The best management teams outside of the ASX 20
Not too long ago, we asked two fund managers to name some of the best management teams in the business. This was in October last year, which now, at least to us, feels like a world away.
Come to think of it, it's about time we took another look at some of the country's top leaders, so we can find the steady hands we so badly need to sail us through these stormy markets.
So why do we keep coming back to management teams? Well, a leadership team can make or break a business. Top-notch teams implement capital management initiatives, pull off surprisingly timely acquisitions and of course, build enviable company cultures.
Investors covet management teams that have "skin in the game", while passionate founders repeatedly become household names as they push their businesses (and share prices) higher.
These include talented teams across the energy, financials, retail, and technology sectors. Plus, Raaz and James also name one management team that impressed during the February reporting season, driving these fundies to take a position in these stocks.
Note: This episode of Buy Hold Sell was shot on Wednesday 30th March 2022. You can watch the video, listen to the podcast or read an edited transcript below.
Ally Selby: Hey, how are you doing, and welcome to Livewire's Buy Hold Sell. I'm Ally Selby, and as many investors know, 2022 has been a year of many, many headwinds. Think COVID variants, supply chain disruptions, inflation, rising rates, and now war. So to help sail us through this stormy market, we've got James Rutledge from Perpetual, and Raaz Bhuyan from WaveStone Capital, to help us find some steady hands for the months ahead.
First up, we're going to talk about the energy sector. It's been the best performing sector this year. I think the index is up around 23%. Raaz, I might start on you. Is there a management team that really stands out?
The best of the energy sector
Raaz Bhuyan: Absolutely. We've owned Santos (ASX: STO), and Kevin Gallagher who's the CEO - and has been the CEO since 2016 - has done an exceptional job. He obviously bought Oil Search right before the oil price took off. He's got a diversified business. He's done an exceptional job with the way he's taking the business forward. He's also doing quite a bit on the transition side, which is quite important to us. He's got carbon storage projects, and so he's trying to bring down the carbon footprint as he's growing production.
Ally Selby: Raaz has picked Santos. James, is there a stock in the energy sector that you think has an impressive management team?
James Rutledge: I would agree with Raaz and say Santos (ASX: STO) is the standout there. Kevin Gallagher's done a great job in taking out costs in the business that he took over in 2016. He has "high-graded" the portfolio through the acquisition of the Oil Search assets. He needs to divest some assets and improve the free cash flow over the medium term, but we will back him to do it.
The best of the financial sector
Ally Selby: Financials are meant to outperform as rates rise. Is there a management team within this sector that you think is super impressive?
James Rutledge: We like Medibank (ASX: MPL). The team prior to the current CEO, and the current CEO, they've done a fantastic job walking a fine line between handing back COVID benefits and trying to grow policy holders. You're seeing growth in the core Medibank brand now for the first time since listing, and that's really a result of the valuable partnerships that they've built, and smart bolt-on acquisitions from the management team. So we're really impressed by them.
Ally Selby: Raaz, over to you. Is there a management team within financials that you would award the top gong?
Raaz Bhuyan: Absolutely. I think Macquarie Bank (ASX: MQG) stands out for us. Obviously, over the years, they've done an incredible job building a business around infrastructure, and more recently they have obviously done quite a bit on the energy transition side. With what's going on with Europe with the Ukraine war, we think Macquarie's going to have a cracker result because of what's happened to gas prices in Europe and the US at their March year-end.
But overall, I think it's not just the CEO and the CFO, it's the broader depth of the business, the tenure of the key executives there. And they have positioned themselves really, really well for the next five or 10 years, as we've seen this massive growth in funds under management in alternative assets. So they've become the biggest fund manager in alternative assets in the world.
The best of the retail sector
Ally Selby: We've also seen massive growth in retailers over the past two years, particularly in this transition from bricks and mortar to online. Is there a management team within that sector that has excelled beyond the rest?
Raaz Bhuyan: We tend to own category killers. We own companies like Bunnings and Woolworths, but I'd like to call out JB Hi-Fi (ASX: JBH) which, to be honest, we were big investors in the float. They have done incredibly well through this entire period. Obviously, COVID has been a big gain for them, in terms of the move from services to goods, and so they've really cleaned up. I was just looking at the share price - they floated in 2003 at $1.55. The stock is $55 today, so that's a 35 times gain. That's the kind of stuff that we would die for, and I'm embarrassed that we actually don't own a company like that.
Ally Selby: What about the management team at JB Hi-Fi?
Raaz Bhuyan: So that's the critical thing, the management and the culture of that business. So if you look over the years, the management at the top has changed, but the culture inside the business has stayed. I think it's an exception in the sense that the business has gone from a small business to a really mature business, and yet they have managed to keep their culture, and that's to the credit of people like Richard Uechtritz and Richard Murray, and more recently Terry Smart, who came back as CEO of the business.
Ally Selby: Over to you, James. Is there a retailer that's leaps and bounds ahead of the competition, in your view?
