PM Capital’s Ashley Pittard has just returned from a European trip that identified a number of new opportunities – but Greek ‘bargains’ don’t make the cut.
Although teeth-gnashing and soul-searching continue in certain circles in London over the failure of pollsters to predict the England component of the UK election, my colleagues and I were not surprised by the vote.
The UK economy has been showing positive signs for some time.
In fact, unemployment is now lower there than in Australia.
Our recent visit to the UK, mid-campaign, reinforced this view and augmented our expectation as the general mood of individuals, but more importantly, companies, were optimistic. Nonetheless, we did not venture north to Scotland – an entirely different story.
As fundamental, bottom-up stock-pickers we are largely immune to broader geo-political trends. That being said, the poll result reinforces our positive view about the UK.
It supports the previous investments we made in what we believe to be quality, yet undervalued UK companies, within our listed investment company, the PM Capital Global Opportunities Fund (PGF) and its unlisted sister entity, the PM Capital Global Companies Fund.
Being a value investor (or contrarian investor as it is often called) we make investments in quality businesses at a point when they are trading at a significant discount to their long-term valuation and hold them until the market realises their inherent value, which may take some time to transpire.
We do not track indices or benchmarks and tend to block out short-term issues, which will not impact the long-term valuation of the company, including news of the day and often even elections.
Banking on European banks
A key holding in our global fund is Lloyds Bank. The company’s share price was markedly impacted by the global financial crisis, which presented the initial opportunity to invest.
Since that time the business has focused on core, domestic operations, increased its capital cushion and reduced its exposure to risky assets, and as such has seen a notable increase in its share price (from $23 in November 2011 to its current price of $89).
Despite this significant appreciation we still see upside potential in the business as Lloyds’ journey of returning profits to shareholders in the form of dividends is just recommencing, and management have indicated they will move to a 50-70 per cent payout ratio in the medium term.
When we compare this to the CBA, Australia’s equivalent dominant retail bank (which has a payout ratio hovering around 75 per cent) we find ourselves at the other end of the risk spectrum.
Lloyds is currently trading at little more than one times book value compared to the CBA, which trades near three times.
The aforementioned example is an archetypal example of our investment philosophy.
We question the validity of Australian investors’ ability to increase their portfolio’s capital value by being overexposed to fully (or over) valued Australian assets when a comparable business can be found offshore, at a vastly more attractive price.
We have uncovered further opportunities within the UK market, in addition to banking, within real estate and the beverage industry.
Although it is understandable – and a natural behavioural bias of investors to invest in what they know – there is no doubt that Australians are heavily under-invested in offshore equities and heavily over-invested in Australian stocks.
New analysis released by Credit Suisse points to the fact that SMSF members now own 16 per cent, or $230 billion, of the Australian equity market either directly or indirectly, via managed funds, and that this percentage will continue to grow.
This is in stark contrast to SMSF holdings of overseas stocks, which have remained steady at the one per cent mark for some time.
Australian equities represent less than three per cent of total global markets, thus on a simple mathematical basis, to infer that local investors portfolios are significantly under-diversified across global markets, is an understatement.
Venturing outside the Sceptred Isle
Turning attention across to Europe, we also visited Spain, Ireland and Greece in our recent research trips.
We were generally heartened by our experiences in Spain and Ireland as both jurisdictions have made significant headway on fiscal and regulatory reform and the property and financial markets are showing encouraging signs.
Greece on the other hand presents some unique challenges. Theoretically, the Greek market would be a classic area of interest for our investment approach. Buying ‘straw hats in winter’ is part of our DNA.
There are many undervalued assets in Greece, particularly in the property sector. However, due to the currency risk associated with Greece potentially leaving the euro zone, we have put our impending investments in Greece on hold.
Having said that, we will continue to monitor the market and if and when the situation stabilises and it is clear that Greece has a future in the euro zone we may selectively weigh in.
In the meantime we would advise investors to be wary of any Greek ‘bargains’, but to seriously consider diversifying their portfolio by seeking exposure to well-priced quality stocks across selective areas within Europe.
Ashley Pittard is a global equities portfolio manager at PM Capital.
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