Ask A Fund Manager
The Motley Fool chats with fund managers so that you can get an insight into how the professionals think. In part 1 of our interview, Medallion Financial managing director Michael Wayne reveals the 2 ASX shares that are his clients' biggest holdings but still look good value.
Investment style
The Motley Fool: What's your fund's philosophy?
Michael Wayne: Medallion Financial, we're not a fund management company per se. We run personal portfolios or private portfolios for individuals.
Essentially the strategy that we employ for our clients is what we call a top-down, bottom-up approach. And by that what we mean is that we look to identify those sectors of the economy that are booming and have the brightest outlook and the best chances, in our view, of doing well from those natural tailwinds that are out there around the economy.
So for example, things like healthcare, aging population, emerging middle classes throughout Asia – there's a natural inertia and a natural momentum to a sector like that… Or the technology space, for instance, is another example of a sector that has those tailwinds.
The idea is once we identify the top-down approach in those sectors that benefit from the global thematics at play, we'll then look to identify the best quality businesses from within those sectors.
MF: What are the two most popular holdings currently among your clients?
MW: Every client is slightly different, but we do try to keep a uniform investment approach across all our clients.
So some of the businesses that pop up most frequently across portfolios are things like CSL Limited (ASX: CSL). Obviously being the largest healthcare provider it's been a great performer over the years. And as the price goes up, weightings tend to go up. So CSL's among the top biggest holdings for clients.
MF: The CSL share price hasn't gone that well in the past 12 months or so. How do you feel about the business at the moment?
MW: We think they're offering some decent valuation – as far as CSL goes, that is. Obviously, COVID hasn't been great for their blood collections business in the US. However, we think that's transitory.
We do think that once the reopening phase plays out, that that level of supply of blood plasma will start to pick up again. CSL is a dominant player worldwide. It's got the infrastructure in place to guarantee supply of the five different blood proteins. So they're in a pretty strong, competitive position.
Often they get talked about as being expensive because the PE [price-to-earnings] ratio comes across as being quite high. But the reality is someone like CSL spends up to a billion dollars if not more these days on research and development. And they account for that in the first year, rather than spreading that out over, say, a decade. That has the effect of… depressing earnings somewhat, which makes that PE ratio, in our view, somewhat inflated.
So yeah, we're buyers of CSL at these levels. And we think that it will continue to do well over the years to come.
I'll give you a couple more. Aristocrat Leisure Limited (ASX: ALL) is a particular holding that we have quite large holdings in for clients, amongst the top 5 holdings. Others are Macquarie Group Ltd (ASX: MQG), for instance, which has been a good performer particularly of late, and it's started to kick on again.
REA Group Limited (ASX: REA) is another one. So those 4 would be amongst the biggest holdings for the vast majority of our clients.
MF: At current prices, which of the four are still tempting enough to buy?
MW: I think CSL and Aristocrat are probably two that offer for a little bit better value than the other two.
But REA Group's the entrenched leader in the real estate space – obviously, real estate is going through a strong patch at the moment, that should benefit them. Macquarie Group had a good set of numbers just the other day. So they look like they're on a pretty good track to growth.
Buying and selling
MF: What do you look at closely when considering buying a stock?
MW: We touched on the top-down bottom-up approach, and this is focusing probably more on the bottom-up sort of stuff that we look at. We like companies that are high quality. And by that we mean businesses that have seen successive years of revenue growth, of earnings growth. Their margins are constant or increasing over time.
We prefer a low level of debt or what we call a net gearing to be negative, which means they've got more cash on the balance sheet than debt. Free cash flow is very important.
Then for those businesses that are more on the emerging side of things, so this probably relates mostly to some of the tech companies. Many of those traditional metrics won't look that attractive just because they're more emerging – they might not even have earnings or profits at this stage. In those types of businesses, we look for low churn rates. We look for characteristics such as average revenue per customer for those SaaS model companies, high margins again. We look for companies that might be sacrificing profitability today in order to generate growth and earnings into the future. So we look at things like marketing spend and how that's impacting cash flows and earnings.
MF: What triggers you to sell a share?
MW: It's a good question because often we see a lot of clients that come across and they are holding these positions which have just fallen away year after year after year. So being able to sell out of something I think is very important. You can have 9 out of 10 trades up 10% but if you get that one trade down 50%, 60%, 70%, it undoes a lot of that good work.
So for us, what we focus on is letting the winners run and [cutting] our losers pretty early.
And what triggers us to sell out of a share is often the news flow. We don't have an arbitrary number like a 10% fall or anything, but if the company comes out with a negative update we'll review it. If they come out with a 2nd negative update, we'll sell it for sure.
So there's no hard and fast rule. But as a general rule of thumb, we prefer to cut those losers pretty quickly off the back of bad news rather than willing and hoping for them to come back.
Tomorrow in part 2 of our interview, Wayne reveals the most underrated share on the ASX at the moment.
