MENU
 

PRE TAX NTA |$3.75

Value as at close of business on 3 January 2024

This fundie couldn’t be happier with her portfolio

The US recession of 2023, if it were to happen, won’t be a repeat of the 1970s, or the 1940s.

“I think we should all be students of history, but not use simplified narratives and analogies to draw conclusions on what to do,” cautions Joyce Meng, the managing partner and founder of New York-based FACT Capital.

Not only are there differences in the energy dynamic playing out between now and historical crises, but information efficiency is also “so much higher” in today’s economy, she says.

Just as Wall Street staged an incredible rally in the depths of COVID-19 while shelter-at-home orders were still in place, two out of the three main US equity benchmarks are in a bear market despite US president Joe Biden’s assurance that the economy is “strong as hell”.

The US added 261,000 jobs in October, according to official labour data released on Friday, but the unemployment rate increased to 3.7 per cent.

“It hasn’t been that bad yet, but stock markets have already fallen in anticipation of [a recession]. And so the speed of discounting, information transmission, is very different,” the fund manager observes.

Today, investors find themselves in a unique place. For hedge funds, the money has already been made on the easy shorts identified by picking off the coronavirus winners: Shopify is down 80 per cent and Netflix more than 60 per cent.

Idiosyncratic opportunities

“We’re in this interesting environment where everyone’s looking at what normalised earnings is, fundamentally. And not only do you have the normal economic cycle, where the Fed is tightening – it has implications across housing assets, consumer borrowing, consumption – but then you also have this COVID ‘digestation’, and the question is, which companies have rebased expectations to a point that’s reasonable versus where is the demand still really, really elevated?”

That is giving rise to some idiosyncratic opportunities for the manager. For example, a listed freight-forwarder comes to mind, which the Street expects to earn more than $US8 a share this year, when its earnings capacity historically is only about $US3.50 a share.

Meng, who declines to name the business, thinks its exposure to falling ocean freight rates sets it up as a weak link, or an over-earner at risk.

“In the short term, stocks don’t work until earnings estimates stabilise,” she says. “And so companies that have already adjusted expectations, have strong predictability of what next year is, and have lowered the bar so that they have a comfortable earnings trajectory, I think those companies are better prepared to perform.”

FACT (fairness, alignment, compounding, transparency) has achieved its three-year anniversary in truly memorable circumstances: the fastest bull market in history, war and now inflation. It has still managed to exceed its benchmark with a return for the long-short strategy of 21.9 per cent against the MSCI All Country World Index at 15.1 per cent.

Meng is a presenter at this year’s Sohn Hearts & Minds Investment Leaders Conference on November 18, which takes place in Hobart, and aims to raise money for medical research.

“FACT’s strategy has always been very GAARP in nature – growth at a reasonable price,” says Meng.

The nature of the bear market has penalised growth stocks, whose valuations suffer disproportionately to value stocks in a rising interest rate environment. However, Meng has put her portfolio through its paces and concluded that there is nothing she would rather own.

Beauty Health Company, the parent of the patented HydraFacial skin treatment and the stock idea she pitched to Sohn’s audience in 2021, is still an outright winner in FACT’s micro-themed universe of which skincare is one such thematic.

“It’s a very profitable name, has earnings support, but it was one of those mid-cap growth names” and that tilt “definitely hurt us this year”.

In the wreckage of high-multiple and unprofitable technology stocks, disciplined investors have lots to be encouraged by, even if the cycle is not yet realigned to re-rate those companies demonstrating exciting growth.

We can find 20 per cent compounders at like 10 times PE, and that would be the type that we’re really shooting for.

 Joyce Meng

“The good news is, I think with the rate hikes, the unlimited amount of capital that can support unsustainable business models with questionable unit economics – that’s gone. And so I think in some ways, it creates a lot more discipline, it rewards incumbents that have like strong ROI [return on investment], strong market share.”

Value stocks, she argues, still cannot escape their intrinsic reliance on the economic cycle, such as iron ore producers.

“There’s some question on what recession would look like for value names that are a little bit more cyclical, and so we like growth at a reasonable valuation because there’s more in the company’s control. But at the same time, they’re justifiable even using conservative cost of equity.”

There is such a thing, Meng adds, as companies that have both value and growth characteristics.

“We can find 20 per cent compounders at like 10 times PE [price-to-earnings multiple], and that would be the type that we’re really shooting for.”

Growth and China

The other source of pressure on returns is the fund’s preference for China exposure, historically around 30 per cent: “We can flex up and down depending on the opportunity set we see. Growth and China have had a challenging year, but we really like our book,” says Meng.

Another micro-theme on the FACT radar is Brazil’s agricultural export growth, represented by a long position in Rumo Logistica. “Rumo is a beneficiary of China’s search for food security as Brazil grain exports to China grow,” the manager says.

The falling Brazilian real has led Rumo – which provides storage and transportation to bulk agricultural product providers – to declare that it is cheaper to ship soybeans to China from Brazil, than the US.

Meng presented Rumo as a long idea at the philanthropic Robin Hood Foundation conference in New York last month.

