Ask A Fund Manager
In part 1 of our interview, Perennial portfolio management director Stephen Bruce explained how value stocks are roaring. Now in part 2, he tells us which ASX share will go gangbusters as the UK economy enjoys a renaissance this year.
Overrated and underrated shares
The Motley Fool: What's your most underrated stock at the moment?
Stephen Bruce: I quite like Virgin Money UK CDI (ASX: VUK).
We're positive on the Aussie financials, but the dynamics are very similar in the UK. If you look at the UK economy, the government's brought in almost identical stimulus and support measures to what we have here.
One key difference though is that the UK is — after getting off to a bit of a disastrous start with COVID — they're absolutely racing ahead with a vaccination program. They're more than halfway there. Probably by June, everyone will be done.
The furlough scheme, which is their equivalent of JobKeeper, has been extended out until September. And summer is coming.
So you have to think that the UK economy is really going to come roaring back to life over the next 6 months and Virgin Money, being a UK bank, will be exposed positively to that.
But then stepping back from the macro, it's a pretty interesting company being the biggest challenger bank in the UK and having recently merged with… Yorkshire and Clydesdale Bank, which gave increased scale and national presence, a super-strong brand and obviously opportunity for revenue and cost synergy. We think it's got good macro exposure, an interesting market position, and then some good stock-specific drivers there.
And it's actually trading on a very cheap valuation. It was around 0.6, 0.7 times its book value. So it doesn't take too much of a stretch to see that getting a decent re-rating over time as the clouds lift.
MF: What do you think is the most overrated stock at the moment?
SB: I'm probably not the only person who thinks about Afterpay Ltd (ASX: APT) when you ask questions like that now.
Who knows how it will pan out. Full credit to people for having created a phenomenon. As we stand today, you have no profits, an unproven business model, you've been exploiting a regulatory arbitrage, you know competition's coming for you, it's only a matter of time until the regulators come for you. The insiders are selling stock as fast as they possibly can.
I have a sneaking suspicion that once the revenue line stops going [up], that the margin line will [plunge] and the bad debts line will [soar]. The losses will go [up].
Who knows, but I'd say for that stock to be a $30 billion market cap and in the top 20 [of the ASX], it's a sign of the times maybe.
That's what growth managers exist for, to have that in their portfolio.
MF: Some growth managers argue that, back in March last year when it was $8, Afterpay was also a value stock.
SB: I know. I think it even got to $6.
There's probably a lesson, that you should buy a little bit of those things when they get to that level. Unfortunately, I didn't.
MF: Is there also a lesson that people shouldn't think that value and growth are mutually exclusive? There can be overlaps occasionally, can't there?
SB: Absolutely. Knowing when to take the opportunities with stocks, which generally fall into one bucket, is really important. When we look at where we've made money over time, it's often been the opportunities that you've had to buy what are high-quality growth stocks, which have just temporarily fallen out of favour. That's been some of the best money-making opportunities that we've had over time.
MF: If the market closed tomorrow for 5 years, which ASX share would you want to hold?
SB: I think Macquarie Group Ltd (ASX: MQG). The reason I say that is, looking at Macquarie today, it seems probably a fairly valued stock. It doesn't look super cheap or super expensive.
A lot can change in 5 years in the market. We all have our view of how the world will be in 5 years, it could be very different. When you think about Macquarie and its outlook now for the next 5 years, based on how we probably all assume the world will be, it's pretty good — but that can change.
One thing we know about Macquarie is they've been able to change their spots, or their stripes, as required, over a long period of time. Even though they've gotten very large, they don't seem to have lost that ability to build new businesses and identify opportunities.
I think, as long as the culture remains intact and more importantly, the remuneration structures remain intact, then it's a business that you can rely on. You come back in 5 years' time and the business will probably look very different, but it will probably still be doing well.
Looking back
MF: Which stock are you most proud of from a past purchase?
SB: This gets back to the point I made before, or you made actually, about knowing when to buy growth-y stocks.
James Hardie Industries plc (ASX: JHX) has been a very good contributor to our fund. If you think about it over the long-term, it's generally sat pretty squarely in the reasonably expensive growth-y part of the market. Occasionally you do get an opportunity to buy these things.
I think it was back in 2019, I can't really exactly remember what the issues [were], but people were starting to doubt its growth outlook in the US and the stock had been sold off pretty aggressively. That provided an opportunity, if you'd formed a view that the long-term outlook… hadn't really changed. That was an opportunity to buy a high-quality growth stock at a value price.
We bought that. It did really well. We sold it around early 2020, and then we got a second opportunity again, in the COVID sell off, when everything got hit really hard, to buy it again.
We bought it and sold it twice. We've had two bites of the cherry in the last 2 years on that stock, and it's been a really good contributor to performance.
MF: Do you remember how much you bought and sold for on both occasions?
SB: If I just look at the timeline, I probably would have been buying it around $20 and then selling it at closer to $30. And then buying it again at probably around $20 and selling it probably closer to $30.
$20 to $30 twice, I would estimate.
MF: Is there a move that you regret from the past? For example, a missed opportunity or buying a share at the wrong timing or price.
SB: Yes… Probably not buying CSL Limited (ASX: CSL) back in 2002 was my biggest mistake.
It was just after they'd merged with ZLB or acquired ZLB — this was a base fractionator. It was quite a difficult period in the industry, you had [the] currency going the wrong way and a few other factors, but it was the one time that you could have bought CSL really cheaply.
Obviously, CSL has gone on to be probably one of the best, if not the best, amongst the absolute best companies that Australia has produced.
MF: Anything to add?
SB: The last 5 years have been pretty tough for value. The last year has been great. When we look at the setup going forward, we're pretty confident that value is going to continue to do quite well for a time yet.
Investors have had a great run out of growth, momentum, tech and all that stuff. They probably all underweight value and it's been a good call. But maybe it's time to take some profits in some of those things, in your Afterpays, and then think about reinvesting in the value end of the market.
