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'Very, very high conviction’: Sohn fundie’s top stock pick

Tom Richardson
Nov 8, 2021

Eley Griffiths Group portfolio manager David Allingham says the Sohn Hearts and Minds Conference is the Australian investment management industry’s answer to the Woodstock Festival.

The former EMI Music employee turned small-cap fundie is buzzing with excitement about presenting at the investment leaders conference on the same stage as Charlie Munger, who co-hosts Berkshire Hathaway’s annual meeting, known as “Woodstock for Capitalists”.

“You know, I’ve been at this game 17 years. I joined Eley Griffiths as a very green, young guy in 2004 who’d come from the music industry, of all places,” Alligham says. “It’s obviously such a great privilege and highlight of my career to be able to take the stage and great to be involved for a cause like medical research.”

GQG Partners

The EGG Small Cap Fund that Allingham runs has returned 11.68 per cent per year since inception, versus 7.34 per cent for its benchmark, the S&P/ASX Small Ords Index, and the fundie is bullish on its stake in GQG Partners, which was 2021’s largest initial public offering.

“We never play IPOs for a stag [profit],” he says. “We don’t think, ‘ah, the book’s hot, everyone’s in it, you know, it’s gonna go up 20 per cent on day one’, that’s not our style. Our style is ‘do the work, have conviction in it and if the stock trades down on day one, fantastic, we’ll buy some more because we know we’re buying it for the three years’.”

Allingham is a massive fan of GQG’s founder Rajiv Jain, who still owns 68.6 per cent of the $5.9 billion fund manager with $US115 billion in funds under management (FUM).

“Look, that business I think did $US21 billion of inflows in FY 2021, the prospectus forecast has them to do $US14 billion in the first half of FY 2022, and only forecasts $3 billion in the second half to June 30,” he says. “So I think those assumptions are very conservative. I think the prospectus FUM they’ve got to close at June next year, they’ll be very close to exceeding that by [this] October.

“It’s a new-age funds management house. He’s got investigative journalists working for him, he’s got people he hires just to tell him where he’s wrong, just doomsdayers.”

According to Allingham, the kicker is GQG has a track record of market-beating performance and management fee structure undercutting its competition in the blue-chip international equities space.

“I think his [Rajiv Jain’s] blended fee rate across the business is 50 basis points. So, I think what he’s got is a cutting-edge fee rate. His retail products are 70 to 75 basis points flat, no performance fees, so he’s got a very low fee rate and exceptional track record.”

Hot sectors and Afterpay

If Allingham could turn back the clock and give himself some advice on his first day at Eley Griffiths 17 years ago, he’d say, “don’t be stubborn”, as it’s one of the great weaknesses in a fund manager, and “learn from mistakes”, as you’re going to make them.

“It’s very tempting to chase momentum in this market,” he says. “But you don’t buy a stock because it’s going up. If you don’t have conviction, and you haven’t done the work, your foundation is never set properly. And therefore, the moment the price action changes against your expectation, you’ll be very vulnerable to just following the price action down.”

The fundie says he’s style-agnostic and sees the merits of both growth and value at different points in the economic cycle.

He’s also “a believer” in today’s market darling, the lithium sector. “From this level you’ve got very good upside in the producers still, with less downside risk should the retail euphoria subside for whatever reason in the coming six to 12 months,” he says.

“I wouldn’t say we’re overweight the sector. We’re kind of market weight. We acknowledge valuations moved aggressively. The pricing is very, very toppy in the spodumene market at the moment, but it may well stay so for a while, so we want to keep an oar in the water there.”

Eley Griffiths’ preference is for lithium miners in production, such as Pilbara Minerals, and Allingham suggests the valuations for popular pre-production players may have run too hot. “The money’s cycled out of, I guess, the more mature producers into the sort of pre-development-phase stocks where there’s clearly more speculation down there,” he says.

One stock he knows more about than pretty much anyone is the buy now, pay later trailblazer Afterpay. In 2017, when Afterpay announced a merger with payments group Touchcorp, the fund manager found itself owning around 9 million shares.

“Don’t even get me started on what the value of that is now,” he exclaims. “Well over a billion dollars, and we initially invested $20 million to $25 million. We rode it to the $40 to $50 range, it went into the ASX 100 so we had to recycle that company.

“That’s probably been the most famous and best investment. And Anthony Eisen and Nick Molnar – if you think about the quality of small-cap management teams, I mean they’d be right up there as the best we’ve ever come across, as a double act.”

After selling Afterpay on the basis that its valuation grew too large for a small-cap fund, Allingham says he looked at the posse of junior buy now, pay later players aiming to copy its success. However, Eley Griffiths passed on them all.

“I think it’s been the right call,” he says. “None of them have done anything. It’s been a bloodbath, to be honest. It’s very, very competitive now, you’re dealing with huge amounts of capital, relatively thin margins.”


While the stock he’s chosen to recommend for Sohn can’t be revealed for now, Allingham exudes a bullish fervour around it.

“It’s one of our highest conviction positions in many years,” he says. “Every stock has its risks; there’s always something to catch you out – that’s the law of small caps. But I think when we frame the outlook for this business on a five-year view, the conviction around it is very, very high. We think calendar 2022 should be a very successful year for the company and there are a couple of catalysts for that value to be recognised in markets.”

The December 3 conference and its fundraising activities for medical research will also be personal for Allingham.

Three years ago, his investment mentor, friend, and Eley Griffiths’ co-founder, Brian Eley, died from motor neurone disease. The high-achieving fund manager says he owes all his success to both Eley and co-founder Ben Griffiths.

“Look, without doubt, the founders of this business have taught me everything I know about markets,” he says. “I think I’ve taken everything from both of those guys and tried to continue to improve and learn. They’ve given me the foundation to run money in small caps.”

The Sohn Hearts & Minds conference will take place on December 3.

This article was originally posted by The AFR here.

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