Antares Equities analysts typically only cover 15 stocks each. Andrew Hamilton explains how that translates to out-performance and stock success stories.
Andrew Hamilton: We believe in understanding the companies that we cover. We do holistic valuations. We tend to run, or we require our analyst to run, for all of our companies a discounted cashflow valuation or a dividend discount model. And we understand the company, we understand the industry in which it operates and its position in that industry to try to get a handle on the types of returns that can accrue to it over the long run.
We want to form a view on management, on their strategy, their ability to execute that strategy. In order to do that, we require our analyst to do their own work rather than rely on third party providers like stockbrokers. We also undertake environmental, social and governance research or ESG alongside traditional financial research, and we bring all of that to bear in our models.
Our analysts are required to come up with these long run ten year forecasts and valuations that we see as very, very robust but they're also free to use other valuation techniques that they think might be appropriate for the company, but that's very much alongside those robust valuations that give us the information as portfolio managers that we require when we making our investment decisions.
Our eight analysts importantly only cover an average of 15 companies each, whereas for many of our peers, the analyst covers 30, 40 or even 50 companies and they can't possibly understand those companies in the same level of detail that our analysts do. We think that gives us the best chance of getting a higher proportion of our calls right versus wrong.
Jessica Amir: And of those calls, how does that translate to returns?
Andrew Hamilton: Well we've seen over many market cycles actually, for a very long period of time, consistent out-performance across a range of our products and portfolios that's been driven by stock specific out-performance, not style. It's not value or growth, it will vary at different points in the cycle because it varies because of market sentiment but we've demonstrated out-performance across different phases of the market cycle.
Jessica Amir: Great, and can you give us some examples?
Andrew Hamilton: Sure, one of the recent examples over the last 12 months has been Santos (ASX:STO), which was a company that was very much on the nose a couple of years ago, had a few disastrous capital raisings but had re-based their balance sheet. They had new management in place, they were setting about cutting the cost base of the company, re-shaping the company to move forward, giving it a much more stable foundation from which to move forward, and at the interim result in August of last year in 2017, that was demonstrated.
We were able to see on the day of the result a significant lowering of their cost base particularly in key assets like the Cooper Basin and the Gladstone LNG project, and lowering that cost base, being able to drill gas wells in particular much more cheaply and tie them in more quickly has almost a feedback effect. It's not just lowering costs now but it also means they can commercialise more of their resource base into reserves.
So in future they'll be able to produce more reserves above their economic threshold and we saw that interim result as very very beneficial for the company with lower free cash flow break even. We increased our investments and luckily for us it took the market a day or two to understand what we had understood on the day, and the stock’s been a stellar performer in the 12 month since.
Jessica Amir: Well done, any others you want to quickly highlight?
Andrew Hamilton: I think some of our highlights over many years include stocks like Aristocrat (ASX:ALL) that we identified many years ago in the portfolios, in the sort of $2 range and now it's above $30 and the key there was again fundamental research, understand the company. Our analyst on that company understood that previous management had really cut back on investment. So they weren't investing in R&D, they weren't investing in design and development so the games didn't have the same appeal. There's a multi-year lag between that type of investment and releasing the game, getting it commercialised and getting acceptance in the market.
Once we saw them investing again, issuing more patents actually, getting more patents accepted, getting better design and development, we knew that the growth would come, that they would start to get more market penetration. So we invested in the company, and I'd like to say the rest is history. It's been a fabulous ride and it's done very well but you don't get a company like that every day. But that was genuine understanding of the company, fundamental research and that's a great example of what we're about, that when the sentiment is against the company, and it's trading often on a price to earnings ratio that might be quite low because of that sentiment, it's a real opportunity if you can identify it correctly because you get the uplift from the earnings growth but also the re-rating of the multiple that the market will pay for those earnings, and in a case like Aristocrat, that resulted in a stock increasing more than tenfold.
Jessica Amir: Well your hard work definitely paid off. Andrew Hamilton thank you so much.
Andrew Hamilton: It's a pleasure.
Jessica Amir: And thank you for watching.