Winner takes all: Harnessing the network effect
A tech start-up may not be the most conventional place to begin a career in investing but it has certainly suited David Moberley of Paradice Investment Management. He believes beginning his career non-traditionally helped shape his investment method and lead to success.
What sort of success? The Paradice Long-Short fund has returned 13.6% since inception, compared to a sheepish 4.2% by the benchmark.
According to Moberley, you want to be involved in companies that have taken market share and own a niche, globally. He used the prime example of Seek in the recruitment sector.
"Those that have the strongest inventory positions, attract the largest audiences and those that have the largest audiences attract the biggest inventory. It makes for a virtuous circle and means that often, the winner takes all."
These lessons, successes and even mishaps are just some of what Moberley shares with my colleague Patrick Poke in one of the recent episodes of The Rules of Investing podcast.
In this wire, I'll summarise some of the key takeaways from Patrick's chat with Moberley including how his beginnings shaped his career, why it's important to listen to market noise and why CSL's issues are just a temporary blip in the road.
The foundations behind the philosophy
The traditional route for fund managers seems to be graduating into an analyst role and working your way up. But often, it's the experiences along the way which help shape your thinking about investing. For Moberley, it was his university job at a SaaS startup that allowed him to realise the power of owning a niche.
While working during the day and studying at night, Moberley learnt the ins and outs of the recruitment sector, which is what the SaaS company specialised in. By comparing the different recruitment agencies as part of his role, he was shocked by Seek's market share and the opportunities that came with being the dominant player in this sector.
He took this information and ran with it. After landing an analyst role at Macquarie later on, one of the first companies to go past Moberley's desk was REA Group, the successful global online real estate advertising company, and now one of Australia's largest 20 companies.
Applying the 'winner takes all' strategy which he found when looking at Seek, he noticed how undervalued REA Group was at $3. Now sitting at $159.48 a share, Moberley labels this one of the best calls of his career.
Now, Moberley looks for this when investing. He's on the hunt for companies that own a niche and own it globally. Just like both REA Group and Seek, there is a multitude of companies waiting to be discovered by a young analyst.
Investing in market noise
Fund Managers keep telling you to block out the noise and make sure it's YOU that has conviction behind your best idea. To some extent, Moberley agrees with this. Investing at Paradice follows a long-term investment horizon of 3-5 years so you have to be sure that you like the companies that you're committing to.
However, there's always room, particularly in heated moments of market volatility, to capitalise on the market noise and make sure you're getting in early. Moberley calls this 'buying rumours and selling facts.'
"If you are going to look for trading opportunities, you really need to think about how you're going to be positioned into those events as opposed to chasing your tail and trying to get set up after the fact."
A great example of when Moberley put this idea into practice was towards the back end of last year when markets were getting swept up by the possibility of a vaccine being approved.
"There were five or six shots on goal in a very short amount of time and that data was looking quite promising."
Moberley quickly invested in vaccine beneficiaries including travel stocks when the market was excited about the possibility of a vaccine. As soon as the news broke to the market that two vaccines were available, he sold these sectors off.
Why? Because unpredictability surrounding these sectors was still prevalent and market euphoria can only last so long.
"A lot of the companies that we sold down into that event still haven't recovered and the vaccine announcement day was really their highest period."
Moberley gives fair warning however, trading isn't for everyone but if you're going to dip your toe in that type of water, buy rumours, not facts.
Valuations in the tech sector
We've seen the signs pointing towards a value-based recovery, where cyclical stocks have been put in the spotlight. There's been speculation that we're at the beginning of a commodities super-cycle, inflation is coming and bond yields have hiked up to new levels. COVID winners, primarily within the tech sector, have been punished by this rotation yet valuations remain high with investors hoping that they will turn out to be long-duration assets. According to Moberley, most of these companies have had their time in the sun and should be stepping into the shade now.
"Our concern is that a steepening yield curve could cause these businesses to be repriced quite quickly."
There's no doubt Australia has produced some stellar tech names including Afterpay, Appen and Altium. Even Moberley, seemingly bearish on the tech sector, recognises that these companies have great management and are quality businesses and hopes to own more of them at cheaper prices in the future.
Moberley's tech watch list: XERO, ALTIUM: Everyone has one stock that they'd love to own at a cheaper price, and the fundies are no different. When Patrick asked Moberley about the one company he'd like to own at a more attractive and less risky valuation, he gave us two! The first being Xero which he labelled as "the best SaaS company in the market." The second company is Altium which Moberley disclosed has been owned by Paradice in the past. His reasoning behind this is the fantastic management team and the high conviction they have in their product. Moberley says it is a company he'd be happy to own again when the valuation becomes sufficiently compelling.
CSL: A crowd favourite with more room to run
Regular readers of Livewire will know that Moberley has long been a supporter of CSL. The stock has been under pressure since mid 2020, delivering a negative return of 14% over the past 12 months, compared to its usual continuous growth.
Concerns regarding plasma collection have pushed CSL into the red, alongside the market's swift rotation from growth into value stocks. Whilst these are genuine concerns, Moberley says these are transitory issues unlikely to have a lasting impact. Whilst plasma collections are down firstly due to COVID and secondly, due to recent stimulus cheques in the US, Moberley expects collection collection volumes to improve as the vaccine roll out gathers momentum.
The big one: Moberley's pick for the next five years
As always, Patrick asked Moberley for the one stock that he would own if the market closed for five years. I had put my money on CSL but no, the stock Moberley would set and forget for the next five years is IDP Education (ASX:IEL), an international education placement firm operating in around 30 countries including Australia NZ and the USA. While facing a few short-term bumps with lack of student mobility due to international border closures, IDP's last result in February demonstrated their ability to bounce back from crisis.
"They're in a phenomenal position coming out of COVID and I can't wait to see what happens to that business over the next five years."
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