Other micro-thematics are the global labour arbitrage in digital services, commercial aerospace recovery, and cloud “hyperscalers” at reasonable valuations. Tactically, with a view to present market conditions, Meng is a fan of companies that have “taken their medicine” and set realistic expectations for next year, small- and mid-cap stocks relative to large caps, and trading the “first-in, first-out” dynamic where “normalisation fears have already resulted in multiple and earnings overshooting”.

‘Resilience’

Meng is a bull on the longer-term thematic of consumption in China.

“For China to be more self-reliant in the face of geopolitical concerns, the government has to enable a resilient domestic economy and not just depend on foreign exports,” which she cites as being about 20 per cent of GDP. “China consumption as a percentage of GDP is incredibly low – household private consumption is only 40 per cent versus the US around 70 per cent.

“When [president] Xi talks about resilience, strong domestic demand and circulation is required.”

That is problematic in the short-term, where lockdowns are still a tool of China’s coronavirus mitigation strategy.

“That being said, as the pressures on the economy build, we expect gradual reopening – we’ve already seen international flights doubling in Q4, restoration of the Beijing marathon maskless, and moderation in the public media tone on the dangers of COVID.

“Notably, we think there will be winners and losers within consumption and stock picking opportunities.”

The Australian Financial Review is a media partner of sohnheartsandminds.com.au.

 

Disclaimer: This material has been prepared by AFR, published on 7 November 2022. HM1 is not responsible for the content of linked websites or content prepared by third party. The inclusion of these links and third-party content does not in any way imply any form of endorsement by HM1 of the products or services provided by persons or organisations who are responsible for the linked websites and third-party content. This information is for general information only and does not consider the objectives, financial situation or needs of any person. Before making an investment decision, you should read the relevant disclosure document (if appropriate) and seek professional advice to determine whether the investment and information is suitable for you.

Recent Posts

Read the latest insights
A curated list of HM1 investor updates, portfolio news and other interesting articles.
Read More
10 top fund managers reveal their long-term stock picks
With valuations stretched and geopolitical tensions high, the new year offers plenty of potholes for investors. 
Rikki Bannan – Don’t get caught up in momentum
Conference Fund Manager Rikki Bannan, Executive Director at IFM Investors, joins Equity Mates to discuss her standout 2023 stock pick, Telix, and explore what opportunities lie ahead.
Professor Jane Butler: Sparking Hope for Spinal Cord Injuries
In this episode of the Hearts & Minds Podcast, we sit down with Professor Jane Butler to discuss her groundbreaking research into spinal cord injuries.
Nick Griffin – The Nvidia story is not over
Nick Griffin, Founding Partner & Chief Investment Officer of Munro Partners joined the Equity Mates podcast in their Summer Series.
 

10 top fund managers reveal their long-term stock picks

With valuations stretched and geopolitical tensions high, the new year offers plenty of potholes for investors. 

Read More
December 28th, 2024
 

Rikki Bannan – Don’t get caught up in momentum

Conference Fund Manager Rikki Bannan, Executive Director at IFM Investors, joins Equity Mates to discuss her standout 2023 stock pick, Telix, and explore what opportunities lie ahead.

Read More
December 19th, 2024
 

Professor Jane Butler: Sparking Hope for Spinal Cord Injuries

In this episode of the Hearts & Minds Podcast, we sit down with Professor Jane Butler to discuss her groundbreaking research into spinal cord injuries.

Read More
December 10th, 2024
 

Nick Griffin – The Nvidia story is not over

Nick Griffin, Founding Partner & Chief Investment Officer of Munro Partners joined the Equity Mates podcast in their Summer Series.

Read More
December 9th, 2024
 

HM1 CEO Succession

Hearts and Minds Investments Limited advises that Paul Rayson intends to retire from the position of Chief Executive Officer, effective 19 February 2025.

Read More
December 5th, 2024
 

Trump unifies top investors in decade-long bullish outlook for US

Nick Moakes, CIO of the $72 billion Wellcome Trust, told the conference that too many investors were banking on a return to the ultra-low interest rates that prevailed over the past decade.

Read More
November 20th, 2024
 

These rock-star stock picks could get markets talking next year

Eleven rock stars of international and local funds management took to stage – each tasked with picking and pitching one company whose shares will take off over the next year.

Read More
November 18th, 2024
 

Is anyone brave or stupid enough to bet against America?

Stock pickers have been punished for betting against the US. The choice between consensus and contrarianism on American exceptionalism is now harder than ever.

Read More
November 17th, 2024
 

Sohn: NYSE-listed Estee Lauder’s Northcape Capital pick

Northcape Capital’s Fleur Wright this gives a rare opportunity to buy a high quality company at an attractive price.

Read More
November 15th, 2024
 

Sohn ASX stock pick: Ellerston Capital’s Chris Kourtis backs Perpetual

Chris Kourtis has put his biggest bet on embattled Perpetual – picking one of the most hated stocks on the ASX – that he believes will soon be the ‘cheapest listed asset manager of scale in the universe’.

