How the best-performing Aussie equities manager is tackling 2023
If you've spent some time online over the past month - and who are we kidding, we all have - you've probably noticed an enormous amount of content dedicated to the yearly phenomenon of the New Year's resolution.
Want to finally get fit? Here's a 10-step plan on how to do it. Want to stick to that diet? Here's a list of easy steps so you can actually keep to your resolution this year. Desperate to stress less? Meditate, practice gratitude, sleep more, prioritise your happiness and repeat.
But what about increasing your investing acumen as we dive into another calendar year for markets? Or learning how to reset your strategy so that you can actually achieve the equivalent of an investing touchdown this year? Now, that's something that I can get around.
"Oh, Ally," I hear you sigh. "Who could possibly do that?" After all, markets continue to be extremely volatile, a bloody war persists in Ukraine, energy prices are still *expletive* and inflation and rising rates continue to plague investors' nightmares.
So, who better to distil their strategies and ideas into one easy read than the fund manager that took out not only the top gong but also the silver and bronze for its stellar performance in 2022?
I'm talking about Lazard Asset Management's Aussie equities team. Lazard's Select Australian Equity Fund, Defensive Australian Equity Fund and Australian Equity Fund took out all three top spots among the 145 Australian equity-focused funds listed on Livewire's 'Find Funds' marketplace.
In this wire, portfolio manager Aaron Binsted, who helps manage each of these three funds, shares what worked in 2022, the themes (and stocks) the team is backing in 2023, and why he believes there's still some pain to be felt by the overall market.
Plus, for a little bit of fun, Binsted shares his own resolution for the year ahead.
1. What are three elements of your investment process that contributed to the Fund's investment performance last year?
The first is incredibly simple, and that is that we only buy stocks that we think are going to add value to the portfolio.
That might sound like an odd thing to say, but most Aussie equity managers will own stocks - not because they think they're good investments - but for index reasons. That could either be because they're large, individual stocks or they're part of sectors that cumulatively have large market caps. So they may not be great investments, but they don't want to be too different to the index, so they own them.
We don't do that for our Select Australian Equity Fund, and that really helped in 2022, because there were some stocks and sectors with big market caps which really got crunched. That hurt a lot of people, and so relatively we've benefited. Instead, we always focus on the business fundamentals and valuations.
The second may sound like an investment platitude, but we're long term.
I know absolutely everyone says that but we've had a lot of external consultants look at us over the years and one of the things they say is that long-term earnings yield is a differentiating factor of our investment style and that is really powerful over the long run.
We are buying sustainable earnings streams at attractive valuations, so over the last 15 years, the earnings per share for our Select Australian Equity Fund has grown at 4.6% per annum faster than the ASX 200. That means that our earnings per share growth has been around 96% more than the general market over the last 15 years. That makes a huge difference over time. And while the multiples of different stocks may ebb and flow year to year, that superior earnings growth delivers in the long run.
And the third is that our analysts don't pitch stocks to portfolio managers.
We separate the investment decision from a stock's valuation and that takes a lot of emotion out of investment decisions. Our analysts don't promote stocks. Instead, they're trying to get valuations right. So I think that sets up a really good behavioural pattern among our research analysts.
2. Which stocks made the most meaningful contribution to your performance in 2022 and do you still own them?
The two stocks that really added a lot of value in 2022 were in the energy space. So Woodside Energy Group (ASX: WDS) and Whitehaven Coal (ASX: WHC). We are mostly out of Whitehaven Coal now. It's up 10-fold from its lows. So that was a significant contributor. And Woodside Energy has performed really well but it remains a large holding in the Fund because we think it's got a really attractive outlook from here. And another stock that added a lot of value in 2022 was Rio Tinto (ASX: RIO) and we still own that too.
