Going global for value and growth
Wilson Asset Management has long been regarded as the dominant listed investment company specialist within the Australian equity market. When the company entered global equities last year it was unsurprising they chose their first graduate hire from over 15 years ago, Catriona Burns, to run the fund.
Geoff Wilson hired Catriona back in 2004, before she left Australia in 2007 to pursue her global ambitions. After investing in global equities for more than a decade, she returned to join Geoff and the team last year as the firm raised nearly half a billion dollars in the WAM Global (WGB) IPO.
With the first year behind them, we took the opportunity to get in touch and learn more about what makes Catriona tick as an investor. Here, she shares some of her favourite investing quotes, some of the books she’s read recently, plus four characteristics to look for and three to avoid when assessing potential investments.
How would you describe your role if someone at a dinner party asked you what you do? What would be your market-related ‘pet topic’?
When I talk about what I do, I describe “investing in undervalued growth companies in global equity markets”. This involves investigating businesses, figuring out how they generate money, their competitive positioning, and their future growth potential, to work out if we want to invest in them. As a global investor I am lucky to be able to have such a wide array of fantastic businesses around the world to choose from.
Right now, I’m most interested in the “free money” experiment currently being undertaken by the global central banks. This unprecedented policy environment is driving asset prices to record highs while the global economy falters; the question is: “how and when will it unwind?”.
Of course, the current environment presents opportunities as prices are boosted despite pressures on earnings as the global economy weakens. The inevitable correction will also create opportunities for active investors, as quality companies trade on very attractive valuations.
You worked at Wilson for three years through to 2007, and returned last year; what changed the most over that time, and what has stayed the same?
What has changed is the significant growth in our coverage. From the focus on small-cap Australian companies in the early days to now managing funds that invest across global markets and all segments of the Australian market, we have excellent access to information and are constantly sharing this across our team.
What has remained constant is our commitment to the investment process developed over 20 years, as well as our focus on making a difference for our shareholders.
Who are some of your investing heroes, and what are some quotes that are relevant to the current market conditions?
Seth Klarman: “The single greatest edge an investor can have is a long-term orientation” and “The stock market is the story of cycles and of the human behaviour that is responsible for overreactions in both directions”.
It is inevitable that markets will overheat and be oversold at certain times. The important thing is to stick to your investment process and look for businesses with compelling fundamentals that are trading at discounts to what you believe is their intrinsic value.
Howard Marks: “Establishing a healthy relationship between fundamentals – value – and price is at the core of successful investing… There’s no such thing as a good or bad idea regardless of price!”
Valuation always matters. This quote is great as it reinforces the point that investors should focus on a business’s fundamentals and that buying at the right price is crucial.
Buying a fantastic business at an extremely high price is not likely to be a winning strategy, nor is buying a terrible dying business at an incredibly cheap price.
We look for a combination of value and growth.
As an Australia-based global investor, what would you miss most if you switched to investing in domestic stocks? What is the main thing that investors are missing out on if they have no global exposure?
Australia has some excellent companies. What I enjoy most is the sheer volume and diversity of opportunities that global investing provides.
Last quarter we invested in a discount retailer in Japan, a ticketing business in Germany, a data and analytics business based out of the UK and a Parisian food products manufacturer. There are so many great businesses globally that investors can own a piece of by investing offshore.
Your portfolio is spread across the US, Europe and Japan, and covers several sectors; is there a common thematic that you find particularly appealing unifying any of these holdings?
We are valuing earnings certainty highly given the extended length of the cycle, heightened geopolitical concerns, & ongoing technological disruption.
The businesses that we look for share the following characteristics:
- compounding earnings with a clear pathway of future growth;
- solid barriers to entry;
- strong balance sheets with low levels of leverage; and
- solid management teams with a track record of success and skin in the game, in many cases they are founder led.
We look to avoid those companies that:
- are value traps – cheap is often cheap for a reason;
- use accounting tools, such as adjustments and intangibles to hide issues; and
- mask a slowdown in their underlying businesses by undertaking M&A activities
You have been on various trips around the globe lately. What were some of the key takeaways from your visits?
Given the uncertainty and disruptions arising from the US-China trade wars, many of the companies we have met with are focused on ensuring their business models are resilient. We are seeing industrial supply chains looking at migrating out of China.
Against mixed economic data releases, the majority of the US companies we hold are not yet seeing significant signs of a slowdown and there is a general belief that the economy is in decent shape. However, we are watching leading indicators carefully as corporates are often the last to see it.
Companies and market participants in the US are also focused on the tightness of the labour market. Meanwhile, job markets in Europe and the UK are patchy, reflecting the multitude of issues within that area. Quality European and UK-listed companies that rate under our investment process generally possess global earnings or are in some way protected from the regional economic and political headwinds. Japanese companies are similar. In Japan, you need to find sectors with tailwinds – they are rare but they do exist.
