There’s plenty of opportunity in the less sexy parts of the market (if you're willing to look)

Bruce Williams, co-founder and portfolio manager of Elston Asset Management, contends that there are plenty of opportunities in markets right now, particularly if you’re willing to look past the obvious.

“We think there are plenty of opportunities out there,” says Williams, adding that usually means “going down the road of something less popular - and less popular might be less sexy, so not AI, for example”.

Williams adds that the team is also prepared to look in places where there are perceived to be structural or company-specific headwinds, relying on Elston’s research capabilities to find value if it exists.

“Through research, we'll take a position if we're confident the market has got it wrong”, says Williams.

In the following Rapid Fire — a preview to a longer-form Views From the Top interview to be released later this week — Williams shares the biggest issue being debated in the Elston war room, the core principles of the team’s philosophy, and what has him most excited over the next 12 months.

He also answers my favourite question for all seasoned stock pickers – whether he gets more satisfaction from the hunt or the reward. 

Please note this interview was recorded on Wednesday, 26 June 2024.

Edited Transcript

Chris Conway: Bruce, thanks for sitting down with Livewire to do a Rapid Fire interview. First question, what's the biggest issue being debated in the Elston war room right now?

Bruce Williams: The economic outlook. You've got increasing interest rates, you've got a stretched consumer, you've got valuations that in some instances are a little high, and then those that aren't high, there's perceived to be an issue with the company itself.

Chris Conway: Bruce, what are the core principles of your investment philosophy at Elston?

Bruce Williams: We have six, believe it or not, Chris, so have you got to half an hour? We'll run through those.

1. The first one is a proper diversification. And I might just give context around proper diversification. If you think about the Australian index, it's extremely concentrated to the big bulks and the big four banks, so proper diversification is taking a major position against the index that you're judged against, but diversification is very important for consistency of results longer term.
2. We have liquidity, every position within the portfolio has daily liquidity. We think that's very important from an end investor's perspective. They may have a call for the money, so we do provide a liquidity.
3. Third is after-tax management. It varies how much you can do there; depends on the structure it's invested through. We go all the way from IMA, SMA, to unitized and you get less flexibility the further you go along there.
4. The fourth is, we look at both value and growth, so that leads us to being a style-neutral manager.
5. The fifth is, we take a long-term investment perspective and that's very much against what's happening in the markets today, which is short-termism is rife.
6. And the last one is avoiding permanent loss of capital. So if you put it in a company perspective, it's profitable through the cycle and a reasonably strong balance sheet.

Chris Conway: Bruce, I know you just said you take a long-term perspective. I'm going to be really annoying and ask you, what has you most excited for the next 12 months?

Bruce Williams: Our positioning towards healthcare would be what it is. It's had several headwinds coming out of Covid and some still persist. In fact, those headwinds are lasting a little longer than what we expected, but certainly we think there's a lot of things to like about it. They're reasonably defensive. They've got demographics in their favour. They do have growth drivers. Very strong market position.

For the first time in a long time, we're overweight healthcare because they stack up on a valuation basis.

Chris Conway: Bruce, what do you think is the biggest risk investors are ignoring right now?

Bruce Williams: It is probably an elongated interest rate cycle where they stay higher, the longer. That flows through to how assets are valued, and we think, in certain instances, valuations are a little high at the moment.

Chris Conway: Just following on from that, given markets are at ritzy levels and those valuations are a little bit challenging, how hard or easy is it to find opportunities right now?

Bruce Williams: We think there are plenty of opportunities out there, but usually, you're going down the road of something less popular. And less popular might be in the form of less sexy, so not AI for example.

Less popular may also be, there's perceived to be a structural headwind or a company-specific headwind with the business and, through research, we'll take a position if we're confident that the market's got that wrong.

Chris Conway: Bruce, my favourite question. As a seasoned stock picker, what gives you more satisfaction? Is it the hunt for the opportunity or the reward when you get it right?

Bruce Williams: Well, I think you've got to be curious to do the job that I do, and so I think the result is just the function of the hunt. It's endlessly enjoyable. We're trying to work out how companies do it.

Business principles are broadly the same, regardless of the industry they're in, and you look at different companies' takes on how they go about it and that, to me, is fascinating.

Chris Conway: Bruce, thanks for sitting down with Livewire.

Bruce Williams: Pleasure, Chris. Thank you.