In the spirit of reconciliation Sohn Hearts & Minds acknowledges the Traditional Custodians of country throughout Australia and their connections to land, sea and community. We pay our respect to their elders past and present and extend that respect to all Aboriginal and Torres Strait Islander peoples today.

Why Sohn’s top stock pickers want investors to play it safe

Jonathan Shapiro, Jemima Whyte, Alex Gluyas, Emma Rapaport and James Thomson
Nov 18, 2022

Top global money managers are telling investors to steer clear of companies that don’t make money and invest instead in unloved but profitable businesses, as continuing central bank interest rate rises threaten to keep markets falling.

They railed against being tempted back into the sort of high-growth, loss-making stocks that have been popular for years but are now dangerous because they rely on the capital markets to survive.

In an event dominated by geopolitical discussion about Russia and Ukraine, former hedge fund manager turned human rights activist Bill Browder told the audience at the Sohn Hearts & Minds investment conference in Hobart on Friday to sit on the sidelines – and in cash – for a bit longer.

MONA founder David Walsh says equities markets need growth to offset risk. Alastair Bett

Historic Sohn picks such as Delivery Hero, Megaport and crypto exchange Coinbase were this year replaced by fallen financial services giant AMP, toll road operator Transurban, and Champion Iron.

“There are going to be some really sweet opportunities to invest once we get to a point when interest rates are peaking and inflation is starting to go down,” Mr Browder said, forecasting opportunities across “all sorts of assets”.

Professional gambler and Museum of Old and New Art founder David Walsh issued a brutal warning to the 600-strong audience in Hobart that risk levels are rising and could ultimately sink returns in equities markets.

“What is not clear to me is whether the variance, the amount of risk, isn’t also going up. If it is, and if that variance is expanding faster than the growth of the market, then one day it will all turn to shit.”

Catherine Allfrey backed the inflation protection of Transurban. Alastair Bett

At the annual conference, which raises funds for medical research, speakers are invited to pitch one stock to invest in over the next 12 months. The best ideas create the bulk of the portfolio for the $560 million ASX-listed Hearts & Minds investment fund.

The fund, which donates a percentage of assets to charity, has slid 41 per cent over one year to trade at an 18 per cent discount to its net asset value after its run of tech-heavy bets soured.

“As investors we always need to consider risk and commodities are cyclical, but that also means miners bounce back,” Regal Partners’ Tim Elliott said in his presentation on ASX-listed Canadian iron ore miner Champion. “Real risk is buying some profitless growth stock on 20 times projected sales on heroic assumptions which often disappoint.”

Champion, Mr Elliott said, allowed investors to buy “hard assets at less than half their replacement cost” in a market that was difficult and expensive for new competitors to enter.

Fred Woollard of Australian fund manager Samuel Terry eyed deep value in AMP because “the sum of the parts are worth more than its market capitalisation of $4 billion”.

Tribeca’s Jun Bei Liu decked herself out in luxury brands to make the bull case for China Tourism Group Duty Free.  Alastair Bett

Mr Woollard said conservative value investors had been wrong about AMP for years, but “AMP keeps getting cheaper”, and with a new CEO at the helm the time to buy was now.

‘Don’t leave this one on the road’

Among the other stock tips touted by fund managers were Eurofins Scientific by David Cooper, and Claremont’s Bob Desmond – in sneakers and a Nike jumper – picked sportswear giant Nike. Tribeca’s Jun Bei Liu decked herself out in luxury brands to make the bull case for retailer China Tourism Group Duty Free.

Tim Carleton of Australian hedge fund Auscap told investors to buy, which he said was trading like a tech stock when it in fact had more in common with a media company.

“With investing you don’t get extra returns for increasing the degree of difficulty. My advice: don’t leave this one on the road,” he said.

Wavestone’s Catherine Allfrey tipped monopoly toll road operator Transburban: “Inflation with this stock doesn’t matter because the prices it charges are linked to CPI,” she said.

While Transurban has high debt levels, inflation will serve to increase nominal revenues whilst devaluing the debt in real terms.

The shift in favoured stocks reflects a turbulent year in which higher inflation forced central banks to raise interest rates sharply, while the war in Ukraine strained the global supply of commodities.

Several presenters revealed they were hunting for value created by the sharp sell-off in technology stocks.

FACT Capital’s Joyce Meng tipped Irish video game developer Keywords Studios and Nick Griffin of Munro Partners said the 30 per cent slide in Dutch semiconductor play ASML allowed investors to buy into a trillion-dollar opportunity.

Existential threat

Sohn Hearts & Minds was first held in 2016 and has raised $40 million for medical research.

But so-called fundamental investors – those guided by the founding principles of investing, such as attractive free cashflow and sustainable competitive advantage – are facing an existential threat.

New York-based hedge fund manager Ricky Sandler of Eminence Capital said fundamental investors accounted for 75 per cent of the equity market 15 years ago, but that had shrunk to 45 per cent.

Meanwhile, the rise of environmental, social and governance investing, increased retail trading and hyperactive hedge fund trading strategies, had further marginalised the role of stock pickers in setting prices. This, he said, meant investors required a “mindset change”.

“Fundamental investors are mostly irrelevant to the stock market in the short run,” he said. “Over time, we think, the markets are a weighing machine and fundamental investors eventually, if they can stick with their convictions, will win out.”

Stocks were not more volatile and their movements “no longer provide fundamental investors with clues”, he said.

Tasmanian Premier Jeremy Rockliff opened the conference, and AFL chief executive Gillon McLachlan made the case for a Tasmanian stadium. The event closed with Australian rock band Hunters & Collectors.

This article was originally posted by the AFR here.

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