Meet Andrew: And his love of strong performing ETFs (and even stronger small caps)

Andrew, a Melbournian, has been around the world of finance since high school, having studied the discipline and then starting his career as a trainee at PwC. Over the years, Andrew’s passion has grown and he recently made a career switch to financial planning. Andrew uses ETFs as the core component of his own portfolio, allowing him to pursue his passion for unearthing underappreciated small caps. In the following interview, Andrew discusses his core/satellite approach, why he prefers shares over property and some intriguing extra-curricular research he has done for his top stock holdings.
James Marlay

Livewire Markets

Andrew from Melbourne has been around the world of finance and business since high school, having studied the discipline and started as a trainee at PwC. As he became more senior, his passion for finance grew and Andrew made the career switch into financial advice. This coincided with an ever-increasing fascination with the stock market.

With his personal take on the 'barbell' portfolio structure, Andrew uses ETFs as the core of his portfolio allowing him to pursue his passion for unearthing small cap ‘diamonds’ that the market is overlooking.

I do a lot of my own research on these companies and take high conviction positions in them. Often these companies would initially present as high risk and with specific headwinds, however, due to the level of research I complete, to me they represent a medium risk whilst providing the potential for outsized returns.

In the following interview, Andrew discusses his core/satellite approach, why he prefers shares over property and some intriguing extra-curricular research he has done for his top stock holdings. He also unpacks his biggest holdings, the stock calls he got wrong and the lessons learned along the way. 

I hope you enjoy his story.

Livewire investor profile

Name: Andrew

Age: 36

Employment status: Employed

Years investing: 18 years

Investment goals: To obtain financial independence for family

Products used: Equities, ETFs & managed funds

Biggest portfolio holding: Vanguard Growth Index Fund

Image: Andrew with his family (supplied)

How old are you and how long have you been investing for?

I’m 36 years old and have been investing since I was 18, in part because of the influence of my parents and grandparents. My grandfather was an active investor and amassed a reasonably sized investment portfolio. When each of his grandchildren turned 21, he transferred a set value of company shares to us as a gift. I’d studied accounting, economics, business management and legal studies at high school and held a position in PwC’s traineeship program – so Pa knew I was interested in finance and investing. As a result, he let me choose the company shares transferred to me. This was back in 2006 and I selected Origin Energy.

Whilst it hasn’t been a strong performer over recent times, it was a boom stock in those days – discovering significant coal seam gas resources and starting work on APLNG. My entry price was around $3.50 and I sold them (with Pa’s permission!) 5 or so years later for about $12.

It gave me a taste of the returns that can be achieved with research and patience. 

I was also lucky enough to receive an inheritance from my grandmother, which was wisely invested by my parents and based on the returns, I was able to pay for most of my university studies.

What is your objective from investing?

My objective for investing is to obtain financial independence for my family. My definition of financial independence is being able to choose how I spend my time, with a balance between:

  • Family time. I’m married with two sons, 2.5 years old and 10 weeks old. Spending time with the children when they are young is invaluable and incredibly rewarding. It’s also time you’ll never get back so both my wife and I are intending to work less than full-time hours until both children are going to school.
  • Working for personal satisfaction. I’ve recently changed careers after 15 years in accounting/financial control to financial advice. I’m greatly enjoying working one on one with clients again and helping them achieve their goals – it’s particularly satisfying to see your advice being taken and the positive impact it can have.
  • Personal time. Just being able to get to the gym, catch up with friends, read the newspaper or watch a movie with my wife are things that I value immensely

I have a strong appetite for risk (given age and stage of life) but seek to balance it with my investment philosophy.

What products do you use to execute your strategy?

I use a combination of direct shares and ETFs to execute my strategy. I have been fortunate to make some good gains out of Australian residential property over time (as most people who have purchased a property in the last 15 or so years have!), however at the moment we only have our main residence (with a mortgage).

I’ve moved away from property because of the lack of liquidity in the event of needing funds, and the high switching costs that exist – you’ve got a 5% loss almost immediately due to stamp duty. 

