Value investing style puts focus on Japan

Funds Management

by Carolyn Herbert

Finance News Network Transcription of MLC Portfolio Manager, Myooran Mahalingam Interview with Altrinsic Global Advisors Portfolio Specialist, Simon Blanchflower

Myooran Mahalingam: My name is Myooran Mahalingam; Portfolio Manager of Global Equities at MLC and it’s my very great pleasure to introduce Simon Blanchflower, from Altrinsic Global Advisors. Welcome Simon.

Simon Blanchflower: Thanks for having me here.

Myooran Mahalingam: Tell us a bit more about Altrinsic Global Advisors?

Simon Blanchflower: Altrinsic Global Advisors is a value manager; we search the world trying to find a handful of high conviction ideas. We address agnostic, so we don’t mind if that’s the developed world or emerging markets. Importantly for us, when we look at those ideas, we look at them as if we’re owners of the business, as if we’re going to buy them outright with our own capital. The other feature of Altrinsic being value is we need to find ideas that trade at a discount to their intrinsic value. And importantly for us, we invest right across the value spectrum, so a very flexible approach.

Myooran Mahalingam: Is it a firm that’s been established since 2000?

Simon Blanchflower: Yes 2000, established by John Hock, now a 17-year track record.

Myooran Mahalingam: Investing in global equities, what are some considerations Australian investors need to take into account when going global?

Simon Blanchflower: I guess the key ones are diversification opportunity. Diversification in that you avoid the sector concentrations in Australia between banks and resources, there’s quite high concentrations there. So by buying global, you’ve got a much greater chance to diversify away from that, across multiple economies, countries etc, different sectors. And also the opportunity sets, simply in Australia you’re looking at hundreds of companies, whereas when you go globally you’re looking at thousands of different opportunities, so a completely different scale.

Myooran Mahalingam: Of course you get access to companies like Amazon Inc. (NASDAQ:AMZN) and Apple Inc. (NASDAQ:AAPL) and Samsung Electronics Co Limited (KRX:005930). Those types of businesses you cannot get access to here?

Simon Blanchflower: Yes, there’s a lot more access availability offshore, much more variety.

Myooran Mahalingam: Currency is often a consideration for investors going global. Can you talk us through how you view currency?

Simon Blanchflower: Obviously when you invest globally, you invest a new risk, which you didn’t experience in just investing domestically, and that’s currency risk. The key thing with currency risk is to invest in the long-term. The Australian dollar is a cyclical currency, so there are times when, particularly in the short term, where the impact could be quite positive or quite negative, in terms of the term experience. But longer-term, it tends to have less of an impact and it can be a diversifier to risk as well.

Myooran Mahalingam: You talked about domestic equities earlier on. Can you talk through the impact China has had on domestic equities?

Simon Blanchflower: Well it’s been quite large, in fact huge. Certainly in the earlier part of the 21st Century, as China became an urbanised economy, the demand for resources was very large and that was a significant tailwind for the market, from the early 2000s through to 2008. Now it’s less potent, simply because China growth has slowed down a bit, there’s still demand but it’s slowed down. And going forward, whilst we expect to continue demand from Australian resources, it’s going to be from a much higher base. The point was it was a much lower base before. So no doubt still an impact, but perhaps not as potent as it was in the earlier part of the 21st Century.

Myooran Mahalingam: You recently returned overseas from Japan. Can you share any thoughts from your trip overseas?

Simon Blanchflower: Japan was interesting I think; we saw quite a few companies over there. It’s a space that a lot of value managers are attracted to, because from a valuations perspective, it does look cheap. The question is, is it undervalued and so we spent a lot of time visiting companies. The key thing for Japan though really, will be next year, to see whether negative interest rate policy is removed, because that is something that’s had a negative impact on sentiment in Japan. So it’s quite important to see that removed. But nevertheless, valuations we still find are quite compelling and also quite attractive asymmetry as well, in terms of upside potential relative to downside risk.

Myooran Mahalingam: Where are you finding opportunities today, globally?

Simon Blanchflower: We’re bottom up, so we’re not top down, so it’s very company specific. I guess where we’re spending most time is trying to find ideas, particularly that are uncorrelated with each other, quite idiosyncratic. Very company specific ideas, especially with market valuations being quite elevated. That’s quite important to make sure you’ve got company specific drivers. But we’ve been, from a top down perspective, we’ve been underweight in the US for quite sometime, overweight Europe, overweight Japan.

We’ve built a reasonable position in financials over the last year or so, but that’s quite outside western banks for example. So again, that’s quite differentiated from the market. And the other area I guess we’ve been building a bit lately is on the healthcare side. Because the healthcare sector whenever you go through an election cycle, often comes under pressure and can represent some value. So we’ve been buying a bit in that area as well.

Myooran Mahalingam: Is there a stock that particularly excites you?

Simon Blanchflower: I think at the moment, one of the interesting pieces of news that came through in recent history was with Nestle (VTX:NESN). It’s one of our larger holdings and a holding we’ve held for quite sometime. They’ve brought in a new CEO and it’s the first time they’ve had a CEO external to the company, since 1922. So it’s quite a significant shift in culture.

Nestle has sort of experienced sub pile growth in recent years and I think this is an opportunity for fresh blood to come into the organisation, revamp some of the business units within Nestle and look to recreate growth opportunities. And not only that, but also to restructure costs and make the organisation more efficient, so we see that as quite a significant going forward opportunity for Nestle.

Myooran Mahalingam: You mentioned you’re a global value manager; value as a style has been under pressure if you look back the last five to seven years. Any thoughts on whether you think that headwind will become a tailwind, going forward?

Simon Blanchflower: Depending on what parameters you look at, that growth cycle looks like it’s been in place now for almost 10 years. So it’s been a big headwind for value managers. I think that if you think about where markets are today, they’re quite elevated. You can obviously dispute how much, but I think margin safety is going to become increasingly important particularly if volatility normalises, which it should.

The other aspect to that of course is whether the interest rate cycle has bottomed as well, because if interest rates start to rise, that will put more pressure on markets and create more volatility. So there should be more opportunities for value moving forward, particularly if this cycle starts to change.

Myooran Mahalingam: Simon Blanchflower, thank you very much indeed for your time.

Simon Blanchflower: Thank you for having me Myooran.


Are you a 708 sophisticated investor?

A sophisticated investor is defined under Section 708 of the Corporations Act (net assets of $2.5 million or annual incomes in excess of $250,000).

They are eligible to receive information regarding wholesale investment opportunities that are not available to regular or retail investors.

Please subscribe if you would like to be alerted to these types of opportunities.