Perpetual’s top stock picker Anthony Aboud makes his money running against the crowd and this is why property trusts like Charter Hall are sitting right the top his list right now.
Companies with low debt and a strong overall balance sheet also are among his standout stocks in a market where bearish sentiment still rules.
When looking for companies to back, Mr Aboud tells The Australian the golden rule is low debt counts for everything.
“I can’t predict the macro environment. Given that most CEOs can’t predict the macro, you want them to be well prepared for whatever’s going to lie ahead of it,” he said.
Mr Aboud heads up several Perpetual funds including the blue chip investment house’s industrial share fund and for nearly two decades he has overseen its top-ranked hedge fund
He is one of more than a dozen top fund managers presenting their best stock picks at the Sohn Hearts & Minds forum in Hobart on Friday. All funds raised from the annual Woodstock for financial markets are donated to medical research. So far more than $40m has been raised from the Australian events since it started in 2015.
Mr Aboud is keeping his Sohn stock tip closely guarded but drops a hint that it’s an offshore company. This helpfully puts it somewhere in the 98 per cent of the global stocks that aren’t traded in Australia.
When probed a bit more he says the company has a good market position and very strong cashflows. It is operating in an industry where Australia is more advanced, but that’s as far as he is willing to reveal.
Wearing his Perpetual hat, Mr Aboud sees property trusts which hold office towers, warehouses and shopping malls as offering the best value in the local market.
The surge in interest rates this year mean many have collapsed in value and are trading between 30-40 per cent discount to book value – that is the value of all their assets minus their liabilities.
“We’re seeing some good opportunities in property trusts because no one will touch them, because they see interest rates as continuing to go up,” he said.
Fresh in most people’s minds are the property trust collapses during the global financial crisis which was mostly due to unsustainable debt levels of many managers. But Mr Aboud says the debt today is much lower than it was before the Global Financial Crisis.
Names like Charter Hall have fallen a long way and they are coming into the frame. He also sees warehouse specialist Goodman Group as being the best in the world at what they do.
Still the risks to property remains interest rates moving much higher than expected as well as a slow recovery to the return to the office.
Elsewhere, Mr Aboud is swinging behind some growth stocks including some tech stocks, largely given the heavy derating they’ve seen. But they have to be backed by a sound business model.
“I think when interest rates were zero, companies only needed narratives, rather than an actual business model,” he said.
“It’s actually harder than people think, to generate stable cash flow, you have to upset someone. It’s either upset the customer cause you have to start charging them, or you have to tell employees to work harder”.
This is the transition that technology shares are going through now. The bigger, more mature, tech companies working out how to survive and the stronger ones also know that they’re going to come out the other side, better placed as competition falls away.
“In the meantime, a lot of companies with business models are going to go to zero”.
Mr Aboud’s team scours the market looking for opportunity, often unloved stocks present the most value.
“We are contrarian by nature. So we like looking where people aren’t,” he said.
During the early days of the Covid-19 market downturn, Mr Aboud and his team were looking for cyclical stocks which at the time were down as much as 70 per cent. Companies being targeted were good balance sheets and low debt.
The goal was to assume the worst and that lockdowns would be in place for years and then predict what companies would survive and match that with their discount.
“It’s one thing to be contrarian, but you also need to be right,” he adds.
Mr Aboud’s flagship Perpetual Wholesale Share-Plus fund is the top-ranked hedge fund strategy over both one and two years, returning 23.6 per cent in the year to August, according to figures from funds tracker Mercer. Over five years it has delivered annualised growth of 11.3 per cent, putting it in the top three and substantially outperforming the benchmark S&P/ASX 300.
Mr Aboud’s advice for stock pickers is to keep an open mind and “not pretend to be an expert on everything”. Here he recalls the early days of the pandemic when every fund manager had a scientific view on Covid-19. Today everyone has a view on inflation.
He says at the moment is everyone in markets are quite bearish. Everyone is of the same view on a number of indicators. They’re bearish about inflation and they’re bearish about the economy.
“I think it’s always dangerous when everyone is on the same side of the boat when the macro view is concerned. So it’s important to keep an open mind”.
Outside of energy he is seeing leading indicators pointing to a deflationary settings. Here he sees inventory levels are moving up, parts of the economy such as housing is slowing while supply chains are starting to free up.
He points out there is a lot of cash on the sidelines waiting to deploy at the first sign of a turn. But that is also going to see increasing volatility and outsized moves in the short term.
And for the own takeover action taking place at his own company? Perpetual is looking to buy out rival fund manager Pendal in a $2bn merger which has seen a late spoiler in the form of a surprise bid for Perpetual itself. But Mr Aboud said his head is down and focused 100 per cent on driving returns from his own funds.
“As long as nothing impedes on that – that’s all I care about”.
This article was originally posted by The Australian here.
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