Even with interest rates at extreme lows, I’m also very sceptical about residential property’s ability to provide income for those that are retiring or near retirement, and consider that the capital gains in future may not be as good as they have been in the past.

How would you describe your strategy?

I would describe my approach as a mix between core/satellite and barbell investing.

My core/satellite strategy revolves around a series of strongly performing ETFs, with one main holding that I’ll explain further and several other ETFs/funds.

These ETFs provide a foundation for our investment growth and have historically provided good long term growth rates, whilst maintaining a low cost of management and minimal tax implications. 

The bulk of these funds provide quarterly distributions, so whilst income is not a focus for us now, these payments will help if my wife and I choose to reduce our working hours.

The core/satellite set-up I’ve just described is also one end of the barbell. The other end of the barbell is what I’d describe as deep value opportunities/undervalued businesses on the ASX. 

I do a lot of my own research on these companies and take high conviction positions in them. Often these companies would initially present as high risk and with specific headwinds, however, due to the level of research I complete, to me they represent a medium risk whilst providing the potential for outsized returns. Generally, I am looking for a return in excess of 50% annually.

When researching these companies, I find it pays to seek information outside the usual financial websites/broker reports to help you understand the business's potential value – I’ll provide an example of this with one of my top holdings.

Could you please share your top 5 holdings in % terms and tell me a bit about why you hold each of these positions?

  1. Vanguard Growth Index Fund: 21.2%
  2. Cash: 18.5%
  3. Metro Mining Limited (ASX: MMI): 10.1%
  4. BCI Minerals Limited (ASX: BCI): 8.5%
  5. iShares S&P 500 ETF (ASX: IVV): 5.2%

The Vanguard Growth Index Fund is the bedrock of our portfolio. The fund has an excellent long term track record at 8.08% p.a. with a mix of income and growth. The bulk of the return is growth though, and given we don’t intend to sell for a long period of time (if ever), there’s an inbuilt deferral of the capital gains tax component. The management fee is 0.29% which is very competitive.

Cash holdings are primarily a function of maintaining a level of protection in the offset account against our mortgage. Whilst the tax-adjusted return is only about 3%, it’s risk-free and provides some Yin to the higher risk Yang below.

Metro Mining Limited (ASX: MMI) is a company that exports bauxite from far north Queensland near Weipa. It’s a higher risk play but I am very comfortable with the percentage in the portfolio. Metro started producing in 2018 and had two profitable years before a COVID interrupted 2020 and 2021. Bauxite is a rock that hosts alumina which is smelted into aluminium. It’s a relatively low-value product (circa $55 to $60 AUD per tonne) and as such, freight costs are a very significant portion of the cost to deliver to customers. 

In 2021 shipping costs hit 10-year highs off the back of COVID related congestion. As a result, Metro became unprofitable and was forced into a dilutive capital raising at 1.6 cents. Following this, they hired a new management team - mostly from Rio Tinto which is a big player in bauxite in QLD - and procured a floating crane which reduced their shipping costs by about half. They became profitable again in the December 2021 quarter and are forecasting a profit of between $36m - $40m for the calendar year 2022. Not bad for a market cap of $71m – I’m looking for a 200% – 300% return within 12 months.

Going back to my earlier point about research, I am extremely comfortable with MMI because of the work I’ve done. Here’s some of the unusual information that I’ve brought together into my thesis:

  • As mentioned, freight costs are the main driver of whether MMI are profitable or not. Shipping rates are published and freely available so knowing how they are trending helps inform the thesis. I watch the Baltic Dry Index which tracks overall movements in shipping rates including the ships that MMI use. This index peaked at 5,647 in October 2021 and has since fallen to 2,040 in March 2022 – suggesting a circa 60% fall in freight costs, very beneficial to MMI.
  • Production levels are the other driver of profitability – the more bauxite produced, the more profitable MMI become. With a bit of digging on QShips (the QLD government register of shipping movements), you can freely obtain the movements of ships that MMI has loaded with product. This is updated daily and allows you to calculate pretty much the exact production figures in real-time.

Using the above means there are limited surprises in the company reports as I have confidence in what the numbers should be. So far my calculations and the company’s reports have been materially consistent which supports my holding of the stock.

