Transcription of Finance News Network Interview with Lodestar Capital Partners Portfolio Manager, John Morgan
Clive Tompkins: Hello Clive Tompkins reporting for the Finance News Network. Joining me from Australian equity manager Lodestar Capital Partners is Portfolio Manager, John Morgan. John welcome back. When we spoke in October last year, the European debt crisis was at its height and the US was only just showing signs of recovery. What’s your assessment of both situations today?
John Morgan: Both have improved dramatically. Europe is the main game for the last quarter and previous months. We’ve seen the European authorities and central banks act a lot more strongly over the period since October. There was a lot of stand-off occurring between the politicians, IMF (International Monetary Fund) and the monetary authorities. What we’ve seen is a near-complete resolution to the Greek bailout; it remains to be seen long term whether that’s actually sustainable. But there’s definitely been some serious time bought by the bailout going ahead. There’re some short term issues there with some private bond holders, hopefully they’ll get resolved by the end of this week. Outside just a Greek bailout that grabs the attention of the media, what is also just as important is what the central bank has done in Europe. They’ve geared their balance sheet; they’ve flooded the market with liquidity of one trillion euros. What that means is the banking system has got plenty of liquidity and has driven down the important bond yields like Spain and Italy, which has resolved that issue. So that landscape in Europe is radically different. There was a real fear in share markets that there would be Armageddon, a Lehman style meltdown in Europe. That didn’t occur, so you’ve had that nice rally out of European banks. America – that recovery has improved and expanded. You’ve got the labour data has got better and better every month and you’ve also got activity indices, beating expectations and consumer sentiment improving. So that’s got better to the extent that the Bernanke Administration is basically saying that there might not be a lot more initiatives in the monetary stimulation front. And it remains to be seen how the share market handles that, given that they’re used to getting underwritten since the GFC started.
Clive Tompkins: Thanks John. And what have markets done over that time, both here and overseas?
John Morgan: Yeah the German market is up 12.6% in the February quarter the US S&P 500 is up 9.5% and we’re up about 5.6%.
Clive Tompkins: John, so why have we underperformed the US to the extent that we have, and are we likely to catch up?
John Morgan: Yeah, there’re a couple of dimensions to answer that. The first is, we’ve got a very high currency and that’s creating this two speed economy. Its mining sector is doing very, very well, the rest is really quite struggling a bit and our Reserve Bank of Australia has been very cautious on how they’re easing, to the extent that they surprised everybody by not easing last month. So the retailers and media companies are all complaining about hard times and a very slow economy, whereas the miners are all very happy. So as a result, you haven’t got an economy that’s got the same sort of momentum that’s created like America at the moment. In addition if you look at the companies that make up our index. The mining companies have been underperforming because they are concerned about, basically a long dragged out recessionary-style low growth environment in Europe. That flows through into China, so the growth prospects and resource companies are not quite as optimistic as they were, say 12/18 months ago. So they’ve basically been going sideways to down over that period, and our banks have been going sideways as well. They’re trading on about book value, whereas the European banks at their worst were trading at 0.1/0.2 times book. So they’ve had a big rally on the back of not having a meltdown which hasn’t really transpired into our banks, because our banks didn’t fall as much in the first place. So it’s really the make-up of our index as well as our high currency and the cautious nature of our central bank.
Clive Tompkins: Now John, the Lodestar approach is one of dialling up and dialling down exposure to equities in response to market conditions. Are you fully invested at the moment or close to it?
John Morgan: No we’re not actually. Our net exposure is about 62 per cent; we have been higher. The market’s had a good rally as we’ve indicated in the last two months of about seven per cent; we’ve actually trimmed a little bit. We’ve put up quite a high beta portfolio which means we’ve got stocks that will go up and down, or more volatile than the actual index itself, especially stocks like the mining services companies - we’ve got a lot of them. As a result we’ve done some hedging to tone down potential volatility of our unit price. So we’ve put that in during February, so we’ve actually reduced our exposure a little bit.
Clive Tompkins: And does that include short positions?
John Morgan: Yeah, last time we spoke I had 14 shorts in the portfolio, we’ve got four now. So we’ve actually reduced the number of shorts in that decline into Christmas. And the four we’ve got on are really pairs trade against other companies we’ve got. So it’s more a one stock doing better than the other, as opposed to being worried about actual franchises out there.
Clive Tompkins: Reporting season is over for another six months John. What’s your assessment overall?
John Morgan: The reporting season itself was basically in line; about a third was below, a third above, the rest in line. What the interesting part of the reporting season was the market’s reaction to that information. The reaction ratio which is how a stock will react the day of the result and the next day was quite positive; it was almost 2:1 positive. So the market was actually expecting worse news than arrived.
