ability to immigrate to Australia and live your life there, then you ration it and you cherry pick, and you have the points system.

As a result, you have a growing population. You have very little government debt. You don't have a social security superannuation time bomb thanks to Paul Keating. Making superannuation compulsory was an incredibly smart move. Nowhere else in the world other than Chile has this.

It's an incredibly smart move because it forces people to save in a tax-efficient manner, and savings is a really good thing, because you then provide private sector savings for investments, and investment drives productivity. You have that.

I think the negatives you would point to for Australia are property prices are still way too high, because they've just gone up so much, and people borrow a lot of money to pay for those properties. There are large amounts of consumer debt, there are very unaffordable prices.

Sydney and Melbourne have appeared in the top 10 of the most expensive big city properties in the world, and that's a problem. Vancouver and Toronto appear in them as well, so does Hong Kong. You're not the only ones, but you've got lots of other good things going for you.

I'm going to talk about banks now in that, while the banks in Australia have been brought to book in the last 18 months through Royal Commission, and they had misbehaved to some extent. I think it's very important that this isn't taken too far.

It's become a political football. Every country you go to, everyone hates banks, the general population. They all hate banks. This takes on a whole new level in Australia – they really hate the banks in Australia.

To have a successful economy going forward, you need to have a strong banking system. Banks are very leveraged. You wouldn't buy any other company where only 5% of the balance sheet was in shareholder's funds. You just wouldn't touch that in another company. But that's the nature of the banks, and that's how banks need to be to function in the economy.

Banks need to be very well regulated. I think Australian banks have no shortage of good regulations. They just haven't been enforced. Now they're suddenly enforced. Some of this bad behaviour in what's a cartel – well, cartel's too strong a word, oligopoly – a very comfortable oligopoly for a number of banks, that's being brought to book. None of this is a bad thing.

What you absolutely need to avoid though is having a financially weak banking system. Some of your politicians have been on this sort of punitive gig, to really punish them. You need talented people. Banks are quite complex. You need talented people running them. You pay them appropriately.

You need to have financially strong banks. Otherwise, you end up like Italy. Nobody wants to go and work for an Italian bank because they're in terrible financial shape. The fact that they're in terrible financial shape means they can't be the engines of credit creation. Credit creation is one of the key engines for economic growth in the long term.

Australia is clearly slowing down. It's clearly seeing house prices come down from an unsustainable level. The policy response has been the right one – low interest rates and try and soften the blow. It's a bit of a natural stabiliser, isn't it?

Australia will go through a period of no growth followed by another recession, but it's not the end of the world. You've got fairly low unemployment. What you don't want to do is turn it into a crash.

The RBA is a very good central bank that understands this and is very measured in what it does. I think it's a bit worried about it, that it could sort of gather pace, just because the excess has been so great in property prices.

But none of this takes away any of the really positive structural things that Australia's got going for it. We like it.

I'm so pleased with the last election, because what was put under threat, is the franking credit system. The franking credit system encourages people to save. It encourages capital discipline in the corporate sector, because dividends are very highly valued by investors.

In some countries like Japan or Korea, they make really dumb investment decisions because the payout ratio is really low. They don't feel the need to maintain a high level of dividends.

That has been a tremendous asset for the Australian corporate sector because if you cut the dividend in Australia, you're probably going to lose your job as the CEO. They think very long and hard before allocating capital away from dividend paying, to going and making some extraneous investment.

I think there are some incredibly well managed Australian companies for that reason, because of the capital discipline it imposes in an economy that continues to have good long-term growth prospects.

Q: Can you give us an example of an Australian company you hold that ticks all the boxes?

Take something like Woolworths (ASX:WOW), for example. Woolworths, it was in a two-player market that's becoming a three-player market. I think there's room in the groceries business for it to become a three-player market with Aldi coming in. It keeps people on their toes.

One of the great beauties of food retailing as a business model is it works off negative working capital. They get your money and my money before they pay their suppliers. That's wonderful. You've always got way more payables. You've not just got these massive receivables that you have to finance. The cash generation from the business is very, very good.

Again, when the stock came down, we just bought more of it. Each shareholder gets a franking credit on top … it's a huge yielder. A bird in the hand is worth two in the bush they say. That's just a great starting point with this huge cash flow-backed yield.

It's one of the dullest companies in Christendom, but it all comes back to looking at the hard numbers and the cash generation, which funds greater dividends, and is very attractive in a really boring company.

I think there's some good tech companies in Australia. CSL (ASX:CSL) This HPV vaccine that it developed – it was also smart enough to realise if we really want to make this go through, we'll licence it to Glaxo, and they'll develop it and get it out there.

The latest comments about it are that it will potentially eliminate cervical cancer, which is a massive, amazing thing to happen. The problem is the stock is valued in the stratosphere. With our methodology, we can't buy it.

Others like Cochlear (ASX:COH), medical technology company. There's some good innovation in Australia. Australia is still not that big a country, but it's got controllable growth, it's got a good education system. You can just see the sort of long path to development going forward.

If you look back 30 years ago, people thought Australia was a big hole in the ground you dug stuff out of and flogged it to the Chinese. It's just not like that anymore.

I think the resource companies are world class because they've invested hugely in becoming low-cost producers. We own Rio Tinto (ASX:RIO) but that's still a commodity product. But where you want to be if you're going to have a commodity exposure is be in the low-cost producer. You're the last company that goes out of business when the price falls.

I can't remember a time in this company where, within our equity portfolios, we haven't been overweight Australia. I've been here for 30 years.

But just on a totally objective comparison with other destinations for money, Australia just comes out very well. It's not without its blots like the property market and consumer debt. But everywhere has got something wrong with it.

Its biggest problem is it's a bloody long way away! It takes a long time and you can't do anything about that. You can't move it!

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BMO Global Asset Management (Asia) Limited (ARBN 618067959), Pyrford International Ltd (ARBN 165504414) and LGM Investments Limited (ABN 19 381 443 479) are exempt from the requirement to hold an Australian financial services licence under the Corporations Act in respect of the financial services each provides to "wholesale" investors (as defined in the Corporations Act) in Australia. Pyrford International Ltd and LGM Investments Limited are regulated by the Financial Conduct Authority under UK laws, and BMO Global Asset Management (Asia) Limited is regulated by the Securities and Futures Commission under Hong Kong laws, which differ from Australian laws.

BMO Global Asset Management (Asia) Ltd ARBN 618067959 is exempt from the requirement to hold an Australian financial services license under the Corporations Act in respect of the financial services it provides to wholesale investors (as defined in the Corporations Act) in Australia. BMO Global Asset Management (Asia) Ltd is incorporated in Hong Kong and authorised and regulated by the Hong Kong Securities and Futures Commission under Hong Kong laws, which differ from Australian laws.





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