Disruption in volatile markets - looking for opportunities outside the top 20

Funds Management

by Carolyn Herbert

Transcription of Finance News Network Interview with Antares Ex-20 Australian Equities Portfolio, Portfolio Manager, John Guadagnuolo
Carolyn Herbert: Hello I’m Carolyn Herbert from the Finance News Network and joining me from the Antares Ex-20 Australian Equities Portfolio, is Portfolio Manager, John Guadagnuolo. John, welcome to FNN.
John Guadagnuolo: Thanks Carolyn, it’s good to be here.
Carolyn Herbert: Can you start by giving us an introduction to the Fund and what’s its objective?
John Guadagnuolo: So the Fund invests into companies that are outside the top 20, listed on the Australian Stock Exchange. So we don’t invest into the banks, such as Westpac Banking Corp (ASX:WBC) or Commonwealth Bank of Australia (ASX:CBA). And we don’t invest into the big retailers, like Wesfarmers Limited (ASX:WES) or Woolworths Limited (ASX:WOW). We look to invest into sort of mid cap to small cap companies.
The objective of the Fund is to make money for our clients, pretty simple I guess, but that’s the actual objective that we have. The secondary objective is to outperform our benchmark and our benchmark is an index that takes out the top 20 companies. And our objective is to beat that index on a rolling five-year basis, by five per cent per annum.
Carolyn Herbert: Can you tell us a bit more about the investment approach?
John Guadagnuolo: So we come at it from a more of an absolute return basis. We’re not that interested in telling our clients that, ‘oh well you lost five per cent but we outperformed our benchmark’, because that doesn’t help your client does it really, you’re there to make money. So we’re looking at returns from an absolute perspective. We’re also a little bit different, because whilst we do have an equity benchmark, we prefer to think of the world in the way you might invest your own money.
So when you’re investing your own money into stocks and shares sometimes directly, you don’t necessarily care too much what the benchmark weighting is, according to the S&P 200. You invest how much you think you’re comfortable investing. We follow that particular way of doing it and the way that we think about it is, to try and invest the money equally across the shares that we’re investing into. So equal weights, we call them par weights.
We then adjust them a little bit, because not every stock is equal. There might be more return available from a particular stock over another, so we like to have more exposure in that area than to some of the others. But more or less, we think about it from an equal weighting perspective. So it’s a little bit different from other stocks, or other investment Funds that you might find on the Stock Exchange.
Carolyn Herbert: Looking at stocks outside of the top 20, where do you see the greatest opportunities?
John Guadagnuolo: So one of the real beauties of this part of the world, if you like to invest into, is that you get companies that are coming up. The disrupters if you like. And a great example that we like to talk about is Fairfax Media Limited (ASX:FXJ). So if you go back say eight or nine years ago, Fairfax had around $1 billion more revenue than they do today. Now the interesting thing about that is that they’ve lost all that revenue to online classifieds, to companies like SEEK Limited (ASX:SEK), to Realestate.com Limited (ASX:REA) and to Carsales.Com Limited (ASX:CAR).
If you added up the revenue of those three companies in Australia for financial year 2015, you’d find it’s around $1 billion, which is exactly the amount of money that Fairfax has lost. So that’s why we like this space and that’s what we look to invest into. Companies that are growing and have some sort of competitive advantage, in the long term that will allow them to disrupt some that are already there.
Carolyn Herbert: What are some of your larger holdings and what makes them so attractive?
John Guadagnuolo: So one of our largest holdings is SEEK that we touched upon before. The reason we like it, it has a very strong position here in Australia in online employment classifieds. But it’s actually been able to take that model offshore, into China in particular. It’s now the largest online classified advertising agency in China. It’s also in South America. We think there’s a lot of optionality in that business to add the value that it does here in Australia.
We also have a very large holding in Henderson Global Investors Limited (LON:HGL). And that one we’ve been building up, because we see European markets that they have a large exposure to, being very cheap compared to other global equity markets. So it’s a bit of a play on that.
Carolyn Herbert: In your view, what role do you think technology is going to play and where do you see the greatest sources of disruption?
John Guadagnuolo: It’s always very difficult to answer that question in this situation. But you’ll see with our position in SEEK, we like disruptors. SEEK was a disruptor, it disrupted Fairfax. Technology can often be overestimated in the short term, underestimated in the long term. We don’t own any exposure for instance, to electricity networks. And the reason for that is becausewe think that they’ll be disrupted by people having solar on their roof. Over time, they’ll have better batteries storage capability in-house and the need for those networks will diminish. And so therefore, it’s hard to work out what the long-term values of those networks are. That’s an example of how we think about technology and its disruptive affect.
Carolyn Herbert: Finally John, we’ve seen a bit of a recovery in the markets compared to the dismal start we had this year. What’s your outlook for the next six months?
John Guadagnuolo: I think that markets have been struggling with the direction of interest rates in the United States, and therefore, the impact of that on the US dollar. So with the Federal Reserve being more relaxed in its outlook about raising interest rates, the US dollar has weakened depreciatively. That’s taken pressure off emerging markets and we’ve seen a relief rally.
The direction of the second half of the year will depend very much,on economic outlook in the United States.If we see wage inflation in particular begin to build, we have a very low unemployment rate in the United States. If wage pressure builds, there’ll more pressure on the Federal Reserve to increase rates. And that could change direction of the markets again, we’re cautious. 
Carolyn Herbert: John Guadagnuolo, thanks for the update.
John Guadagnuolo: Well hopefully it’s of value to our clients and thank you for the time.