Chinese companies are significantly more upbeat than they were six months ago as government stimulus measures appear to have reached consumers.
How do you see the current political issues playing out in markets?
Political risk is a constant. It is undeniably heightened with the uncertainty surrounding Brexit, Trump’s tweets and the US-China trade war, the yellow vest protests in France among other issues. Active investors are required to look through the noise and identify the challenges and opportunities presented by political events. For example, the US healthcare sector saw a significant sell-off during April when ‘Medicare for All’ was flagged as a potential policy. We saw this as a buying opportunity as it was highly unlikely to be adopted and implemented and the rout has corrected. Drug pricing, on the other hand, looks like it is a focus from both sides of politics, so we are wary of exposure to pharmaceutical companies within the healthcare sector.
Can you discuss a recent addition to the investment portfolio?
Airbus (EPA: AIR) is the flagship European aerospace and defence company headquartered in the Netherlands, with its main office in Toulouse, France. It is the world’s second largest operator in the space. We first invested in AIR during the market sell-off in December 2018 prior to the US Federal Reserve’s pivot.
AIR operates in a global duopoly, with rational pricing behaviour and enormous barriers to entry. This was most recently tested by Bombardier (TSE: BBD) and its CSeries planes. After years of developing their own narrow-body plane & the significant associated cash-burn, Bombardier was compelled to sell a 50.01% stake in the CSeries, to Airbus for $0, on the condition that Airbus provide sales and capital support throughout the planes life; a remarkable outcome for Airbus (and a big loss and strategic misstep for Boeing). The cost of failure in this industry, and the long tail of parts and maintenance support required, makes it easy to see why potential new entrants face an uphill battle to convince airlines to purchase their jets.
Airbus has significant growth opportunities ahead. Global demand for flights continues to grow at a healthy multiple of global GDP (c. 5-7% in normal years), something we expect to continue for many years to come, driven by the increasing appetite to fly among developing nations such as China and India.
Specific to Airbus, the acquisition of the CSeries from Bombardier as well as the recent issues faced by Boeing with its highly publicized 737MAX issues, create a situation where they are very likely to outperform Boeing in the narrow-body market. They also have a catch up opportunity on operating margins relative to Boeing.
Airbus generates approximately $100 billion in sales against Boeing’s $140 billion. Despite Airbus’s competitive advantages, Boeing trades at an enterprise value of almost $300 billion, while Airbus looks decidedly cheap at $150 billion. Independently, Airbus’s 15.9x forward cash-adjusted PE is very attractive.
We are seeing ongoing catalysts for investing in Airbus. We think the market is underestimating the earnings upside ahead. Airlines are generally risk averse, and we believe they will start to shift their orders from Boeing to Airbus. The first confirmation of our thesis was the recent Saudi Flyadeal cancellation of 50 Boeing 737MAX-8 aircraft and the replacement order of 50 Airbus A320neo aircraft.
Identifiable catalysts are an immutable part of the Wilson process: Can you list some of the types of catalysts that you look for, and nominate a stock in the portfolio with a potential catalyst shortly ahead of it?
There can be various different types of catalysts that we identify such as upside to earnings relative to market expectations, accretive acquisitions or divestments, a change in the executive team, or changes in capital management, such as dividends and buybacks.
L3Harris Technologies (NYSE: LHX) is a holding where a recent merger should provide catalysts over coming quarters. Prior to the merger, L3 and Harris generated c$1 billion of free cash flow each year. Management has laid out a path to $3 billion in combined free cash flow within three years of the deal’s close in July 2022, representing a 16% annualised growth over that period. We have high regard for the management team of Bill Brown and Chris Kubasik and see significant opportunity for the company to exceed the synergy & free cash flow targets laid out to date.
You have capacity to short sell under your mandate. While you don’t have any shorts at present, are you likely to have any in the near-term?
We potentially will. It is often the case of looking for a long and finding a short. However, we would need to identify a catalyst first, as we do on the long side. On the short side, this process is even more important as you can have a correct thesis on a short for a long time, but the share price can continue to go against you given management incentives and sell side bias.
What was the last book, report, podcast or documentary that made a deep impression on you?
Reports – Howard Marks’ memos are always great, his latest focuses on the dangers of the claim that “this time is different” and as we get closer to the end of the cycle this is particularly pertinent. Ray Dalio’s “Paradigm Shifts” is another that speaks to the importance of adapting in investing and not extrapolating what is working today to be what will always work.
Books – Thinking in Bets by Annie Duke and The Art of Execution by Lee Freeman-Shor.
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