The Rules of Investing

Peter Morgan: The best asset I've ever bought

Peter Morgan is one of the most accomplished investors in Australia. While he might not be a 'household name' these days, ask anyone who's been around the industry more than 10 or 15 years and they'll likely tell you how he helped build Perpetual from an obscure company managing $70 million worth of perpetual trusts (hence the name) to a $10 billion giant of the Australian funds management industry. He worked alongside investors like Anton Tagliaferro, John Murray, John Sevior, and Matt Williams as they all made names for themselves in the industry.
After leaving Perpetual in the early 2000s, he founded 452 Capital, which went on to become one of Australia's most successful boutiques. Then in 2009, he abruptly left the industry after being diagnosed with a rare and deadly form of brain cancer - a diagnosis that was later shown to be incorrect, but not before a round of chemo.
This experience left him with an entirely new perspective on life, one that valued experiences and memories over gathering an ever-larger pool of assets. Throughout all this, he says the best thing he's ever bought is his dog, Blaze - $300 well spent indeed!
In this episode of The Rules of Investing podcast, we delve into his incredible story, hear how he manages assets differently now as a private investor, and hear some of his views on markets and stocks today. 

How to lower your risk and maximise returns

Small caps are often thought of as being high risk, but that doesn’t have to be the case. With the right approach, it’s possible to maintain a moderate level of risk, while still producing outstanding returns.
This is exactly the approach that Richard Ivers, Portfolio Manager at Prime Value, takes in managing the Emerging Opportunities Fund. By focusing on high quality businesses with relatively few risks and strong competitive positions, he’s managed to outperform the market in 87% of months that it fell.
“A shorthand method for working out quality is that if you can work out where the earnings will be and have a high level of certainty on where they'll be in three to five years, typically, that means that it's a quality business. Such a business will be able to withstand all the pressures and issues that may come at it.”
In this episode of The Rules of Investing podcast, he explains how his experience in the corporate world helps inform his investment decisions, we discuss a range of Australian companies across the finance, media, and beverage industries, and he details his low-risk approach to Aussie small cap investing.

The big picture view on Aussie equities

In the under-researched and often illiquid world of small and mid-caps, stocks are largely driven by individual factors. If a company’s product or service succeeds and earnings improve, the stock price usually follows. But, as Matthew Haupt, Lead Portfolio Manager at WAM Leaders explains in the latest episode of The Rules of Investing, in the world of large caps, where stocks are heavily researched and traded by professionals, macro factors play a much larger role.
“Given the breadth of the revenues of these bigger companies and the slower growth rates, the macro factors are more of a driver.”
In this episode, he tells us how he uses macro analysis to help inform the stock picking decisions at WAM Leaders, we hear his views on a range of key ASX stocks and sectors, and he share his take on Jeremy Grantham’s prediction of a bubble in US equities.

The ‘special’ stocks Emma Fisher is hitching the Airlie wagon to

Truly special businesses don’t come along very often. Those with enduring competitive advantages, the ability to grow for long periods and produce high returns on capital. When you find a rare business like this, it’s important to think long term, and “hitch your wagon to those economics”, says Emma Fisher, Portfolio Manager and Head of Research at Airlie Funds Management.
That’s exactly what she did when making her first recommendation as an analyst back in 2013. As the time, CSL was trading around $60 per share. She continued following the company, and when starting at Airlie in 2016, advocated holding the stock across their portfolio.
Her patience and commitment have paid off, with CSL up nearly five times from her initial recommendation, and three times since 2016. But today CSL faces new challenges in a COVID-affected USA.
In this episode of The Rules of Investing podcast, we discuss those challenges and how CSL is placed to navigate them. We also hear why markets are underestimating Aussie retailers yet again, and we learn about an Aussie small cap powering ahead on its Formula 1 credentials.

Grantham: This is a bubble, this is serious

Jeremy Grantham is famous for his ability to pick bubbles. The co-founder and Long-Term Investment Strategist at GMO Investment and Asset Management correctly called the Japanese equity bubble in the late 80s, and the tech bubble in the late 90s and early 2000s. All through 2007, he warned investors of the bubble, telling investors in a September ’07 article for Fortune Magazine:
As wonderfully favorable factors cool off, asset prices will be under broad pressure, and risky assets will be under extreme pressure. If the credit crisis gets out of control, this will happen quickly and painfully. - Jeremy Grantham, September 2007
But Grantham is no permabear. In March ’09, when many investors capitulated, he wrote ‘Reinvesting when terrified’, telling investors that it was time to start putting cash to work, as equities were greatly undervalued.
We now believe the S&P is worth 900 at fair value or 30% above today’s price. Global equities are even cheaper. - Jeremy Grantham, March 2009
In an exclusive interview that runs for nearly two hours, Grantham explains why he believes we’re in the late stages of another great bubble and his expectations for when it will come unraveled. He also explains why others fail to act in the face of bubbles, and we discuss some of the assets best placed to weather the storm.

Making money from unloved and out-of-favour stocks

It takes a special type of person to be a contrarian investor. Few people are willing to buy companies while others predict doom. It means accepting that you won’t always get it right, and the ability to put aside preconceived ideas about a company and focus only on the fundamentals.
One investor who’s made a career of this approach is Simon Mawhinney, Chief Investment Officer at Allan Gray Australia. It was this contrarian streak that saw him buying banks and retailers in middle of the COVID-crash, a decision that turned out better than anyone could’ve expected at the time.
But it doesn’t always go so smoothly, as was the case with his investment in the now-defunct Arrium, which we discuss in this episode of The Rules of Investing. We also discuss two current investments from the Allan Gray portfolio, and one former market darling that he’s investigating currently.

Winning the vaccine trade - where to next?

Getting the ‘vaccine trade’ right was perhaps the single biggest influence on performance for most fund managers in the second half of 2020. Equity markets jumped 10% in November on the back of the announcement, a huge month by any account. But for the managers who made the right call and backed it, a good year’s worth of returns were realised in a month.
One fund that called it better than most was L1 Capital’s Long Short Fund, which posted just shy of 32% for the month. Founders and Joint CIOs, Mark Landau and Rafi Lamm, spent a huge amount of time last year researching vaccines, which gave them the confidence to fully position the portfolio for a positive result in November.
In this episode of The Rules of Investing, Mark and Rafi tell us how far along we are in this ‘vaccine trade’ and how it plays out from here. We also discuss what went wrong following the IPO of the L1 Capital Long Short Fund, and they share several of the stocks that they think have outstanding opportunities ahead.

Inside Morgan Stanley’s bullish bet on the recovery

In early 2020, Nathan Lim, Head of Wealth Management Research at Morgan Stanley Wealth Management, noticed a strange phenomena. Chinese New Year had just passed, but thermal coal consumption wasn't recovering as it normally does. This rang alarm bells, and Lim was soon warning clients that the economic cost of the coronavirus would be far greater than people appreciated.
Fast forward to a year later, and the world and the economy are entirely different places. Importantly for investors though, the cycle has been reset. Markets were already late-cycle going into 2020, but the economic upheaval of last year has brought spring time upon investors again.
"We think we are very much early cycle, and we think you should be adding risk to your portfolio."
In this episode of The Rules of Investing podcast, Lim details how and why it's time to add risk, explains their process for picking great fund managers, and he shares some of the managers they prefer for today's market conditions.