Ask A Fund Manager
The Motley Fool chats with fund managers so that you can get an insight into how the professionals think. In this edition, The Montgomery Fund portfolio manager Joseph Kim reveals a pair of ASX shares that he'd be intrigued to see in his portfolio in 5 years' time.
Timeless ASX shares
The Motley Fool: If the market closed tomorrow for 5 years, which stock would you want to hold?
Joseph Kim: I've got 2 answers here.
For the more risk-tolerant investor, I really like AVITA Medical Inc (ASX: AVH). It's done really well and it's burnt me in the past.
There's a lot of concern around cash burn and the total addressable market, et cetera. I won't say it's not risky because they still need to execute.
When you look at biotechs and you look at medical device companies in general, a lot of it is about promotion and they promote the product and how awesome it is. But when you talk to the surgeons and the physicians that are going to ultimately use it and have to get reimbursed by the US medical system to use it, you potentially get different answers.
Now, the other part of that is a lot of the times when they spruik their products, they don't even have approval from the FDA, right? So this is an amazing product, whatever, but we don't have FDA approval because we haven't been able to demonstrate statistical significance that this thing actually works in terms of what we say it does.
Most of the time they don't work. [But] this one is proven to work. You've de-risked the FDA approval part, which is usually the biggest risk with these biotech and medical device companies.
So yeah, it's going to take time. And there's always going to be people that won't use it because they're just stuck in their ways… But then, ultimately, as a doctor with the duty of care, you've got to provide the best outcome to your patients. I think from that perspective, I'm pretty optimistic now.
The other one is Goodman Group (ASX: GMG). So founder-led business, got all the right tailwinds.
People are going to say, it looks expensive. It's [been] expensive for a long period of time. Five years is a long time… With Goodman, you have [the] right tailwinds, they're in the right areas. You've got a management team that's aligned [to a] value-focused business. You can see the pipeline of developments that they have. And in the next 2 or 3 years, you should be growing at about 10% [per annum]. The business is getting more valuable over time.
MF: Is the adoption of online shopping a theme for Goodman?
JK: It is. Data centres too, by the way, they developed data centres.
One of the big things over the past 3 or 4 years, it's [become] more extreme, is that there's a real hollowing out of the middle of everything. What I mean by that is you look at brands, luxury brands. Right at the top they're booming. The middle is where it's really suffering relatively.
It's a bit like that in property as well. You've got the cheaper property that's in not-so-great locations. And, yeah, they've all gone up with money being cheaper and cheaper, but then the top end has gone extreme.
So the middle is hollowed out. These guys are in the right place for that too. Their locations, what they have, and so you go, well, is that a trend that's going to stop anytime soon? It's unlikely.
That's why I'm more bullish on Goodman as opposed to just pure e-commerce. Because, yes, e-commerce is great — but it's more like they're in the right places with the right pipeline of opportunities with a focused management team.
Looking back
MF: Is there a move that you regret from the past? For example, a missed opportunity or buying a stock at the wrong timing or price.
JK: Oh my God, this is an easy one.
It was during March in 2020. So we were able to go defensive before the [COVID-19] market crash because we anticipated COVID being a bigger issue than what the market was initially thinking, but it took too long for us to get back in.
Our clients and our investors didn't get the full benefit of — obviously the downward journey was much more pleasant — but the rebound journey. People are a lot more averse to capital loss than capital gain, right? So that journey is a lot more unpleasant. There are few people who got both sides [correct].
Why it's even more frustrating is because at the bottom of the market, we were like, 'Hey, we're really outperforming'. This is when things start to look reasonable and we should lock some of that away now. What I mean by that is we should really start using some of [that] cash into really high-quality businesses that we know are going to be here in 2 or 3 years' time.
If the market keeps falling, yeah, we'll probably fall a bit more with it, but this is where you have to look beyond the valley.
And the reasoning was, look at what China did. China locked down for 3 months, just completely locked down. It wasn't smooth, but they were able to reduce the number of cases… Then you look at what the central banks were doing, they were printing enough money and providing enough support — physical and monetary support — to make sure that we could tide everyone over for those 3 months.
Now, what derailed that was the US just having a rampage in COVID cases, which meant that they just didn't do that hard lockdown.
So we did put cash to work, but it was also a period of extreme uncertainty with no vaccine timetable. But again, with the benefit of hindsight, that's probably been by far my biggest regret.
MF: Is there a particular ASX share that you missed out on that particularly hurts?
JK: We were a little bit late to Wesfarmers Ltd (ASX: WES), but we did end up buying that pretty quick. That's obviously done really well.
Look, it's tempting to say BHP Group Ltd (ASX: BHP), but it's not because we identified BHP as one that had a margin of safety because of what China was doing in terms of stimulating the old parts of the economy. By the old parts of the economy, I mean the property, construction, infrastructure, et cetera. That's the easiest lever for them to pull. So it's tempting to say that, but I think there were better risk-return opportunities than BHP… Yes, the reward didn't look as high, but there was a much lower risk. So I'm not as anxious around that.
Again, we bought into it a bit late, but Goodman got below $10. And finally, when it got below $10, we knew why it was going there because there were a lot of property funds that were highly leveraged and they had to deleverage. So there was a golden opportunity to get it very cheaply. I wish we had've got back in earlier.
