The Rules of Investing

Chris Watling’s portfolio preparation guide for a 2023 global recession

Last week, London-based economist and founder of Longview Economics Chris Watling walked into a pub and ordered three pints of beer. The barman poured the pints and promptly asked Watling for £30. There was a pause, as the two made eye contact before eventually acknowledging the extreme prices for beer. 
But it's not just beer and bars that are going through a rough time. The other B - the Bank of England - is in a policy tussle with the new UK government, and that's led traders to question the economic credibility of the country.
In this special edition of The Rules of Investing, Watling sits down with Livewire's Hans Lee for a discussion on the state of the UK, his current global market strategy, and what he feels are the next big risks on the horizon. We also dig deep into the changes he's made to Longview's model portfolios - and there are many to get through.

Mark Landau: Why it’s time to put down the last decade’s playbook

The old adage that "past performance is not an indicator of future returns" is possibly more relevant in today's market than it's ever been. 
When the market is driven by momentum, as it has been through the past decade, piling onto winners has paid off. And why wouldn't it? Earnings have been easy to fuel when debt costs next to nothing, in a market where the shareholders reward the pursuit of market share - no matter how it's achieved.
In today’s episode of The Rules of Investing, David Thornton sits down with Mark Landau – Co-Founder and Chief Investment Officer at L1 Capital. 
Mark started L1 in 2007, alongside Raphael Lamm. Their flagship long-short strategy has returned a whopping 18.7% per annum since inception, and was ranked in an HSBC survey as the ‘Best Performing Hedge Fund Globally’ in 2015 and ‘Top 20 Hedge Fund Globally’ in 2016, 2017 and 2021. 
The episode covers an enormous amount of ground. We discuss everything from the uniqueness of today's market, where L1 is deploying capital, what makes earnings sustainable, the importance of balance sheets. Mark also tells us why the investing playbook of the last decade should be put back on the shelf. 
Timestamps
1:15 - Origins of L1 Capital
3:20 - Lessons from the GFC
5:30 - The problem with long-only investing
6:00 - Quality value strategy
8:10 - Today's unprecedented market cycle
10:00 - No quick fix for inflation
19:55 - How macro informs a bottom-up approach
22:30 - Where L1 is deploying capital
24:30 - Expensive defensives 
28:00 - Sustainable P/E ratios
30:30 - Importance of under-geared balance sheets
31:10 - Pricing power
32:00 - Management teams on notice
35:30 - What makes a good short
42:50 - 3 favourite questions

How this Hall of Fame bear is buying the dip

It's not a stretch to call the last twelve months in markets a regime change. Inflation, rates, valuations, liquidity; everything has been turned on its head. 
While today's conditions may be unique in makeup, they're not new in isolation. Each of the trends we see today have visited markets before. 
So who better to get on the Rules of Investing than someone who has seen it all: Hall of Fame fund manager Chris Kourtis from Ellerston Capital. Chris has served as a Director and Portfolio Manager of Ellerston since 2005, and has over 36 years investment experience.
Before Ellerston, Chris co-founded the Melbourne based Investment Management firm Portfolio Partners in 1994, where he served as Director, Senior Investment Manager and Head of Equities. 
As you'll hear, Chris is extremely bearish on markets - but that doesn't mean he's packed his bags. Quite the opposite, he's bought the dip!
TOPICS DISCUSSED:
the parallels between today and the dot-com crash
how to gain exposure to the resource sector without being a slave to commodity prices 
the problem with banks
what he liked about Xero compared to other tech plays
the importance of dividends
why 'old-school' investing principles are so important in today's market
He also gives us double value for money by naming two stocks he'd put in the bottom drawer.

Why the stock market’s bubble hasn’t really burst yet

When markets crash sharply, as they did earlier this year, it can be a mistake to assume that as soon as the falls peter out, the market will then naturally recover. 
Sure, this sometimes happens. The crash of 87, the global financial crisis, and COVID are all examples where the market went into freefall fall once, more or less, before recovering. 
But here's the thing. Just because the market has sold off and since recovered some, that's no guarantee the market is in recovery mode. Markets, sectors and individual stocks can go down, stabilise, then go down again.
While picking the bottom might be a mug's game, you're not going to go into high gear and invest if you think there's further broad based losses on the way. 
This is where today's guest comes in. Dr Philipp Hofflin, Portfolio Manager at Lazard Asset Management, is an expert in market bubbles and what happens after them. And it's not as cut and dry as you might think.   
In this episode, Phil discusses: 
his learnings from Jackson Hole and where we are in the rate cycle;
the difference between Australia and the US when it comes to interest rate sensitivity;
why some stocks are now attractive while others have further to fall;
how he values the energy sector, and 
what sectors and stocks are attractively priced.  