James Rutledge: I would agree with Raaz on JB Hi-Fi. Another one in this space that we like is Nick Scali (ASX: NCK). As we went into lockdown, obviously a very tough time for a furniture retailer that's relying on physical stores, and furniture isn't really a great category when you think online. But they pivoted the business, invested in technology, and were able to sell online through the lockdowns, and you saw that in the last result. Their online orders grew 88%. It's now almost 10% of group sales. They've also made a smart acquisition in terms of Plush to really grow the business over the medium term, and we think that's a great acquisition. So Nick Scali for us.
The best of the tech sector
Ally Selby: Tech has been really caught up in this sell-off. It has definitely been the worst hit over the past few months. Is there a management team within this sector that you think can help turn the company around?
James Rutledge: Despite that sell-off in tech, we continue to struggle with valuations in that space, but one management team that we think is doing a good job is Carsales (ASX: CAR). They managed the transition from founder to the current CEO really well a number of years ago. They've invested offshore very well, especially in Korea, and they have a business model that isn't one size fits all in terms of those markets. They have a good cost discipline, so that's a team that really stands out in the space.
Ally Selby: Over to you Raaz. Is there a tech team that is super impressive for you?
Raaz Bhuyan: I agree with James on Carsales. I think they've done a pretty good job transitioning, which is quite a difficult thing for a founder-led company, and they've done incredibly well. It's one we own. But the only true technology business that we think is good in Australia is Xero (ASX: XRO). Obviously, it's a Kiwi business-
Ally Selby: The only good tech company in Australia?
Raaz Bhuyan: As in, they have been quite successful in expanding overseas, and actually making a meal of it. So if you think about the businesses in Australia and New Zealand, they took on the incumbent, MYOB, and grew a business here, and they've gone to the UK and taken on Sage and done quite well. So we think that that's quite good of Steve Vamos and his team, to have done all of that, and now they're going into North America. So it feels like if the business is even half as successful in the US, they will do an incredible job. And it's going to be one of the big tech companies I think, out of Australia; that is listed in Australia.
Stocks on fundies' watchlists thanks to top-notch management teams
Ally Selby: We have recently come out of reporting season. Both of you would have had the opportunity to speak to most of the country's most successful CEOs. I want to know, Raaz, is there a company that you don't own currently, but the management team has really impressed you and it makes you want to have another look at that stock?
Raaz Bhuyan: You are right, Ally, we see a tonne of companies, so it becomes a bit of a blur through reporting season. But one of the companies that we think is quite an exception has been Qualitas (ASX: QAL), which is actually a recent float, it's an IPO. But Andrew Schwartz and Mark Fischer, who were the founders of this business in 2008, have got a tonne of skin in the game. This is one of the only IPOs, I think, that has come on where their money has actually gone into the business.
So if you think about it, it's essentially a real estate fund manager. Obviously, they have just floated, but our view is that with the additional money that they have taken into the business, they should be able to grow their firm from around $4 billion and easily double it. And as you know with funds management businesses, they are incredibly scalable, so they've got the platform.
So that's one we are watching, and obviously, we've got a small position in it. It does remind me of Macquarie Goodman from 20 years ago, which eventually became Goodman Group, so it could potentially become a very good business. So that's something that we are watching.
Ally Selby: James, is there a company that you don't own currently, and the quality of the management team has made you want to take a better look?
James Rutledge: The one for us was Qantas (ASX: QAN). We didn't own that in the Fund coming into reporting season. Qantas has done an amazing job. They really didn't waste the COVID crisis. In the depths of COVID in June of 2020, they announced a cost-out programme to take more than a billion dollars of costs out by FY23, and they are on track to deliver that.
The management team is very impressive. They have positioned their business really well for a reopening that we will see in the coming months, and the airline can cope with anything that's thrown at, it in terms of higher oil prices or further COVID shutdowns. So, that's the management team that has impressed us, and we have subsequently bought that stock in our fund, so that's now a current holding.
Ally Selby: Well, we hope you enjoyed that episode of Buy Hold Sell today, and that list of some of the best management teams on the ASX. If you enjoyed the episode, why not give it a like? And remember to subscribe to our YouTube channel. We are adding new content every week.
Which management team is the best in the business?
James and Raaz have laid it all out on the table to share some of the best management teams outside of the ASX 20. But we would love to know what you think.
Let us know in the comments section below which management team has impressed you over the past few months, and could help steer investors through the volatile markets of 2022.
Can't get enough of Buy Hold Sell?
Give this wire a like if you've enjoyed the discussion and hit follow to be notified when new episodes are released.
If you're not an existing Livewire subscriber you can sign up to get free access to investment ideas and strategies from Australia's leading investors.
MORE ON Equities
9 stocks mentioned
3 contributors mentioned
Buy Hold Sell is a weekly video series exclusive to Livewire. In each episode two fund managers give their views 'Buy, Hold or Sell' on five ASX listed companies. Not recommendations, please read the disclaimer and seek advice where appropriate.