Why funds management beat medicine for this small-cap stock picker

Ask Eleanor Swanson, Portfolio Manager for Firetrail Investments, for her top personal holding and there’s no hesitation. Telix Pharmaceuticals (ASX: TLX). You could say this links back to her background studying Commerce and Science, with majors in immunology and finance.

While Swanson very nearly picked medicine instead, finance won her over.

“You don’t get bored because you’re not looking at the same company over and over again. There’s always opportunities to go and cover new sectors. There’s often new companies coming to the market, IPOs and you get to learn about them for the first time. There’s diversity and the potential to learn about something new every day. It’s quite unique,” she said.

It’s one of the reasons she believes more women should consider entering the industry. Either way, Swanson is passionate about stock picking and the opportunities she sees ahead.

In this wire, Swanson discusses her outlook and where she sees the investment opportunities, her journey into finance and why funds management has made her a better BBQ guest.

Livewire is pleased to feature Eleanor Swanson as part of our International Women’s Day Coverage profiling established and up-and-coming female investment leaders in Australia. We are dedicated to featuring more female chief investment officers, portfolio managers and analysts in our articles, podcasts and videos.

The portfolio manager in brief

• Name: Eleanor Swanson, CFA
• Title: Portfolio Manager for the Firetrail Australian Small Companies Fund
• Firm: Firetrail Investments
• Years in the industry: 8
• Speciality: Australian and New Zealand small-cap equities
• Biggest personal portfolio holding: Telix Pharmaceuticals (ASX: TLX)
• One thing very few people know: Swanson lived in Suva, Fiji when she was younger. She moved to New Zealand at 10 years old and only returned to Australia at 15 years old.
• Guilty secret pleasure: Period dramas. Think anything Jane Austen or the Bronte sisters.

From immunology to finance

Swanson was hedging her bets when she elected a double degree in science and commerce at university, but it was a strategy that worked. Before long, she was majoring in finance and immunology. An unusual combination but one that called to Swanson’s various interests and talents. Following an internship at JP Morgan, she earnt herself a graduate role there and spent two years as an analyst.

She hasn’t regretted the decision to enter finance.

“It’s a great industry that touches on lots of different industries. You’re constantly learning and getting really deep into companies,” she says.

It’s also translated into her personal life.

“You can have a conversation with someone at a BBQ and there’s always something to talk about. The minute you find out where they work, you just want to find out more about the industry. You seem super engaged with people but you’re also thinking of it through the lens of investing,” Swanson says.

Stepping up from analyst to Portfolio Manager

Swanson's move to Macquarie as an equities analyst marked a significant point for her journey.

It was there she met and worked for Patrick Hodgens and Blake Henricks, jumping ship with them when they founded Firetrail Investments five years ago.

Both have unsurprisingly been significant influences on Swanson’s investment philosophy and her career, along with other members of the Firetrail team. But that’s not to say her career journey has been passive either. Swanson knew where she wanted to be and spoke to her managers about it.

“I was determined to move from an analyst role to into a portfolio management role. So I asked my boss what I needed to do to get there. I had a bunch of hurdles to meet,” she says.

It opened new doors and experiences to her and allowed her to effectively ‘learn on the job’.

“I had to become more involved in portfolio management meetings, get involved in trades, cover a majority of sectors within the Australian small cap index and get involved in marketing the fund. That included meeting with institutional and retail clients and become able to answer a broad range of questions about the fund, how we think about risk, the investment philosophy, thematic and sector exposure,” she said.

Swanson achieved her promotion to Portfolio Manager in July 2022.

Every company has a price

Swanson’s investment philosophy aligns with Firetrail’s.

There are three components, but crucial is the idea that every company has a price. It’s a focus on company valuation compared to where it is trading now and historically.

“If we’re seeing a company derates relative to the market multiple, that presents a flag to do some work. Is there a fundamental issue with the business or has the market overreacted to temporary news that will resolve? If the latter, it could be a great chance for investors to buy the stock,” she says.

The last year has been a challenge for identifying stocks though, and Swanson says it is because the macro environment is playing a greater role in markets than company performance and earnings. Rate hikes have been key drivers.