We’re in ’Tech Wreck 2.0”, and some big names won’t make it

The world is opening, but not to calm and stability. 
Rather, COVID has left a trail of destruction. And I'm not talking about the health implications. The pandemic has left economies and markets rattled by supply chain problems, inflation, and rate hikes. 
Big tech has been hit the hardest as investors flee long-duration stocks. 
However, despite sharing an acronym, the big tech stocks have been split down the middle. Some companies are awash with cash and trading at extremely attractive multiples. Others look like emperors with no clothes.  
This is one of the topics Livewire's David Thornton tackles with Mary Manning from Alphinity Investment Management. Mary is a Portfolio Manager for the Alphinity Global Fund and Alphinity Global Sustainable Fund. She's been investing in global markets for over 20 years with stints working for Ellerston Capital, Oaktree Capital and Soros Fund Management.
We also go deep on US-China relations and compare the two starkly different markets, as well as Mary's interesting take on the ESG challenges brought about by Artificial Intelligence. 
Timestamps
1:00 - Back on the road and takeaways
2:00 - low-end vs high end-consumer
3:30 - Diverging FAANGS
8:20 - Big tech profitability
13:20 - US-China hostilities
16:00 - Operating in China
19:00 - Weaponised trade
25:30 - Investing in China
29:00 - Sustainability and AI
37:00 - 3 favourite questions

A stealthy small cap quietly building a market monopoly

Investment management can be a brutal business. When you're talking small caps, the brutality is amplified orders of magnitude. 
Between March 20 and September 3 last year, the ASX Small Ordinaries Index sky-rocketed 44.38%. That's the kind of performance that will make a fund manager euphoric, but also nervous. Mean reversion is a thing. 
Eventually, you need to pay the piper for that kind of performance. And pay the piper the small cap sector most certainly did, in the form of a 25% downward correction.  
But just as what goes up must come down, what goes down will eventually go up. And we may have passed that inflection point, with the Small Ords Index up over 11% in the last month. 
In this episode of The Rules of Investing, Livewire's David Thornton sat down with Donny Buchanan, Co-Founder, CIO and Portfolio Manager for the Lakehouse Small Companies Fund. 
Donny's fund has been swept up in the sell-off. But frankly, so has just about every fund. What's important is how they set themselves up for the recovery. You make money in the buying, after all.  
Donny discusses the problems associated with valuing tech growth, the importance of believing in and sticking to your fund's mandate, and the lessons he's taken away from this latest sell-off. 
He also offers up a small cap tech stock that is quietly forming a monopoly by creating its own ecosystem. 

Is a golden era for income investors coming?

Fixed income has had a torrid time of it the last year – in fact, by some measures it’s been the worst year on record – with US treasuries losing about a tenth of their value. 
Since the beginning of this year, global bonds have recorded their worst performance on record, with the Bloomberg Global Aggregate Total Return (USD) Index down around 10% year to date - equating to $3.76 trillion in lost value. 
This performance has also coincided with a sell-off in global equities, with the MSCI World Net Local Total Return Index down around 21% over the same period.The last time that we saw a multi-month sell-off in both global equity and bond markets was in 1994 – a time when the Federal Reserve also had to sharply reverse policy.
But if you’re thinking about selling out of fixed income – think again. Crystallising a loss by panic selling may be the worst thing you can do.
Joining us for today's episode of The Rules of Investing is Andrew Canobi, director of Australia Fixed Income at Franklin Templeton. He’s been in the role since 2014, and is responsible for steering macro strategy, credit research, and fixed income portfolio construction. Prior to that, Andrew was director and portfolio manager for Deutsche Asset & Wealth Management. He also had stints at Invesco and ABN AMRO.
What goes up must come down, and as Andrew explains, yields can only go so high, so we mightn’t be very far from a golden era in fixed income. 
He also gives us his take on the inflation cycle, why we should take our cues from the market rather than central bankers, and where the best value exists in fixed income. 
This episode was recorded on June 18, 2022. 
Timestamps
1:20 - Are markets at DEFCON 1?
2:25 - Will central banks do too much or too little?
3:30 - Should we take cues from central banks or the market?
8:00 - How is supply side inflation tamed by killing demand?
10:00 - Is Australia's housing market the joker in the pack?
14:00 Why fixed income is still a good investment
20:45 - A corner of the fixed income market investors don't know about
22:20 - Investing in overseas bonds
26:00 - 3 favourite questions

How Perpetual’s Vince Pezzullo invests when multiples retreat

Markets are a right mess today, thanks to surging inflation and the fear of what that will do to earnings.  
In this environment, you want companies that have the market position, leadership and balance sheets to survive. However, actually finding these companies is no mean feat. 
On today's episode of The Rules of Investing, Livewire's David Thornton sits down with Vince Pezzullo - Deputy Head of Equities at Perpetual. Vince joined Perpetual in 2007 and has covered a heap of sectors since then; you name it - chemicals, financials, banking, telecommunications, materials and REITS.
He now heads up the Australian Share fund, Geared Australian Share fund, Direct Equity Alpha fund and the Perpetual Equity Investment Company (ASX:PIC) with about $435 million under the hood.
There's not much we don't cover in this episode. We take a granular look at the affect inflation is having on valuations and company decision-making, the structural shifts afoot in the energy market, and the qualities every company in your portfolio should have. 
We even discuss an Irish gambling stock making waves in a wide-open US market.   
This episode was recorded on June 23, 2022. 
Timestamps
1:45 - Company margins
5:00 - Investing to get down the cost curve
6:00 - DuPont ROE
7:30 - Growth stock valuations
9:30 - Energy, the global tax on growth
10:45 - Shifting trade flows
13:10 - Santos
14:30 - Energy sector going from spot price to contracts
19:45 - Banks margins and rising rates
23:00 - Inflation: 1990s vs 1970s
25:30 - An investment checklist during high volatility
28:00 - The limit to duration risk
29:10 - The importance of real assets
32:00 - The Irish bookmaker making waves in the US
39:00 - 3 favourite questions