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The Millennial fund manager who pounded the table on Afterpay

William McInnes
Nov 15, 2021

Very few fund managers would be able to offer better insights into the customer bases of stocks Adore Beauty and Afterpay like Firetrail Investment Management’s Eleanor Swanson.

As a rising star within Firetrail’s small companies team, she has a sharp insight into how the younger generation think, act and spend differently.

She was central to the firm’s success in backing Afterpay, with her determination the stock was worth backing winning over senior fund managers.

“We had debate within the investment team where I was saying, ‘guys, people love this, they’re using it over and over again’, and they’d say: ‘why are they using it? It’s just a fad’,” she says.

“I was bringing that more Millennial perspective, that when you’re at university, going from paycheck to paycheck, maybe you can’t afford that dress you want, and so it’s great to pad your paycheck out for an extra six weeks.

“I guess being younger, you definitely have a different viewpoint, and you definitely bring something to the team.”

Backing Afterpay

Swanson’s battle to win over Firetrail’s analysts and invest in Afterpay is recounted in Buy Now, Pay Later: the incredible story of Afterpay written by The Australian Financial Review’s Jonathan Shapiro and James Eyers.

“In early 2019, she’d convinced one of Firetrail’s funds to buy into Afterpay at around $20. Her pitch at the time was that it was a $56 stock. Her models suggested it was worth even more, but was wary of startling her colleagues who already thought it was too expensive,” the authors wrote.

Swanson first pitched Afterpay to the value-orientated Firetrail when the stock was just north of $10. But risks were swirling at the time as policymakers debated whether the company’s business model should be classified as providing credit.

“The real ‘aha’ moment with Afterpay was when we started to understand those customer cohort trends,” she says.

“If you look at Afterpay in the early days, you could see with the customers, the frequency of spend was just ratcheting up every year. They’d go from using it two times a year, eight times a year, and up to 20 times a year.”

Swanson says Afterpay’s movement into other verticals outside fashion and make-up also helped bolster the investment case.

“You could just see that the potential for the average order value to tick up and the frequency of spend was building out even more, so they were just building this incredible ecosystem,” she says.

“And when you run frequency of spins, and average order value through your model, you just get the most incredible uplift in revenue.

“The final piece of the puzzle is just the penetration of the Millennial population in each market. We saw what they did in Australia, where they got up to 40 per cent penetration of Millennials. If they could get anywhere close to that in the US, it was just going to be extraordinary.”

Her unique insight into Adore Beauty was a key reason behind the firm backing it early on, although its fortune hasn’t quite mirrored Afterpay’s.

“A lot of my friends loved Adore Beauty, and they used it all the time,” she says. “It definitely helps knowing people that know about the company.

“We’re currently at about 12 per cent of beauty spend being online in Australia, whereas the UK and the US is closer to 30 per cent. So just from a top-down perspective, it looks super compelling.”

Swanson admits the performance hasn’t been as good as she might have hoped, but still believes there’s more to come from the online beauty retailer.

“The thing we underestimated with adult beauty is that they were adding so many customers during the COVID period, and we underestimated the churn of those new customers off the platform,” she says.

“We still like the business, though, and we still think from a thematic, top-down market share perspective, they’ve got huge runway. But we probably overestimated the potential loyalty of those COVID customers.”

Blazing a trail

Swanson’s passion for investing was sparked during her university days, where she studied a double degree in commerce and science, majoring in immunology.

“I thought I wanted to be a doctor and go down that route,” she says.

“But there was this great subject at the University of Sydney called ‘vals’, or financial valuations, and that’s where it kind of clicked I loved looking at companies, understanding their business models, figuring out the cash flows, valuing it and then figuring out whether you wanted to buy or sell it.”

After a graduate stint with JPMorgan, Swanson moved to Macquarie Investment Management, where she worked under Blake Henricks, who would go on to found Firetrail alongside Patrick Hodgens.

When the pair split off to open the new boutique, Swanson didn’t hesitate in joining them.

“Honestly, I didn’t feel like it was a big risk because Patrick and Blake, have such great brands in the market as great stock pickers, and they built up a huge client base at Macquarie that were very loyal,” she says.

Firetrail founders Blake Henricks and Patrick Hodgens

She sits on the investment team of the firm’s small companies fund, which made a return of 56.44 per cent in the 12 months to October 31, an excess return above benchmark of 25.42 per cent.

“I love the alpha potential in small caps,” she says. “The large cap guys get excited if they’ve got 30 per cent upside in the stock, whereas we would get excited if there’s 200 or 300 per cent upside.”

Swanson is presenting at this year’s Sohn Conference, joining the likes of Charlie Munger, Phil King and Mark Nelson at the philanthropic investment conference in December.

“From a personal perspective, I’m super excited to present at Sohn because they support the Shake It Up foundation,” she says.

“I’ve got two grandparents who’ve suffered from Parkinson’s, and they do incredible work, funding research into Parkinson’s because there’s so much they don’t know about it and there’s very little treatment to help out. It’s degenerative and it’s horrible.”

Finding an edge in health

Her background studying immunology has been a boon to her analyst career, giving her a unique ability to provide an insight to the medical technology sector.

When asked about the fund’s investments in Telix Pharmaceuticals and Aroa Biosurgery, she’s quick to descend into technical medical jargon even the most seasoned fund manager would struggle to keep up with.

“With Telix, they’re trying to diagnose the cancer through imaging through PET scans or SPECT imaging,” she says.

“They’ll actually take a radioisotope and bind it to an antibody injected into you, and that antibody will bind specifically to the antigen, so when you’re imaging the patient, it just lights up the tumour.”

Firetrail was also a pre-IPO investor in Aroa Biosurgery, which is up 50 per cent since listing in July 2020.

Getting in early

The firm isn’t afraid to play around in the IPO and pre-IPO market, making some big early wins from a number of recent floats.

“We’re very active in that part of the market and there’s so many opportunities, particularly at the moment,” she says.

“We were just recently in Judo Bank and also SiteMinder, and they’ve both done incredibly well already.”

Swanson says the firm’s success is cemented in its view that every company has its price.

“We very much need to know what that price is, so we build super detailed models, figure out how we’re different, figure out the earnings, and then we can take a view on the stock and figure out the right time to get in,” she says.

“The process is very much founded in valuation, which I love because it takes away the stress of just trying to follow the crowd. We’re just looking for the metrics we know we want the company to hit.”

This article was originally posted by The AFR here.

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