Hall of Fame Special: How two of Australia's best invest
With decades of experience under their belts, it's fair to say that Ellerston's Chris Kourtis and Airlie's Matt Williams know a thing or two about investing. While their styles differ quite widely - Chris is a contrarian and Matt's all about quality and solid balance sheets - they both have their eyes keenly focused on their next opportunity.
Interestingly, despite the different investment styles - valuation is one thing they can agree on - and make it clear that investors should take a fresh look at their portfolios and make sure they don't get caught out if we see a sell-off in the near future.
Similarly, management is something that both our Hall of Fame fund managers are watching. However, while Matt is searching for businesses with teams that can execute well and help a stock soar, Chris is looking for missteps that could see the market punish a business far more than it should.
So, in this episode, Livewire's Ally Selby sits down with Chris and Matt for their insights into how they are thinking about markets and the macro forces at play, as well as a deep dive into their strategies and what makes them tick.
Plus, they also share one piece of advice so that investors can be successful over the next 12 months, and a stock that can help investors on their way.
I should say this episode is quite long, so sit back, relax and get comfy. But then again, how often do you get to hear straight from two Hall of Fund managers in one episode?
Note: This episode was recorded on Tuesday 8 October 2024. You can watch the video, listen to the podcast or read the edited transcript below.
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Edited Transcript
Early lessons that shaped Chris and Matt's careers
Ally Selby: As in the management team or your managing of the investment itself?
Matt Williams: The management team. So the really good management teams who can allocate capital in a really skilful and successful way can just end up having miraculous stock returns.Ally Selby: In your view, what percentage of the ASX would have those kinds of teams?
Matt Williams: That's a good question. I think management's really improved over the 30 years I've been in the business, in Australia, both the management and boards. However, you can get stung - you can still get hit by management who surprised you with a big change in capital allocation plans.Ally Selby: Over to you, Chris. What's something that you learnt really early on that completely changed the way you think about investing?
Chris Kourtis: Well, Matt's certainly right about picking the right management team, but I've found some of my best investments over the journey have been where management have got it wrong or misstepped or made dumb acquisitions or pursued a strategy, which for whatever reason, short term, has been value destructive and share prices correct sharply.Often, I've found these companies that are in a transitional phase where management has got it wrong, for whatever reason, industry dynamics change or they've just misread the outlook, and the market has clobbered some of these stocks. And some of the best investments I've made are some of those turnaround stories.
Lessons learnt from mistakes
Ally Selby: There's a few breadcrumbs in that for your stock pick at the end of this episode, but we'll get into that later. Everyone makes mistakes, I've definitely made a lot of them. What's one mistake you've made during your career and what did you learn from that?
Chris Kourtis: How much time have you got, and how many would you like to talk about?Ally Selby: About seven to 10 minutes.
Chris Kourtis: Probably one of the biggest errors of judgement that I can think of, and I'd hate to think what performance it's cost me over the last decade-plus, is probably not participating in the Commonwealth Bank (ASX: CBA) recapitalization during the GFC in late December 2008, early 2009, when they did that raising in the mid-$20s. The market cap was probably $40 billion at the time. Fast-forward to today, we're at a $220 plus market cap. The stocks just never looked back, three times price to book, 23 times earnings, and I've never owned it.So it's probably cost me... I shudder to think and shake my head, but probably 700-800 points of underperformance. Just that stock alone, not owning CommBank. Big error of judgement. Not going to buy it today, by the way. I'm quite stubborn at times.
Matt Williams: Like Chris, I've made a million stock mistakes. A really good investor will be wrong 40% of the time. If you are right around 50% of the time, you're a winner, you're going to outperform. So I've made so many mistakes, but I think if I boil it all down, it's that great old saying, "What hurts you is not what you don't know, it's what you know for sure that is wrong." And so many times I've made assumptions and then looked for evidence that confirmed those assumptions and ignored contradictory stuff, and it's that stuff that gets you.
So, I think being open-minded always and, Chris and I have been doing this for so long, not getting stuck in a rut and saying, "This is the way to do things." I think we've always been able to learn and embrace new ideas and new thinking that keeps us away from those mistakes.
Macro forces at play in markets
Ally Selby: You both have decades of experience in markets. Matt, how are you thinking about some of those macro forces that are at play at the moment?Matt Williams: I think the macro looks pretty good. There's always trouble in the Middle East, and this is at a higher level. Now, you look at the US, which is cutting interest rates. China is doing something about their sluggish economy. Australia, hopefully, we'll be looking to cut interest rates sometime early next year. So, really things are pretty good.
The macro is very good and it reminds me of a time maybe the early 2000s, when the US was cutting rates, the house building, what became the bubble, was really getting going and things were good. I guess what's different from that time though to now is that valuations are at a really high starting point here. Back in the early 2000s, the tech wreck just happened, so they were building from a lower valuation point. Here though, valuations are high.