Read More
November 15th, 2024
 

AI start-ups a threat to incumbent big companies

Paul Bassat predicts emerging artificial intelligence companies will disrupt sectors and overtake established incumbent companies just as rapidly as the seismic shifts that took place when the internet emerged in the mid-1990s.

Read More
November 15th, 2024
 

Howard Marks and Sohn’s big stars reveal seven rules for investing

Among the stock picks and stunts at the Sohh Hearts & Minds event, Howard Marks and Nick Moakes provided investors with long-term rules for playing markets.

Read More
November 15th, 2024
 

Sohn investors position for bullish but bumpy Trump ride

Australia and the rest of the world must adjust to a new Trump presidency that will deliver an expected bull market but also disruption, with the leader in waiting prepared to “create pain” to get his way.

Read More
November 15th, 2024
 

Sohn stock picker experts name best shares to invest in for year ahead

‍Don’t overlook down and out silver miners, legacy skincare brands ready for a revival and a big financial company suffering from a severe case of shareholder wealth destruction.

Read More
November 15th, 2024
 

Eleven stock tips from Sohn to get you through 2025

“There’s no finer place for the finance festival than in the festival city,” said Matthew Grounds. He, along with fellow Barrenjoey co-executive chairman Guy Fowler and investor Gary Weiss, is one of Sohn’s driving forces.

Read More
November 15th, 2024
 

Sohn Hearts & Minds Investments fund targets $1.5bn valuation

‍Hearts & Minds Investments chair Chris Cuffe is hoping for HM1 to grow to more than $1.5bn in the next five years.

Read More
November 14th, 2024
 

Galaxy Digital CEO Mike Novogratz believes bitcoin will hit $US100k

Bitcoin’s bounce to record highs in recent days is only the beginning of a fresh surge higher for cryptocurrency, says US billionaire Mike Novogratz.

Read More
November 9th, 2024
 

Why this New York hedge fund manager sees opportunity in European stocks

Influential New York-hedge fund manager Ricky Sandler will turn to Europe for his next stock pick.

Read More
November 6th, 2024
 

Antipodes’ Ross says short-term wealth hinges on US election

The portfolio manager says defensive stocks pose a bigger risk than the magnificent seven for investors that are overexposed to the American sharemarket.

Read More
November 5th, 2024
 

Concentration risk key for investors: Antipodes Partners’ Vihari Ross

The concentration risk in global stock indexes that has built up during the strong rise over the past year must now be a key consideration for global investors, according to Vihari Ross.

Read More
November 5th, 2024
 

The fundie betting big on China – with help from AI

Mr Mehta is sticking to his well-worn strategy: he’s hunting for companies across Asia that aren’t battling intense competition and have management teams focused on costs, cash generation and high payouts to shareholders.

Read More
November 5th, 2024
 

Why this fundie wants you to ‘wince’ at his stock picks

When fund managers come to pitch their favourite stock at the annual Sohn Hearts & Minds conference, there are two ways they can go: they can play it safe, or they can take a risk and shock the room.

 

Read More
October 29th, 2024
 

IFM Investors’ Rikki Bannan backs small cap investments to rebound after mixed performance

IFM Investors executive director Rikki Bannan believes this year could be a good one to invest in some select small cap stocks.

Read More
October 27th, 2024
 

Meet the 2024 Conference Managers

Following a global search, the Conference Fund Manager Selection Committee is pleased to share eleven new managers for 2024. 

Read More
October 22nd, 2024
 

Chris Kourtis is on a winning streak. Here’s his next ASX pick

Chris Kourtis of Ellerston Capital thinks he’s found another winner and thinks it’s the last chance to have a bite at the cherry before the strategy plays out.

Read More
October 21st, 2024
 

Why Ellerston Capital’s Chris Kourtis plans to back a ‘hated’ stock

Chris Kourtis of Ellerston Capital plans to tip one of the “most hated” stocks in Australia when he presents at the 2024 Sohn Hearts & Minds Conference.

Read More
October 21st, 2024
 

Alex Pollak champions rewards of disruptive investment

Alex Pollak’s funds management company Loftus Peak rode the Nvidia wave and he is now looking at more opportunities in disruptive industry stocks.

Read More
October 14th, 2024
 

Buy Hold Sell: 2 Hall of Fame investors analyse each other's best ideas

Hall of Fame alumni Chris Kourtis of Ellerston Capital joins Livewire to analyse high conviction stock picks.

Read More
October 11th, 2024
 

Sumit Gautam - Why AI won't deliver in 2025 | Scalar Gauge

Sumit Gautam is the Founder of Scalar Gauge and speaks with Equity Mates ahead of his appearance at the Sohn Hearts & Minds conference.

Read More
October 8th, 2024
 

Missed out on Nvidia and Ozempic? This fundie says it’s never too late

Northcape Capital’s Fleur Wright is still kicking herself for not owning market darlings Nvidia and Novo Nordisk, the maker of the weight loss wonder drug Ozempic, before shares of those companies rocketed in 2023.

Read More
September 30th, 2024