BCI Minerals Limited (ASX: BCI) is another undervalued and underappreciated company on the ASX. BCI used to be in the iron ore industry but sold their mines to Mineral Resources who now operate them. BCI receive a royalty on production and pricing – this is a constant income stream that supports the company. Over the last 4 years, BCI has been progressing the Mardie Salt and Potash project, and they are now in the construction phase. Rio Tinto operate large salt projects on the coast of WA and have for over 40 years, salt is critical to a huge amount of industries and has favourable supply/demand characteristics. The BCI project revolves around the evaporation of seawater using wind and solar – it has a project life of 60+ years and anticipates an annual EBITDA of $260m when in full production. All of this potential for a market cap of $440m supported by a cash balance of $334m.

Finally, the iShares S&P 500 ETF (ASX: IVV) is an ETF that tracks the S&P 500 in the USA, it provides access to some of the biggest and best companies in the world with a very competitive management fee. It is one of the satellites to the Vanguard ETF highlighted above.

Could you tell me about your worst investment?

There’s been a few unfortunately, but each one brings a fantastic lesson. Probably the most significant financial loss was on Blue Sky Alternative Investments. I’d done my research on them and they appeared to have a pretty good alternative asset model. 

The question was always about the value of the assets that they managed. I knew this was the biggest risk, however, I took comfort in the valuation reviews that they received from KPMG, CBRE, Colliers, NAB and JLL.

Ultimately there was a short attack from Glaucus Research that challenged the value of the assets. After repeated denials, the company had to write down several key assets and write off the management fees associated with them. This caused the company to lose money, and be unable to attract new capital furthering the companies woes. I lost about 80% of my investment.

How does Livewire help with your investing process and what tips can you share with other investors about using Livewire?

Livewire helps me from both a macro and micro perspective. I use the information on the website both to keep up to date on local and international markets and to seek new investment ideas. Having access to the thoughts of leading fund managers (whom a retail investor would generally not have access to) makes a big difference to how I think about trends and opportunities.

Do you have a favourite contributor you recommend other investors follow?

I’m a big fan of Romano Sala Tenna because his articles generally focus on specific stocks that are either undervalued by the market, or overlooked by the market – these are companies that appeal to me. I’m also influenced by confirmation bias here because Aeris Resources and Coronado Global Resources are two stocks he’s covered that I also hold for the same reasons.

I also like Christopher Joye because whilst I don’t currently invest in fixed income markets, his articles and insights are always very interesting.

What can Livewire do better or what do you dislike about Livewire?

There’s nothing I dislike about Livewire. It’s a great resource presented in a very user-friendly way. One thing that I’d love to see added to the platform is some stock-specific information. Often I’ll read an article by a contributor or the regular “Buy, Hold, Sell” and there’ll be an interesting stock mentioned. However to see the stock’s price I need to navigate to another website to have a look at it. Perhaps a price chart and the last 5 announcements for the companies mentioned in the articles?

Is there a lesson you’ve learned as an investor that could potentially help others?

Yes definitely. There are probably three, and they are related:

  • Pick the weeds, not the roses. This is a saying I like to adhere to in my financial decisions. It refers to letting the stocks you have purchased that are performing well stay in the portfolio. The weeds / or the dud investments should be sold as soon as the investment thesis no longer holds.
  • In reference to the weeds, it's important to sell when your thought process has been proven wrong. Too many investors buy a stock because of the expectation of price growth due to some trigger event, and when the trigger event fails to deliver, the investor holds the stock even though the reason to hold no longer exists. Trust me, you will feel better having sold and it gives you funds to find the next opportunity.
  • The third lesson is to have conviction. When you think you’ve identified a stock that is undervalued, make sure you back yourself in the purchase and don’t let it get away.

Can you share a personal passion or ambition you have for your future?

As mentioned earlier, I’ve recently changed professions from accounting into financial advice. I love talking about all aspects of finance to anybody that’s willing to listen and as a result I’m very pleased to be doing it for a living. I’m excited about helping everyday Australians achieve their financial independence – whatever that may look like for them.

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James Marlay
Co Founder
Livewire Markets

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