Ally Selby: Right. Over to you, Chris. Do you agree? Does this time remind you of any other time in the past?Chris Kourtis: I think Matt's nailed it when he says that's the risk, valuation risk, with non-bank industrials now probably on about 24 times with very modest earnings growth. So valuations look stretched, but hopefully, when we fast-forward six months and rates are coming down in Australia, we will get some earnings momentum.
And China stimulus, it's real, it's happening. The Chinese market has gone ballistic, the property market in China has gone up 36% in five nanoseconds, and we've had a 30% return in the Chinese market in the month of September alone or 29.5% or whatever the number ended up being. And the market's gone on with it so far this month.
So, that's positive for Australian resource stocks. It can't hurt. So there's a degree of catch-up, and if you look at some of the heavyweight resource stocks, your BHPs (ASX: BHP), Rios (ASX: RIO), and Fortescues (ASX: FMG) of the world, they're still well down calendar year to date versus the industrial segment. So it's not all doom and gloom. I suppose I'm cautiously optimistic.
How to invest like a Hall of Fame fund manager
Ally Selby: Love that phrase. You're obviously both Hall of Fame Fund managers, which means you've made it to quite an illustrious list. What sets your strategy apart from the rest of the fund managers out there in the Australian market? What makes you a Hall of Fame Fund manager?Chris Kourtis: Apart from the powerful suits that I wear... Personally, I can only speak for myself, and I've always been a contrarian and a very high-conviction manager. I'm never going to be called an index hugger. I do deep dives into stocks and I'm not always right, but I will swing the bat and I'll never, ever, ever be accused of being an index hugger.
And as I said, some of my best wins have been turnaround stories where I go where no one else wants to go, where something looks toxic - it's a former market darling, it's fallen from dizzy heights to bombed-out levels. And I could go through a number of stocks where literally I've picked an inflexion point and often if I'm guilty of anything, it's being early,
Often, I use the phrase, "Average down to get out of town." A lot of fundies will just say, "Look, we're wrong. We're dumping our position. This is causing us too much pain with clients." Well, that's never scared me. And often I'm zigging when everyone else is zagging.
Ally Selby: Okay, over to you Matt. What makes your strategy different from the rest of the pack? What makes you a Hall of Fame Fund manager?Matt Williams: A bit different from Chris, and I really admire Chris' contrarian attitude and I see it and we talk about the stocks that he buys. Obviously, Chris is a senior member of the Hall of Fame. He's a lot older than I am. I'm a much younger Hall of Famer. But I guess what sets us apart is basically, and it's a very boring kind of answer, but it's a disciplined application of the process over a long time and we just try and stick to that process. And now myself and Emma Fisher at Airlie have continued on and she's improved the process. We just try and stick to it and we've just found over the years, the five years, the 10-year periods, it seems to work well. And so we've just got to make sure that we don't get lost in the fads and the macro kind of ideas and just stick to applying the process.
Ally Selby: What is that process? What's important to you when selecting a stock?Matt Williams: I think the number one thing, the thing that can kill you, is when you get it wrong, as I talked about before, and the balance sheet comes into play. So, our first step in the process is financial strength, and if you get that wrong, then all hell can break loose and there's no stop to the downside for a stock in financial pressure. So I think that's a key part of our process.
Ally Selby: Is that also key for you?Chris Kourtis: I'm a bit more flexible. And Matt's right. The operating leverage and financial leverage on stocks, depending on where we are in the economic cycle, and competitive pressures, industry dynamics that change, that can alter the trajectory of earnings for certain companies. When things turn down, there's operating leverage. But in the cycle we've just endured, where rates have gone up and companies that have got far too much debt and are suffering from much higher interest costs, and then throw in a bit of regulatory risk... Star Entertainment Group (ASX: SGR) is a classic example and we've avoided it like the plague for years and years. Quite frankly, blind Freddy could have seen the train smash there, but that comes down to operating leverage and financial leverage that has seen the stock go from $5 to 28 cents or wherever it is today.
Risks for the next 12 months and tips so you can be successful
Ally Selby: I want to get into the risks now, you said before that you are cautiously optimistic. What risk do you see out there in the market?Chris Kourtis: I think the biggest risk is complacency. And this market has been driven by momentum, fear of missing out, and valuation discipline has virtually gone out the window. There seems to be this mentality of buying stocks with this growth at any price mentality, and I think at some point that will bite a lot of people on the bottom. And I think ultimately valuation is paramount.
Matt talked about management and management getting things right and executing well, and there are a lot of companies that have executed well where management has nailed it and others where management has got it horribly wrong or the board has got it wrong and a lot of those stocks are in the toilet. Now, some of those will be some of the best buying opportunities you've ever seen in your life. Others, like a Star, the rest is history.
