Interview: An investor’s guide to large caps

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Sean: Welcome to the Fear & Greed daily business interview. The local

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Sean: equity market hasn’t had a great time of it recently.

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Sean: The market a week ago hit a technical correction down

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Sean: 10% from its peak, with interest rates, geopolitical uncertainty, the

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Sean: global outlook including oil prices and other factors weighing on

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Sean: the (inaudible) . So where to from here? How should

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Sean: investors think about the market, particularly large caps? I welcome

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Sean: this morning Matthew Haupt, lead portfolio manager of WAM Leaders.

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Sean: Matthew, welcome back to Fear & Greed.

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Matthew: Thank you for having me. Great be here.

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Sean: So WAM Leaders invest in large caps. What is it that

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Sean: you’re looking for?

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Matthew: Stocks that go up in value, I mean ideally. But

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Matthew: yeah, what are we looking for? Generally we look across

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Matthew: the market and we’re just trying to identify companies that

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Matthew: are obviously valued correctly or cheaply, sorry. And then having

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Matthew: a range of factors which will drive a share price

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Matthew: up, whether they be macro tailwinds or company- specific catalysts.

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Matthew: But just trying to identify a reason why that stock

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Matthew: will go up in value and why the market will

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Matthew: look at it differently and apply a different valuation at

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Matthew: a point in time. So I mean, that’s the key

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Matthew: thing with stocks is trying to identify the reason why

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Matthew: the market is valuing as it is and then finding

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Matthew: the reason why it will change that way it looks

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Matthew: at a company. So I mean, that’s the key thing

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Matthew: with investing is trying to find that at all times.

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Sean: Okay. So is there a sort of a process here

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Sean: whereby you look at the top 50 or whatever WAM Leaders

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Sean: is in and obviously, there’s going to be a quantitative

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Sean: aspect to it, but then the qualitative aspect, how do

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Sean: you do that part of it?

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Matthew: Yeah, I mean qualitative is the thing you can’t really

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Matthew: see as such. So for us it’s really around the

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Matthew: quality of management. I mean, that is crucial as we

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Matthew: all know in our own lives and businesses management is

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Matthew: crucial as they set the tone and set the environment for

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Matthew: the workforce to prosper. So ideally on the qualitative front

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Matthew: is meeting with management, spending as much time as we

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Matthew: can and channel- checking previous employees just to see have

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Matthew: they got a track record in success, because as you

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Matthew: know, the top 50 is pretty competitive, the growth rates

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Matthew: are not outstanding, so management is crucial. So that’s what

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Matthew: we’re trying to identify. And also the depth of management

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Matthew: too. So quite often the CEO, CFO gets all the

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Matthew: headlines, but we’re really looking at the bench strength and

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Matthew: possible successes below as well. So it’s really just FaceTime

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Matthew: with management and channel- checking that actually have the credentials

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Matthew: to outperform. I mean, that’s a real key for us.

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Sean: And just before we kind of leave this kind of

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Sean: line of chatting, what about dividends? How important are they

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Sean: in your process?

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Matthew: Dividends aren’t really solely a focus for us. I guess

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Matthew: the second derivative is high dividend payers generally have good

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Matthew: quality businesses. So dividends isn’t a focus, but a high

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Matthew: dividend paying companies generally a high quality company. So I

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Matthew: guess peeling it back a bit, it’s more that second

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Matthew: derivative part. Is the company high quality? Does it have

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Matthew: good cashflow? All those key things rather than dividends specifically.

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Matthew: So it’s more an outcome of the positive business again.

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Sean: Okay. So let’s look at where we are now. Is

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Sean: it a good time to be in large caps to

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Sean: be thinking about investing in large caps as opposed to mid-

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Sean: caps or small caps for example?

