Carleton, who tipped Macquarie when he appeared at the Sohn conference in 2017 and JB Hi-Fi in 2018, likes to invest in high-quality companies with good track records.

“We like to keep our investment approach reasonably straight forward,” he says in an interview ahead of the conference. “It’s unlikely you’re going to hear us pitch a company that you’ve never heard of before.

“Most of the companies we invest in are companies which have shown they are great companies for some time now.

“They are often large companies with a wonderful track record. They are not particularly complicated businesses for most people to understand.”

Carleton, who worked at Goldman Sachs and Macquarie before setting up the boutique investment manager in 2012, likes to keep things simple.

“You don’t get extra (investment returns) for degree of difficulty,” he says. “We’re very happy playing in spaces where we feel we don’t need a whole lot of special information or expertise to make an investment decision.”

Carleton says Auscap largely steers away from investment in technology, biotech and mining companies, which need specialist expertise to analyse.

Recent Sohn conferences have seen a range of tech companies tipped – not all of which have done well in the market.

“It’s safe to say that you won’t see us tip a technology company at Sohn,” Carleton says, adding this year’s fall in the market has created new opportunities.

“There are quite a few opportunities we are looking at, at the moment, where companies are getting quite close to the prices where we would be a happy buyer,” he says.

Carleton describes Auscap’s approach to investing as buying “best of breed companies”, hopefully at a good price.

“We are a value manager with a quality bias,” he says. “The quality bias is important. We’re not interested in buying companies just because they are cheap.”

He says one of the lessons he has learned from his time as an investor is not to buy into a company just because it is cheap.

“Some of our historic mistakes have been us being too attractive to the value side of the equation and not buying best of breed businesses,” Carlton adds.

He describes “good companies” as those that have a track record of delivering strong returns on invested capital.

“If a company is able to achieve a 20 per cent return on every dollar invested, compared to another company which is only able to deliver 8 per cent in every dollar it invests in, it has some sort of competitive advantage,” he says. “Once you’ve identified that a company has been able to do this over a long period of time, and you have evidence that they have some form of competitive advantage, our job is to make sure we think it is ­sustainable.”

Carleton argues that while investors should be paying attention to macroeconomic forces, it is much more important to study what is going on in the individual companies themselves.

“Every company will be faced with the headwinds or tailwinds of the broader economy, but what dictates the earnings of many companies – particularly high-quality companies – five or 10 years down the track, is what is happening inside the company.”

Carleton still likes Macquarie and JB Hi-Fi. And he rejects suggestions that retail is about to be killed by online shopping.

He argues that companies like JB Hi-Fi, which have efficient ­operations in a sector in which ­people will continue to buy, such as consumer electronics, has a long-term advantage in an inflationary environment.

Rising inflation, he says, will favour the larger and better run retailers. “You want to be invested in the most efficient (retail) ­operators and companies with significant scale as they are the ones easily able to absorb rising costs,” Carlton says.

 

This article was originally posted by The Australian here.

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