Clive Tompkins: And were you at all surprised by lower results from the likes of QBE(ASX:QBE), Woolworths (ASX:WOW) and the retailers?
John Morgan: No, historically we had very low exposure to retailers. We actually had been short Woolworths and QBE strangely enough and we’ve taken those off into Christmas. QBE had their big profit warning; we bought all our shares back the day of that profit warning when the stock fell dramatically. We actually went long QBE and it had to have its rebound and we sort of traded out of that small long position.
Woolworths, we’ve actually started buying that very recently. It’s just got too cheap and we don’t think the consumer is in that bad a shape than after this quite a long period of underperformance by Woolworths. So we’re actually starting to put our toe back in the water there. So 14 shorts in October, four now, so we’ve been taking them off as there’s been some bad news hitting the market.
Clive Tompkins: And what about the miners and the mining services sector?
John Morgan: Yeah we’ve got a lot of stocks there, we’ve got heavily weighted. The AGM commentary last year and even the previous results - all good, good strong momentum. The mining services companies, they’re actually doing better than the resource names because the activity is picking up and volumes are picking up. But not necessarily the costs that go into the mining company and the commodity prices they are receiving are not that fantastic - they’re good, they’re great, they’re boom times, but the momentum is not there. Whereas the momentum is with the mining services companies and as a result we’ve got a lot of those names. We’re very heavily weighted in Emeco(ASX:EHL), Boart Longyear(ASX:BLY), NRW Holdings(ASX:NWH) and we’ve got a lot listed in Orica(ASX:ORI) and Incitec(ASX:IPL).
Clive Tompkins: So did the results lead to any reweighting in your Australian Strategic Share Fund?
John Morgan: We did very well over the quarter. The market’s up 5.6 per cent and we did up 5.4 per cent after fees and that was with a net exposure of average about 69 per cent. So we did very well in stock selection, so we’ve actually trimmed a few of those stocks that are up 20/25 per cent in that period. In addition we’ve put a bit of hedging on it just in February, just as the market has moved up a fair bit. So we’ve actually brought our weighting down into the strength of our performance.
Clive Tompkins: John still on the Fund. What are your biggest positions?
John Morgan: Notwithstanding those mining services companies I just named, outside of that we’re pretty boring. We’ve got a lot of Telstra; we’ve got a lot of NAB(ASX:NAB) a lot of ANZ(ASX:ANZ). We’ve got good holdings in GrainCorp(ASX:GNC) and Iluka(ASX:ILU). Flight Centre – you mentioned retailers, one retailer we’ve actually got a lot of is Flight Centre(ASX:FLT) because with the high Aussie dollar, people are buying online or going overseas on trips. So we’ve got a lot of Flight Centre(ASX:FLT), whereas we don’t have many of the other traditional retailers like a Myer(ASX:MYR) or David Jones(ASX:DJS).
Clive Tompkins: And how has the Fund performed since we last spoke?
John Morgan: Last quarter we basically matched the share market with lot lower risk, lot lower volatility which is our mantra. Plus over the last quarter we’ve beaten Bills as well, but that’s in a nice market that’s been going up strongly. So it’s been a good quarter for us.
Clive Tompkins: Last question John. What do you see ahead for the next three to six months?
John Morgan: In these environments, it’s always a bit hard crystal balling. The way we’re thinking about the market is the GFC was like a big stone getting dropped into a pond, and the waves are quite big and dramatic initially, and they’ll keep recurring but they’ll become less and less. And we’re seeing that right this week with some last minute negotiations between private bond holders and the authorities on the Greek bailout. Not quite as dramatic as Europe authorities being completely unawares – not unawares that’s probably too strong a word, but ignoring the severity of their problems two years ago. So the issues are still there, they’re still related but they’re getting a bit smaller every time and I think the market gradually, as I’ve said in October, the valuations under any measure are very, very cheap. And eventually confidence will gradually get restored and that’ll get expressed on higher valuation and metrics in the share market. So this forgiveness of average results in the last reporting season is probably going to be maintained for the next year or two. And from there will gradually get stronger and develop into a bull phase at some stage. There’ll be some stage in the next two years where all of a sudden the market is going to be up 30/40 per cent. Just after the cash in ’87, it took till ’93 for it to have that 50 per cent rally. I think history is going to kind of repeat itself a bit at some stage. The real big issues are gradually getting sorted. There’s going to be two steps forward, one step back and those step backs are when you should be taking your opportunity to reweight into shares.
Clive Tompkins: John Morgan thanks for the update.
John Morgan: Thank you.
Ends
EHL Price at posting:
$1.13 Sentiment: None Disclosure: Held
