Inside the minds of Australia’s corporate leaders: 300 meetings and 2 five-year ASX stocks
Blackmore Capital CIO Marcus Bogdan recently spoke to Glenn Freeman of Livewire Markets - a full transcript of the interview can be found here or below
If you’re looking for investment ideas – and that’s why you’re reading this, after all – getting inside the heads of Australia’s corporate leaders is a huge advantage. Otherwise, you run the risk of following the herd of runaway sentiment or jumping on themes usually well past their peak by the time the market has twigged.
Before the pandemic, Blackmore Capital portfolio manager Marcus Bogdan consistently held more than 300 face-to-face meetings a year with company executives and industry leaders. While swamped with virtual meetings in the last couple of years, Bogdan and his team are back on the road, recently landing back in Melbourne after visits to London and Berlin.
In the following interview, the co-founder of the Quality-focused firm explains why pressing the flesh is so important. Bogdan also delves into Blackmore’s distinct investment approach, which uses separately managed accounts and model portfolios rather than a managed fund structure. And he discusses a couple of the Australian large-cap stocks he would buy and hold for at least five years.
You previously worked at big-name firms Merrill Lynch; Cooper Investors; and Citi. How did this shape your stock selection approach?
Timing can be fortuitous in your investment career. Unknowingly, starting my career in the “recession we had to have” in the early 1990s – when interest rates were above 10% – enshrined the importance of balance sheet strength as an enduring feature of company investment.
The multinational investment houses of Merrill Lynch and Citi provided insight into global economic and industry trends. This was wonderful in helping a young research analyst better understand the drivers of return and risk for Australian corporates. It was particularly useful when Australian firms expanded into offshore jurisdictions, and “on the ground” resources of these markets were readily available.
The timing was also on my side when I moved to Cooper Investors as a portfolio manager, which was just before the Global Financial Crisis hit.
The firm’s intrinsic investment approach of detailed company and industry analysis highlighted the unsustainability of many Australian corporate financial structures, despite often sound underlying investments. This underlined the importance of financial prudence in portfolio construction and the ability to invest resiliently through all investment cycles.
What’s the appeal of using an SMA strategy versus other structures?
During my time at Citi, I was exposed to the separately managed accounts (SMA) portfolio structure, which was adopted by US investment houses far earlier than here in Australia. It was clear that implementing SMAs enabled us to provide superior investment results over the long term via:
systematic portfolio management,
applied via our requisite skill,
in accordance with explicit portfolio mandates, and
supported by administration processes, including error-free implementation.
This was a significant improvement over the traditional non-discretionary stockbroking model, especially where investors wanted to maintain a direct line of sight and ownership over their equities and preferred not to invest in traditional pooled unit trusts.
Since the Hayne Royal Commission, compliance responsibilities within financial services have become far more complex, drastically bumping up the cost of delivering financial products and advice. This pressure on financial planning business profitability and sustainability have created an efficiency drive with investors looking for smarter, streamlined ways to invest in direct equities via a professionally managed structure.
The SMA structure provides solutions to many of these challenges via its convenience, tax efficiency and franking credits, transparency of underlying securities and agility that allows managers to take advantage of opportunities and manage risk.
What’s your record year for company visits? What are some of the most important questions you ask company CEOs?
Visiting companies is one of the most rewarding aspects of investing. As a portfolio manager, I’ve consistently targeted – and achieved – the goal of at least 300 annual company and industry participant meetings. These were replaced by virtual meetings mid-pandemic, and while we have adapted to this change, which will remain a useful touchpoint, it will never be as effective as face-to-face meetings. The cognitive experience of thinking and reasoning is undoubtedly elevated through an in-person discussion. For example, we’ve recently returned from company visits in London and Berlin, where company executives’ appreciation of in-person meetings – either at their headquarters or other locations such as conferences – helps provide deeper insights. And in these meetings, some of the most important questions we ask are those about:
A. Understanding the approach and discipline of capital allocation.
B. How management helps ensure company returns are sustainable through the investment cycle
C. A focus on building a sustainable competitive advantage in terms of innovation and employee engagement.
Quality might be set for testing times in the next 12 plus months, but others see it as the only place to invest now. What’s your view?
