How the top Australian equity manager is approaching 2023
You’ve definitely seen a ton of stuff devoted to the yearly phenomena of the New Year’s resolve if you’ve spent any time online over the last month – and who are we fooling, we all have.
Want to start exercising more? Here is a list of 10 steps to follow. Do you want to follow that diet? To help you truly stick to your resolve this year, here is a list of simple measures. Want to be less stressed? Practice gratitude, meditate, get more sleep, put your pleasure first, and so on.
But as we enter a new market year, what about sharpening your investment skills? Or discovering how to adjust your approach so you can truly score the investing equivalent of a touchdown this year? I can go around it now, no problem.
I can hear you groan “Oh, Ally.” Who could be capable of doing that? After all, the markets are still incredibly unpredictable, the brutal conflict in Ukraine is still raging, energy costs are still exorbitant, and inflation and increasing rates are still the stuff of investors’ fears.
So who better to distill their ideas and methods into a quick read than the fund manager that won gold, silver, and bronze for its outstanding performance in 2022?
I’m referring to the Australian equity team at Lazard Asset Management. Among the 145 Australian equity-focused funds available on Livewire’s “Find Funds” marketplace, Lazard’s Select Australian Equity Fund, Defensive Australian Equity Fund, and Australian Equity Fund claimed the top three positions.
The three funds’ portfolio manager, Aaron Binsted, discusses what worked in 2022, the themes (and stocks) the team is supporting in 2023, and why he thinks the market will continue to experience some pain in this quarter.
Additionally, Binsted reveals his personal resolve for the coming year just for fun.
Lazard Asset Management’s Aaron Binsted
1. What three aspects of your investment strategy supported the Fund’s performance in investments last year?
The first is really straightforward: we only purchase equities that we believe will add value to the portfolio.
Although it may seem strange to suggest, the majority of Australian equities managers will buy companies for index purposes rather than because they believe they are attractive assets. They could be huge stocks individually or they might be a member of a sector with a large market cap overall. They may not be terrific investments, but they own them because they don’t want to deviate too far from the index.
We don’t do that for our Select Australian Equity Fund, and it was a major assistance in 2022 when several firms and industries with large market sizes experienced severe pressure. Since many individuals were harmed, we really came out ahead. We always put more of an emphasis on the economics and values of the firm.
The second can sound like a cliche about investing, but we’re talking long term.
I know that’s what everyone says, but we’ve had a lot of outside experts look at us over the years, and one of the things they say is that our investing style’s unique selling point is our long-term profits yield, which has significant long-term power.
Our Select Australian Equity Fund’s earnings per share have increased 4.6% annually faster than the ASX 200 over the past 15 years because we are purchasing stable earnings streams at competitive prices. This indicates that during the past 15 years, our profits per share growth has been around 96% higher than the growth of the overall market. That has a significant impact over time. Additionally, while the multiples of various companies may fluctuate from year to year, the longer-term benefits of the greater profits growth are clear.
Thirdly, portfolio managers are not given stock recommendations by our experts.
We decouple the choice to invest from the stock’s valuation, which significantly reduces the emotional component of investing choices. No stocks are recommended by our experts. Instead, they are attempting to make accurate appraisals. I believe that creates a really positive behavioral pattern among our research analysts.
2. Do you still possess the stocks that had the most impact on your success in 2022?
The energy sector included two stocks that truly increased in value significantly in 2022. Thus, Whitehaven Coal and Woodside Energy Group (ASX: WDS) (ASX: WHC). Whitehaven coal is now mostly gone. From its low, it has increased ten-fold. In that case, it played a big role. Additionally, Woodside Energy has been quite successful, but it continues to be a sizable position in the Fund because we believe its future prospects are very promising. Rio Tinto (ASX: RIO), another firm that had significant value growth in 2022, is a stock we continue to own.
3. Which of the Fund’s major positions do you support in 2023, and why?
The portfolio contains a sizable investment in QBE Insurance (ASX: QBE). The primary reason we own it is that there has been a very strong premium cycle over the past two years, with significant increases in insurance rates. We believe that as they take their time to process insurance firms’ P&L, QBE has at least two and maybe more years of really strong profits growth nearly built in. Furthermore, that is not at all included into its share price. Additionally, higher bond rates have the extra benefit of raising EPS since they allow investors to receive a greater running yield on the bonds they buy.
