Jordan Cvetanovski, Portfolio Manager of the Pella Global Generations Fund, discusses strategies and opportunities in a volatile market.Tim McGowen: We're talking to Mr Jordan Cvetanovski, who is the Portfolio Manager of the Pella Global Generations Fund. The fund seeks to construct a portfolio with a superior growth valuation relationship and quality to the market. To do this, Pella targets companies that are growing, trading on attractive valuations, generating strong returns on capital and have strong ESG credentials.
Jordan, thanks for your time.
Now, Jordan, equity markets are in a very different place than there've been to over the last decade. We've got high inflation, rising interest rates. How do you see it from a global perspective in terms of market outlook and valuations?
Jordan Cvetanovski: So if we think about the last 40 years, really the '80s, '90s, we had deflation. We had a bit of a pause and then 2010s was a very heavily deflationary kind of period. And during this whole period, the central bankers were heavily reliant on monetary policy to stimulate the economy and get that kind of inflation back into the system. And they were very aggressive in doing so. So, we saw interest rates fall from very high levels back in the '80s, all the way down to zero and negative in many cases. And I think if we go into the future maybe 30 years, and we think back on the fact that we had US$19 trillion worth of bonds that were negative yielding, which meant that we happily accepted a situation where we paid governments to take our money, we would think that was quite an extraordinary and somewhat ludicrous kind of period of time.
And what happens during these periods is where money is essentially free, debt is free, is you get a lot of debt growing, as I mentioned before, and that leads to misallocation of capital, as you could imagine.
So what happened recently is we've had an end to this kind of period over the last decades, and that is all changing. And what's changing is that inflation, as you mentioned, has come into the system. Once inflation comes into the system, it's no longer tenable, it's no longer acceptable for interest rates to remain where they were. So, as interest rates go up, the price of money goes up. The opportunity cost goes up. And suddenly people start thinking about valuations.
So what we've had over the last year is you've seen the beginnings of this kind of bear market, if you like. We've had this extraordinary bull market over the last 10 years, where all assets were inflated, especially in the tech space and especially in the US, where so much money is concentrated. So, what's happened is you started initially seeing money coming out of the SPACs into the US, those special purpose vehicles. Then you had money coming out of those expensive high-growth tech stocks, and they were deflated without any kind of cash flow generation.
And where we think the next phase of the market will be is where investors will really have to start thinking about valuations going forward.
Tim McGowen: An interesting point. We saw today, you got corporate bond yields in the States around 5 per cent and they're short dated. And the yield on the S&P 500's about 6 per cent, but obviously with a lot more volatility and risk. What does that mean for markets going forward if corporate bond yields are attractive from a yield perspective?
Jordan Cvetanovski: Well, the question is, should they be 5, should they be 6, or 7, or 8 per cent, right? And for us, the way we think about it is we value each company. We look at the free cash flow yield. It's similar to what a bond yields, except that we buy growing companies. So if you have a company on 5 per cent free cashflow yield growing at 10 per cent a year, you get $5 cash this year at 5.50 and so on and so forth, and the year after. Now, you can compare that to a real interest rate, but you can't compare a price to revenue multiple. You can't say a Tesla or some other company on the price to revenue of eight is cheap when you compare it to what you mentioned, which is bond yield at six, S&P yielding five. We think it's a bit less than that because we think the S&P's come downgrades going forward. So we think the S&P has some downside to come. We think the S&P should fall from here. And how much is debatable. You know, should it be 5, 10, 15, 20, 25 per cent? But we certainly think that valuations are stretched, given the alternatives are getting more attractive at this stage.
Tim McGowen: And, so in that regard, where do you see the investment opportunities for your portfolio?
Jordan Cvetanovski: Well, putting all that into context, we still think equities broadly is not something you should ignore. In this time of volatility, if you're an active manager, if you really do the work ahead of time, you really understand these businesses and look for these quality businesses and can value them in a way that compares to all these other alternatives, you can find some great opportunities.
So the problem with the markets essentially is inflation. And you think about what's causing inflation. You've got several drivers, you've got some structural drivers in terms of employment being full, and you've got lack of productivity since COVID and other factors. And then you've got some structural supply-side issues. So, for the last few decades, we were lulled into thinking that technology would solve all of our problems. And we forgot to invest in the real economy stuff, you know, the machines and the factories that will make the widgets and the other things that will make things that we actually consume.
Now, Tesla might be valued as a tech company, but in the end, Tesla is a car, which is made out of steel, made out of copper, made out of lithium. We need that stuff to come out of the ground. We need that stuff to be formed into shape. Now, that is what's been lacking. And that is where you've got real supply issues. And what we're focusing on when it comes to that is looking for companies where they are, on the cyclical side of things, focused on sectors where there's real shortages to come over the next five to 10 years. You can talk about copper miners. You can talk about fertiliser companies like Nutrient and Mosaic in the US. These are very long-term thematics that you can play at this stage at a very attractive valuation.
Now, that is our cyclical component of the portfolio, but the majority of our fund is invested in quality secular growth companies, 20-odd companies that are basically in health care, technology, industrials, retail. We've got Dollar General, one of our biggest investments, which is a hard-discount retailer in the US. So, we're talking a retailer that benefits from the average person having to think about how much they spend on food and stretching the last dollar more and more. So, you can find companies that actually benefit from this environment, and that's where we're focusing on.
So we've got that stability of the core. We're taking advantage of those cyclical components in the market, copper, mining and a few other things. And that's how we intend to beat this kind of volatile market in the short to medium term.
Tim McGowen: Jordan, thanks for your market insights.
Jordan Cvetanovski: Thank you very much for having me.
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