Finding value in Asia with contrarian investor Will Lam
Fund manager Will Lam of Elite Rated Invesco Asian sits down with Darius McDermott to discuss...
Australia and New Zealand are not markets that not many UK investors would probably consider very often. Even less so the pacific islands. We think of them perhaps more as long-haul luxury holiday destinations.
While stock options in New Zealand are a little limited, and those in Fiji, for example, almost non-existent (the stock market is only open for two hours a day and had just 68 new investors in the first six months of 2018), Australia is a different case entirely.
From commodities to infrastructure, healthcare to travel, there are many investment opportunities waiting to be discovered. And the country hasn’t had a recession for more than 25 years – a record among developed countries around the globe.
So how can UK investors gain access to these opportunities?
Here are four funds investing down under:
Australia is a key part of the Jupiter Asian Income portfolio. Manager Jason Pidcock likes countries where there is good governance, a strong rule of law and 10 year local government bond yields are lower than the US, which represents confidence from the market that the government will not fail to pay on its debts. “Australia ticks all of these boxes,” he said.
Given his more cautious view on emerging markets, he believes companies in Australia, outside the traditional mining and energy sectors, will prove more resilient in a volatile environment. Around 25%* of the fund (ten holdings in total) is invested there today, including Macquarie Group – the world’s largest infrastructure asset manager – which is among his top ten biggest holdings.
Jason also has one holding in New Zealand, Meridian Energy. Meridian is one of the country’s largest utility companies and is one of the highest yielding stocks in the portfolio at around 6%. Meridian is attractive in that it functions without subsidies, so Jason believes it is a more sustainable business model than many utilities which produce energy via green or hydro power.
Peter Meany, co-manager of First State Global Listed Infrastructure, is also a fan of the country’s good governance and, as a result, says that the Australian market offers infrastructure investors exposure to quality assets.
His favoured holding in Australia is Transurban. The company owns high quality networks of toll roads in Melbourne, Sydney and Brisbane, with a growing presence in North America. Steady volume growth, inflation-linked pricing and network expansions support a 5% yield growing at 5-10% per annum.
“Recently, a consortium led by Transurban, bid A$9.3 billion for a 51% stake in Sydney’s WestConnex motorway network,” he told us. “The deal represented a full price to cement the company’s presence in the Sydney market and enhance the optionality from future connecting tollroad projects. Similar to the 2015 acquisitions in Brisbane, we expect the stock to recover once the large rights issue is digested and further details on WestConnex come to light.”
His one word of caution is that assets that are defensive and provide income will naturally be vulnerable to higher real interest rates in the short-term. The uncertain political environment is not conducive to companies making long-term investment decisions. “But sadly this situation is not unique to Australia,” he concluded.
The team at Guinness, who have an 11% *weighting to Australia, like companies from a number of sectors, including travel and healthcare.
Corporate Travel Management, a global business with 29% of its revenues from Australia/New Zealand, is one of their holdings. The company provides travel services to corporate clients using technology to drive down costs. It is highly efficient and process driven, automating wherever it can. The dividend policy, to distribute 50-60% of net profit after tax, is attractive to an income fund. The yield is only 1.6% currently, but what attracts the Guinness team is the steady dividend growth – 29% per annum over the past 5 years and 20% last year.
Sonic Healthcare is another company the team holds. It provides diagnostic and pathology services and has a global footprint operating in 8 markets, all with ageing populations. It offers a menu of more than 3,000 diagnostic tests. It understands its markets in terms of the regulatory and government budget environment. It has generated a return on capital above the cost of capital for many years and has continued to reinvest in the business, growing profits and accompanying cash flows. Dividends have grown very steady by 5% per annum and the net yield is a steady 3.4%.
“The culture in Australia tends to be one of higher dividends,” the team said. “In part this is due to the requirements of the large pension funds, the superannuation schemes. It is important to note that for us, a high yield is not of interest. It is the growth of profits and cash flows that deliver a growing dividend that delivers the investment profile we are after.”
Invesco Asian manager William Lam recently added Telstra to his portfolio. Telstra is a telecommunications company which has fallen from favour of late.
According to William, recent news on sector consolidation means that it should be able to better monetise its market leading position with additional opportunities for asset sales and cost-cutting. “The nationalisation of its fixed line network will also provide it with 30-40 years of inflation-linked payments guaranteed by the Australian government,” he said.
The fund also holds a number of commodity-related stocks based in Australia and another fairly recent addition was QBE Insurance. William bought the stock in the last quarter of 2017 as he believes it will be a beneficiary of rising US interest rates and has the potential for its premiums to rise after a year of bad catastrophes.
*Source: Fund fact sheets, September 2018