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Matthew: Yeah, it’s an interesting question. Can you time the market

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Matthew: between sectors? Is there a big enough valuation discount between

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Matthew: sectors and why is there a discount? Obviously small to mid-

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Matthew: caps historically look pretty cheap, but you really got to

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Matthew: peel back the reasons why that’s the case and the

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Matthew: index doesn’t really capture what’s underneath the hood. So to

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Matthew: look at index levels solely is missing the point, I

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Matthew: think. You really got to look at what is moving

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Matthew: those indices. And for us that’s the more important thing

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Matthew: rather than size of company. I think the main factors

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Matthew: around what environment are they going into, is it beneficial?

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Matthew: Do they have company- specific reasons why they should go

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Matthew: up or down? Rather than just looking at a size

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Matthew: metric and thinking invest in small caps, because it looks

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Matthew: like it’s a cheap place to invest it sort of

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Matthew: rather than being simplistic.
I think really to do your

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Matthew: homework, you’ve really got to go underneath the hood of

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Matthew: what’s happening in the economy in the business cycle and

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Matthew: the macroeconomic cycle instead of making general call around the

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Matthew: size of a company being a driver of where to invest.

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Sean: Stay with me Matthew, we’ll be back in a minute.

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Sean: My guest today is Matthew Haupt, lead portfolio manager of

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Sean: WAM Leaders. So if we look at some stocks now

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Sean: let’s take the banks on the basis of what you’ve

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Sean: just said. Is there one of the big four, for

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Sean: example, that you think will outperform the others at the moment?

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Matthew: Generally the way we look at banks is which ones

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Matthew: are crowded going into results, because they’re so well- analyzed and

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Matthew: we get monthly data around market shares and the like.

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Matthew: So you really got to look at positioning and at

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Matthew: the moment, National Australia Bank and ANZ I would class

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Matthew: as crowded trades in the banks and Westpac and CBA

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Matthew: are not crowded. So on that basis you’d say the

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Matthew: ones which look the best and we’ve always got a

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Matthew: contrarian bias would be Westpac and CBA. We’d think they

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Matthew: would trade better. Westpac I think kick it off. They’re

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Matthew: the first report. So again, what we would do here

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Matthew: is we’ll see how the first bank report and then

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Matthew: adjust our weightings based off on how that first bank

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Matthew: reports too, because that’ll give you an indication of how

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Matthew: the market is thinking about the results. But overall, the

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Matthew: environment is incredibly competitive.
The mortgage wars are being ongoing

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Matthew: and the deposit wars. So overall, I think the sectors

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Matthew: will perform broadly in line. I can’t see a reason

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Matthew: for the sector to outperform wildly from here. So I

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Matthew: think it’ll be a real litmus test that first result

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Matthew: to see more so on positioning of how people are

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Matthew: positioning banks. I think at the moment, the last time

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Matthew: I checked it’s around a slight underweight in the Australian

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Matthew: bank, so there were a large underweight, but that has

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Matthew: closed recently. So it’d be very interesting to see how that

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Matthew: goes. But generally you trade around which one is crowded

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Matthew: and the under- owned banks. So that’s how we look

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Matthew: at it.

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Sean: Okay. So what about some of the stocks you do

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Sean: like or don’t like? I mean we can go through

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Sean: the sectors, but rather than do that, let’s jump to

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Sean: some of the ones you like.

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Matthew: Yeah, so really interesting market environment too, because the diversions

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Matthew: between stocks is huge at the moment. You’ve got stocks

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Matthew: near their 52- week highs, maybe after the correction we’ve

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Matthew: had just recently, they’ve come off a bit. And then

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Matthew: on the other end of the spectrum you’ve got stocks

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Matthew: near GSC lows. Around 2016 levels, a lot of stocks

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Matthew: are hovering around that level too. So there’s a real

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Matthew: divergence. So again, we’ve got that contrarian picking in our

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Matthew: nature. So we like a lot of the names that

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Matthew: are trading heavily discounted to historical valuations. So a few

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Matthew: of them, I mean, the most recent one really liked

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Matthew: the business Orora. They been the spin out of Amcor.