“We’ve seen a very material reduction in the price investors are willing to pay for future earnings and that’s driven the majority of market moves over the past 12 months. The Small Ords is down more than 20%,” she says.

The biggest risks of 2023

Rate hikes have also required Swanson to take a more granular approach to watching the balance sheets of the companies in her portfolio – with an eye to leverage ratios and banking covenants as rates rise. She names balance sheets as one of the biggest three risks for 2023.

The other two include weakening of the consumer and energy markets. Both are notable themes but in different ways.

The weaker consumer refers to the reduction in confidence and spend from consumers in tough economic conditions which will typically hit some sectors more than others – retail being an obvious one.

“If we think about some of the retail companies offshore like Breville (ASX: BRG) or City Chic (ASX: CCX), they are acting as canaries in the coal mine for what might happen in Australia. If we look at consensus expectations fore retailers, they’re still 50-100% above pre-COVID levels,” Swanson says.

Energy markets have seen tremendous spikes and volatility in the last year, particularly as a result of supply challenges caused from the Russian invasion of Ukraine. Swanson expects prices to continue to be challenged this year, but also on an ongoing basis due to the green transition.

“We think it makes sense to be in low-cost producers that will remain profitable through the cycle given its hard to predict price oscillations,” she says.

On the whole, Swanson expects once there is more clarity on the rate cycle, markets should stabilise somewhat and return to being more driven by fundamental factors.

Finding the opportunities in the noise – Swanson’s picks

Given her background, it won’t surprise many to hear that Swanson is very aware of what is happening in the healthcare sector. Further to that, she sees a number of current opportunities in the sector, particularly in a tougher market environment. As she points out though, healthcare is a non-discretionary spend item and should generally grow in line with population growth.

Her picks in the sector include Estia Healthcare (ASX: EHE) and Aroa Biosurgery (ASX: ARX).

Estia Healthcare is an aged care provider. Swanson believes markets are avoiding it due to regulatory uncertainty over mandated care and that it is currently undervalued. She notes the government can’t risk going too hard on regulations and will need to be supportive of the sector and ensure it remains profitable.

“If we take a step back, we’ve got an aging population with the proportion over the age of 80 expected to grow 4% compared to the broader population which is growing at 1.5%. That’s an issue facing the government. They actually need to increase the number of beds in Australia by 200% in the next 20-30 years,” she says.

Aroa Biosurgery produce, manufacture and distribute wound care products, primarily in the US. They’ve got a distribution partner in the US called Tela Bio (NASDAQ: TELA) and has won a number of large hospital contracts.

“The attractive thing about Aroa’s products is they’ve got fantastic clinical evidence that their products cause wounds to close more quickly than competing products. They are also about 20-40% cheaper than competitors. That’s a really clear case for hospitals to adopt their products,” Swanson says.

Swanson expects Aroa to grow their top line at around 20% pa and expects the operating leverage to come through in the next two to three years.

A final word of advice – share your goals with others

Swanson believes its important to speak to others in your company and the industry to build your career along the way and discuss your plans and goals. As the saying goes, don’t ask, don’t get.

She believes her goal to become a Portfolio Manager largely happened because she shared her goals with management.

“My advice to young women in the industry would be there’s no point in keeping your career ambition or specific goal to yourself. You need to articulate it to someone senior because that will give them the opportunity to help you get there.”

She also believes staying silent is one of the barriers preventing more women from reaching senior levels of funds management. It comes back to the commonly noted research that women won’t apply for roles unless they believe they meet all the criteria, whereas men are typically open to trying if they meet some of the criteria. People often learn on the job so failing to step up and articulate goals can be a barrier to getting the experience.

“Many women are working away to reach that 100% longer than they might need to. If they were to sit down with the manager and understand the key criteria, they might get to those positions a lot faster,” she says.

It’s something to keep in mind at any stage of your career.

Eleanor Swanson is Portfolio Manager for the Firetrail Australian Small Companies Fund. You can learn more here:

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Firetrail Australian Small Companies Fund

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