So where's the risk? I'd say the risk is valuation risk and as I said, 24 times non-bank industrials, it cuts against my cloth a little bit. As long as the earnings come through and the stocks trading on premiums to that multiple deliver the earnings growth and the revenue growth that the market is expecting, that'll be okay. It's only when they're priced to perfection and it's a crowded long. I always avoid the crowded longs. It's something I've been pretty good at, and a lot of them that if they miss their numbers, that's when those stocks get absolutely poleaxed.
Ally Selby: Okay, over to you Matt. Other than valuation risk, what other risks do you think investors need to be aware of?Matt Williams: I think Chris nailed it with complacency. I think at this point when you've had such a good run, the market's been great, right? And it's always a great place to be. You've got to be in it to win it. You can't try and second-guess it and macro call it, but I think it's an opportune time, given the strength that we've had, just to check your portfolio, check the stocks you own and whether you've maybe become a little complacent.
Are you in just the high-octane stuff? Has your portfolio shifted over the last few years gradually to a point where you're carrying some unintended risks? The other thing is that investors should always be set so that if the market does suddenly fall 20-30% very suddenly, they do not become forced sellers, they can hang on and if they're lucky enough, can actually add to their positions.
Ally Selby: That was an awesome piece of advice. Chris, do you have anything to add?Chris Kourtis: I was just going to add to do your own homework and not follow the sell side recommendations, which is always fraught with danger. Do your channel checks, check with other companies to make sure what company A is telling you is not a furphy. But the thing that bugs me the most about the market behaviour currently is sell side analysts just chasing the share price down in terms of their target prices and recommendations or chasing them all the way up after they've gone up 50% or 100% with the stroke of a pen. They alter, they upgrade their recommendation and target price. That's not the way Matt and I invest. We can't just with the stroke of a pen, just say, "Oh, oh well, we've missed the last 100%, we'll just put it on a buy now." Magic.
2 high conviction ideas from Hall of Fame investors
Ally Selby: To finish us off today, I want to know where you're both seeing the most opportunity right now. You've talked a lot about stocks that are undervalued by the market, maybe they've been really beaten up. Do you have an opportunity like that for us today?Insignia Financial (ASX: IFL)
Chris Kourtis: Well, my table thumper is probably controversial, it's one of the most hated stocks in the marketplace. It's in the financial sector, it's Insignia. And you look at the share price performance over the last decade, it's gone from $13 to a low of $2 and back to $2.68 or $2.70 or wherever it's trading today. Now, look at the market cap and it's $1.8 billion. Just to remind your viewers that they paid $1.5 billion for MLC and they paid $1 billion or thereabouts for OnePath from ANZ a while ago.
Again, it gets back to management and recently they misstepped with the dividend pause. Now, that upset the apple cart and surprised us, even as investors. But then, I take a step back and I can now see why they did it. They were worried about the timing of their cash flow and the timing of cash payments for previous remedial action. And there was a class action which they actually just settled last week with Slater and Gordon and it was a $22 million outlay. Maybe they didn't know the extent of the class action liability and whether it was going to be $100 million or $200 million. So they paused the dividend. The stock was $2.92 before the result, it crashed 25%. It's now recovering. I could see that stock double from here. I'm not in it for five or 10 or 15 cents.
I look at the multiple that it's on, probably 7.7 times P/E. All its peer group - it's not apples and apples, but Platinum (ASX: PTM) is on 13 times, Magellan's (ASX: MFG) on 13 or 14 times. AMP (ASX: AMP) - that's such a good brand, isn't it, that's on 14 times. This thing's on 7.7 times PE. They paused the dividend. We would be hopeful that they'll reinstate the dividend at the next result, fingers crossed. That's up to the board. We'll see.
And then I look at other platform businesses like HUB24 (ASX: HUB), and market darlings like Netwealth (ASX: NWL) on 55 and 60 times P/E when they've been growth companies. But half their profit plus comes from the cash margin and in six months, when the RBA is going to be cutting rates, those stocks are going to be downgraded. And on 55 and 60 times P/E, they're the best shorts in the market. I'm not allowed to short, but if I could, that'd be the first two I'd put on.
Ally Selby: Okay, over to you Matt. Where are you seeing the most opportunity today and can you give us a little stock pick?BlueScope Steel (ASX: BSL)
They'll probably get good returns on that over time. And the management team has just been excellent capital allocators. They've bought back a lot of stock over the last five years, very quietly. And the balance sheet is excellent. So we think, no matter what happens in the market, this company should outperform going forward over the medium term.
Ally Selby: Could it double, like Insignia?Matt Williams: No. Probably not in the timeframe that Chris has specified for Insignia, but I think it's a very good three to five-year stock, for sure.
Ally Selby: Okay. Well, I hope you enjoy that episode of Buy Hold Sell as much as I did. If you did, why not give it a like? Remember to subscribe to our YouTube and podcast channels, we're adding so much great content just like this every single week.What tips do you have for investors so readers like you can be successful over the next 12 months?
Let us know in the comments section below.
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