Quality at a Reasonable Price (QARP) is the dominant factor for the Blackmore Capital portfolio. Quality, defined in terms of margin resilience, strong cash flow conversion, and balance sheet durability are critical factors to fortify the portfolio. That’s particularly important in this environment of moderating earnings growth, persistently high inflation, and rising interest rates. That’s why we currently strongly prefer QARP above the “Quality ‘at any price’ (Quality Growth).”
Valuation multiples continue to de-rate due to rising discount rates. Indeed, with central banks facing the daunting challenge of reducing inflation without causing a recession, earnings and valuations are likely to remain under pressure for the foreseeable future.
The risk of inflation remaining stubbornly high could further compel central banks to respond forcefully, thus lowering the baseline growth path for economies. Such a backdrop suggests that it is too early to consider cyclicals and growth stocks in a meaningful way. Instead, fortification around economic defensive and industry sectors that can pass through rising costs remains preferable.
With a mandate to invest between 20 to 40 stocks, how are you currently positioned?
In an environment of tightening financial conditions, persistent high input pressures and slowing earnings growth, the portfolio remains overweight in companies that offer greater earnings safety. At Blackmore Capital, we continue to prefer stocks that are less vulnerable to rising discount rates and are less sensitive to slower economic growth.
With a focus on earnings resilience, the portfolio is overweight consumer staples, defensive industrial companies, and healthcare. Each of these sectors has historically grown earnings in periods of economic weakness. Moreover, it does appear that the current pace of monetary policy will continue until there are tangible signs of inflation moderating. A hallmark of more defensively based companies is their ability to pass through rising input costs, a critical attribute in a period of rising inflation.
We also remain overweight in the energy sector which has been supported by elevated geopolitical tensions that have put further downward pressure on adequate supply of oil products. With demand levels that are still above supply levels, prices for the energy sector continue to be supported and remain an important hedge against inflation. Overall, the largest underweight sectors in the portfolio are consumer cyclical and technology, where we expect tightening financial constraints to continue to weigh on valuations.
Our portfolio currently holds around 23 stocks. In addition to the overweight allocations to healthcare, consumer staples, energy, and industrials mentioned above, we're underweight financials and materials. One recent adjustment involved reducing our exposure to Commonwealth Bank (ASX: CBA) and reinvesting the proceeds in telco holdings, including Telstra (ASX: TLS) and Spark New Zealand (ASX: SPK). These changes express our more cautious stance on economic growth and the housing cycle in Australia and other developed economies, where low interest rates, quantitative easing and fiscal stimulus have driven an unsustainable global housing market.
If your portfolio could only hold two stocks for the next five years, which would you choose and why?
CSL Limited (ASX: CLS) is well-positioned to deliver double-digit earnings growth with strong underlying demand returning for plasma products. Plasma collection has been the single biggest factor driving the company’s share price performance during the COVID pandemic, where donor supply was significantly disrupted.
A sequential recovery in plasma supply is now well underway, benefiting from increased social mobility and the rollout of new donor centres. Indeed, we expect that the second half of 2022 will prove to be the trough in earnings for CSL, as annual collections are on track to exceed pre-covid levels in FY23.
Seqirus (Influenza vaccine division) has been a critical source of diversification and growth for CSL during the ongoing plasma challenges experienced throughout the pandemic. Seqirus has been a beneficiary of heightened awareness of respiratory diseases and continued innovation in cell-based influenza vaccines has driven an improvement in margins. Overall, we expect the structural demand drivers for plasma therapies and influenza vaccines to underpin growth for CSL for the foreseeable future.
And in the theme of green infrastructure investment, Macquarie Group (ASX: MQG) is a clear beneficiary of an environment that we believe will reward companies with rising exposure to net-zero targets by 2050. The opportunity for Green Capex needs has never been stronger as investment is urgently required across the entire supply chain to meet Net Zero targets.
Macquarie firmly established its position in 2017 when it acquired the Green Investment Group from the UK Government, to become a leading financier and developer of green infrastructure including renewable energy projects.
The transition to “green” energy is also driving heightened volatility in energy markets as governments grapple with the ongoing energy supply challenges impacting both fossil fuels and renewables. There’s increased demand – and this is growing – for the risk management, financing and logistics services offered by Macquarie’s Commodities and Global Markets division. This is driven by the increased activity, volatility and supply chain disruption in energy and commodity markets currently.