3. What are some of the largest positions in the Fund and why are you backing them in 2023?
QBE Insurance (ASX: QBE) is a very large position in the portfolio. The key reason we own it is that for the last two years, there's been a very strong premium cycle; insurance premiums have been going up a lot. They work through the P&L of insurance companies with a delay so we think that QBE has at least two and potentially more years of really strong earnings growth almost baked in. And that is just not priced into its share price at all. And also, there's the added kicker of higher bond yields, which increase the EPS as they can earn a higher running yield on the bonds they purchase. So I think there's a really strong earnings tailwind for QBE and it's incredibly attractively priced - forward multiples are below 10 times on QBE. So huge earnings momentum and a low valuation.
We also own Insurance Australia Group (ASX: IAG), but it's not as big a position and we think there's more upside in QBE as commercial insurance has a much stronger cycle than home and motor insurance. So while they have been strong, it just doesn't have that same leverage.
Woodside is another big position in the portfolio. We think it's got really strong cash flows and very attractive dividends. It boasts really strong production growth over a number of years, with Scarborough and Sangomar coming online. There are also some great greenfield projects, particularly in the Gulf of Mexico, like Trion and Calypso, which could add a lot of value. We also think the skew is definitely to the upside on LNG pricing for the next five to eight years. So we think the risk-reward trade-off is still really attractive for Woodside.
We also really like Collins Foods (ASX: CKF). It underperformed in the back half of 2022, with cost pressures hitting margins. We think that's a short-term pressure, which has allowed us to accumulate it at a low share price. They've got really long-term structural growth through store rollouts, both in Australia, but primarily in the Netherlands. And then we should have some cyclical increase in profits when margins recover, as those short-term cost pressures ease off.
4. Which positions worked against you in 2022? Did you sell out of these positions or do you believe they could be in for a turnaround in 2023?
A position that hurt us last year, that we exited, was Alumina Limited (ASX: AWC). We've owned that in varying degrees over a long period of time, but there were two major headwinds that meant it underperformed. The headwind that everyone saw was the soft alumina commodity price, which meant that the share price performed badly. The reason that we sold it was they have a refinery in Spain called San Ciprián, which buys energy from the spot market linked to oil. And when energy prices went nuts, we were very worried about the margin crunch they were going to experience. So that led us to exit the stock. Since then, it's released a production report, which revealed they were not going to pay a dividend for the current period and that may continue for the year.
Another one that we have held and indeed bought more of through that period was Collins Foods. That underperformed in 2022, but we think that is due to short-term, cyclical pressures, and we really like that long-term story. So that's one that we've held and added to on margin weakness.
5. 2022 was a difficult year for many investors. Do you expect 2023 to deliver better results?
For the market, we think there are still quite a few headwinds. Firstly, valuations - while they're not extreme, they aren't super attractive. So I'd say valuations are relatively full, but not worrying.
What really gives us pause is the fact that we've just had a year of incredibly fast and large monetary tightening. And this may continue in the first half of 2023. That is definitely going to have economic impacts. It's just a question of how broadly they will be felt.
I think that's a risk and so I'd say we'd be cautious about the year ahead. That said, we think we're really well positioned from a portfolio perspective. Two of the large sectors that I mentioned that we are invested in - energy and insurance - are independent of the economic cycle. Energy is attractive because of underinvestment. And we really like insurance because of the premium cycles. So we're quite bullish on the portfolio, but we think the market may have a more difficult time.
6. What are the major themes you are pursuing in 2023?
Compared to the rest of the market, we're underweight domestic cyclicals, although we do have positions in more defensive consumer names, like food retailers. Other than Collins Food, we also like Coles Group (ASX: COL) and Metcash (ASX: MTS).
Given our outlook for the overall market, we are avoiding economically sensitive domestic names, particularly within discretionary retail and housing, like JB Hi-Fi (ASX: JBH), Super Retail Group (ASX: SUL), Boral (ASX: BLD) and CSR Limited (ASX: CSR).
7. And for a bit of fun... What is your New Year's resolution for 2023?
Actually having "Date Night" with my wife rather than continuing to talk about how we need to go out without the kids.
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15 stocks mentioned
3 funds mentioned
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Ally Selby is a content editor at Livewire Markets, joining the team at the end of 2020. She loves all things investing, financial literacy and content creation, having previously worked for the likes of Financial Standard, Pedestrian Group, Your...