TRANSCRIPTION OF FINANCE NEWS NETWORK INTERVIEW WITH LODESTAR CAPITAL PARTNERS, PORTFOLIO MANAGER, JOHN MORGANClive Tompkins: Hello Clive Tompkins reporting for the Finance News Network. Joining me from Lodestar Capital Partners is Portfolio Manager, John Morgan.
John welcome to FNN. Can you start by introducing Lodestar?
John Morgan: Yeah Lodestar Capital Partners began in June 2005. We started with three principals, myself, Susie Fenton and Dennis Rope. We’ve got accumulated experience of about ninety years, mainly in shares but also asset allocation which is important for this Fund.
We had the idea of starting up equity mandate that was a bit different from the traditional, where we could dial up and dial down our exposure. At the time there weren’t many Funds in Australia that offered this style, but over the last six years there’s been an increasing number as the demand from customers is getting more sophisticated. And to date we’ve accumulated about $160 million in funds under management.
Clive Tompkins: Thanks John, so can you tell us now about your Australian Strategic Share Fund?
John Morgan: Its objective is to give the client equity type returns over the full investment cycle but with lower volatility. So to date we’ve been going for six years. We’ve outperformed the share market by about a little bit over 1% per annum, but it’s been with about two-thirds the volatility that the share market’s produced over that period.
Clive Tompkins: Thanks John. So how do you generate equity like returns with less volatility than the share market?
John Morgan: There’s a number of ways you do that. When times are good and you’re in a bull market, we tend to look like a traditional long-only manager with plenty of capital in the market, basically fully invested. When we go through bear markets or when times are tough, we dial down our exposure, we can do that in a number of ways. You can do that by just increasing the cash and selling shares out. Sometimes there’re capital gains consequences doing that, so sometimes we would put short positions on or hedge using derivatives. So there are a number of ways you can do that. So when you look at the full investment cycle which includes the bull market plus the bear market, our net exposure will not be at a hundred percent. And plus stock selection hopefully will give you some outperformance on top of that dialling up and dialling down effect.
Clive Tompkins: Good and what percentage of the Fund would be allocated to shorts?
John Morgan: At the moment there’re 14 shorts and they’re roughly about 1% each, so 14%. That’s in the context of a net being at around 70%.
Clive Tompkins: John, your investment style is described as high conviction, style agnostic. What does this mean?
John Morgan: Style agnostic means that we don’t get caught up in defining whether an individual stock is a value stock or a growth stock. We don’t think the Australian market is deep enough or hasn’t got enough number of stocks, to properly reflect a value strong investor or a growth investor. A great example right now is BHP. Most long-only managers might brand themselves value or growth, but BHP is likely to be the biggest holding in their portfolio. Now is it a growth stock? It has produced much better growth earnings over the last five years than the market and likely to, courtesy of China, over the next five years. But it’s trading on a forward price earnings multiple of seven times which normally reflects value. So whether or not a long-only manager is true to his branding by having a lot of BHP can be a debate. We remove ourselves away from that and basically being style agnostic, if we think BHP is a good stock we’re free to own it. If it runs into trouble, we’re free to remove it without worrying about being a value investor or a growth investor. High conviction means we’ve probably – and we have historically held a lot less stocks than a traditional long-only manager. For example we’ve currently got 45 stocks we hold, normally it’s closer to 50, a long-only manager might hold closer to 100.
Clive Tompkins: Good and what are some of your biggest positions and where has the Fund made money?
John Morgan: We’re a bit boring at the moment. We think secure yield is an important focus for investors right now given the uncertainty and volatility that’s being produced. Our biggest holdings are NAB, Telstra and ANZ; they’re all yielding very well. Well above cash rates, well above term deposits and if you put the franking credits on top, it’s been very rare that these three stocks that have stable dividends to growing dividends, have yielded this well relative to other types of income streams. Longer term, we’ve made very good money out of stocks like GrainCorp which you trade in and out of given its basically - depends on the wheat crop on the east coast of Australia. Amcor is one we’ve made good consistent money out of over the last two or three years, and Telstra even just recently has been a great investment for us. We didn’t have much of a Telstra holding until the tsunami occurred in Japan, the whole market got sold down including Telstra. We didn’t see the relationship that Telstra had with what was happening in Honshu and stock got down below $2.70, we bought a lot of stock there. It’s now above $3.00 and we’ve received a 14 cent fully franked dividend over that period in a market that’s gone down aggressively. So Telstra people see it’s pretty
boring but it’s been a really good investment, absolute and relative over the last twelve months.
Clive Tompkins: Now a more general question John. Buy and hold as a strategy no longer seems applicable in today’s volatile markets for delivering long term growth. What are your thoughts and how much of this determines your willingness to set price targets?
John Morgan: We’ve set price targets from day 1 with this Fund given the nature of dialling up and dialling down exposure. The reason we set this
Fund up, there is inherent weakness to buy and hold for some investors’ profile. Buy and hold does suit some people but as the last five years has shown, that’s not optimal. By having a manager that can actually dial up and dial down in exposure can be advantageous, not only just producing a better return for the investor, but actually lowering the risk profile at the appropriate time. So setting price targets is something we’ve done, day 1.
Clive Tompkins: Last question. John what’s your outlook for the year ahead?
John Morgan: That’s a tricky question, given the next day is tricky at the moment. The market’s incredibly cheap on any metric you want to use fundamentally. You need a resolution, firstly in Europe; it’s probably the prime focus right now. The ECB, that’s their central bank, The International Monetary Fund and the politicians don’t seem to be able to agree on the proper structure of resolving, not just the Greek debt situation, but the whole pattern of the sovereign debt issue. It goes to Portugal, to Ireland, even to Italy and Spain. There’s no resolution there that’s actually kept the market happy for more than a week or two. The latest development, the quantity they’re talking about is of a size that can actually resolve the issue, but you need everybody on board with that structure. Once that occurs there is a chance that there is a restoration of confidence, then you need the US economy to show that it’s not going to go into double dip. It’s got its own set of issues there. And there seems to be a high level of brinkmanship amongst the politicians in that country, that doesn’t let fiscal stimulus occur properly at this stage of the cycle, which is all bringing on its own set of problems. China has got great growth internally but is a bit export reliant still at this stage of its history. So it is reliant on the US and Europe not going into recession, to keep those great levels of growth going. That’s a bit long-winded, but what it means is as soon as those macro issues are resolved, totally or to a fair degree, the valuation that’s embedded in our share market will be unlocked. And you’re likely to have a very strong rally, it will be quite quick. But the timing of that is going to be difficult because it’s in the hands of politicians and bureaucrats, and investors can’t control that situation. The main message is, once those macro risks achieve a tolerant level or are resolved, then you are going to have a rally on your hands. In the meantime it’s going to remain very, very cheap, that’s why yield is such a good thing. If you’ve got to a reliable stock that’s got a high yield, at least you’ve got that paying away nicely in an after-tax sense in this environment, waiting for the actual valuations to – the cheapness to get released back to fair value.
Clive Tompkins: John Morgan thanks for the introduction.
ENDS