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Matthew: They had a recent acquisition, which the market is very

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Matthew: skeptical on, the Saverglass acquisition. The market is skeptical, because

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Matthew: of the size and where it came from and the

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Matthew: location.
And we think those fears are well- overplayed. So

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Matthew: Orora looks like a really good investment for us at

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Matthew: this point in time. Again, the acquisition, they’ll get it in

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Matthew: the new year. It’s a higher margin business than in

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Matthew: their existing business. And the proforma numbers put out by

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Matthew: Orora, we think they’re very safe. So we think the

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Matthew: market has got that wrong at this point in time.

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Matthew: And then if we look at another one, we think

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Matthew: Treasury Wine looks pretty good too. And again, it’s an

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Matthew: acquisition. They’re just in the process of raising money for

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Matthew: now. We think that company is well- placed. Predominantly premium

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Matthew: luxury end of wine has been doing okay in a

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Matthew: pretty challenging environment as we go through a de- stocking

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Matthew: phase and a lower demand period after the surge through post-

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Matthew: COVID. So we think that looks good. It’s got China

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Matthew: to come back, we think in the second half of

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Matthew: the financial year. And then the acquisition, they’re in the

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Matthew: process of doing now, which is a U. S. business

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Matthew: again, we think that brand has potential to be rolled

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Matthew: out internationally.
So you’ve got a few key drivers here

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Matthew: of potential earnings growth even in the form of the

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Matthew: underlying business with the China coming back. And then if

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Matthew: you lay on top of that, the acquisition, it actually

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Matthew: looks like it’s going to have quite strong growth over

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Matthew: the next three to five years. So that’s a company we’re

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Matthew: quite excited about at the moment as well.

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Sean: Okay. What about the market generally over the next year

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Sean: or two? How do you think it’ll perform?

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Matthew: I think the time horizon the market has at the

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Matthew: moment is about one month at a time, maybe one

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Matthew: week. But we think the direction we’re going in, the

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Matthew: ultimate place we’re going to is an interest rate cutting

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Matthew: environment. So we think that happens around the middle of

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Matthew: next year. So in that environment you have to be

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Matthew: positive equities. It’s that journey getting there that we’re a

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Matthew: little bit uncertain on. So the journey it started, the

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Matthew: hire for longer was kicked off in September. And then

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Matthew: I think the financial condition tightening scared a lot of

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Matthew: the, we talk about America, the Fed members. So they

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Matthew: walked that back and even the other day the Fed

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Matthew: were trying to walk back the message they created in

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Matthew: September, the hire for long, which really contracted or tighten

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Matthew: financial conditions. So it is a real fine line. They

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Matthew: have to keep financial conditions tight, squash that last bit

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Matthew: of inflation and they cannot let the forward market or

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Matthew: the forward curve start pricing in aggressive cuts, because that

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Matthew: will undo a lot of the work they’re trying to do.
So it’s really a game

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Matthew: they have to play now where they actually don’t really

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Matthew: believe what they’re saying. They can see the slowdown happen,

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Matthew: but they cannot take their foot off and they have

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Matthew: to remain tight until it all comes crashing down basically.

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Matthew: So that’s the environment we think we’re in over the

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Matthew: next period. So it’s going to be pretty volatile as

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Matthew: they have to keep things tight despite a slowing economy.

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Sean: Matthew, thank you for talking to Fear & Greed.

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Matthew: Thank you.

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Sean: That was Matthew Haupt, lead portfolio manager of WAM Leaders.

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Sean: Remember, this is not an investment podcast though you should

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Sean: always seek advice that suits your circumstances before making investment

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Sean: decisions. Join us every morning for the full episode of

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Sean: Fear & Greed, is Australia’s best business podcast. I’m Sean Aylmer,

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Sean: enjoy your day.