Therefore, I believe that QBE has a very strong earnings tailwind and is extremely well-priced; its forward multiples are under 10 times. Thus, there is a strong earnings momentum and a modest value.
We also hold Insurance Australia Group (ASX: IAG), but it’s a smaller stake and we believe QBE has greater upside potential due to the considerably stronger cycle of business insurance compared to home and auto insurance. Even if they have been powerful, the leverage just isn’t there.
Another significant investment in the portfolio is Woodside. We believe that it has extremely robust cash flows and highly alluring dividends. Scarborough and Sangomar’s introduction to production over a period of years has allowed it to boast extremely robust output growth. There are some fantastic greenfield projects as well.
in the Gulf of Mexico, such Trion and Calypso, which might be very valuable additions. We also believe that the price of LNG will skew much higher over the next five to eight years. So, in our opinion, Woodside continues to benefit greatly from the risk-reward trade-off.
Additionally, we adore Collins Foods (ASX: CKF). It underperformed in the second half of 2022 as margins were hurt by cost constraints. We believe that pressure is momentary, and that’s what made it possible for us to accumulate it at a low share price. They have tremendous long-term structural growth through shop openings, both in Australia and in the Netherlands, but mostly in Australia. Then, when those short-term cost constraints subside, we should see some cyclical growth in earnings as margins improve.
4. What actions backfired on you in 2022? Did you abandon these positions, or do you think that things could change in 2023?
Alumina Limited was a stake that cost us money the previous year and that we sold (ASX: AWC). We’ve held it to varied degrees over a lengthy period of time, but it underperformed due to two significant headwinds. The weak alumina commodity price, which caused the share price to perform poorly, was the headwind that everyone saw.
We sold it because they had a refinery named San Ciprián in Spain that purchases energy from the spot market associated with oil. We were also quite concerned about the margin squeeze they would face as energy costs skyrocketed. So we sold the shares as a result. After that, it said in a production report that it would not be paying a dividend for the current quarter and could do so for the entire year.
Collins Foods is another company that we have owned and actually purchased more of throughout that time. However, we believe that the underperformance in 2022 was caused by short-term, cyclical forces, and we truly like the long-term story. That’s the one we’ve kept and added to due to margin deterioration.
5. 2022 was a challenging year for a lot of investors. Do you anticipate better outcomes in 2023?
We believe there are still several headwinds facing the market. First off, while not excessive, values aren’t very alluring. As a result, I’d say that values are generally full, but not alarming.
The fact that we’ve just seen a year of extraordinarily rapid and severe monetary tightening is what actually causes us concern. In the first part of 2023, this may still be the case. There will undoubtedly be economic repercussions from that. What remains to be determined is how widely they will be felt.
That’s a danger, in my opinion, therefore we should proceed with caution in the upcoming year. Having said that, we believe our portfolio positions us quite favorably. Energy and insurance are two of the big industries I mentioned that we have investments in, and both are unaffected by the economic cycle.
Due of underinvestment, energy is appealing. And the premium cycles are another reason we truly enjoy insurance. We are thus extremely positive on the portfolio, although we believe the market may face further challenges.
6. What main subjects will you be focusing on in 2023?
Energy and insurance are perhaps the two most important. In addition, Suncorp Group (ASX: SUN), which belongs to the insurance industry, and Santos (which we also have a sizable holding in) are other firms that we believe are especially appealing within these sectors (ASX: STO).
We are underweight domestic cyclicals in comparison to the rest of the market, however we do own holdings in more defensive consumer stocks, such as food retailers. We also favor Coles Group (ASX: COL) and Metcash in addition to Collins Food (ASX: MTS).
We are avoiding economically sensitive domestic companies because of how we see the market as a whole, especially in discretionary retail and housing, such JB Hi-Fi (ASX: JBH), Super Retail Group (ASX: SUL), Boral (ASX: BLD), and CSR Limited (ASX: CSR).
7. As a little fun question, what is your 2019 resolution?
Instead of always mentioning how we should go out without the kids, I should really be enjoying “Date Night” with my wife.