Ask A Fund Manager
The Motley Fool chats with the best in the industry so that you can get an insight into how the professionals think. In this edition, Auscap Asset Management portfolio manager Tim Carleton urges investors to create a 'buy list' to take advantage of cheap valuations.
Investment style
The Motley Fool: How would you describe your fund to a potential client?
Tim Carleton: My name's Tim Carleton and I am a portfolio manager and founder of Auscap Asset Management. And we are an Aussie equities manager with a value and quality bias. So we're trying to buy best-of-breed businesses when we get an opportunity at a price that we find attractive, and then we try to hold those investments for a long time.
Really, the only reasons that we look to sell is if the price gets to a level that we just can't justify, irrespective of the quality of the business, or if we've realised that we're incorrect in some way, in relation to the analysis that we did on that particular business.
But you tend to find that that happens thankfully infrequently — so that the stocks that we hold tend to be in the portfolio for quite some time.
MF: If you have a value tilt, how have you gone in the last 12 months?
TC: We had a very, very strong 2021. The fund was up a little over 43% net.
And then we've had a bit of a pullback, which is not that unsurprising, in the context of what equity markets have obviously done this year. But from our perspective, that's an opportunity because… we have probably about 8% cash as we sit here today. So we're sitting here with a buy list and I think some of the valuations that you see at the moment are getting into attractive territory.
So we're well aware of what the market's concerned about, but at the end of the day, investing is about investing in individual companies. And I think these sort of sell-offs give you opportunities because the baby gets thrown away with the bath water and this is when you find that the high quality stocks are trading well below where they historically trade, given the quality of the earnings and growth that you anticipate in the company over the coming years and decades.
MF: How do you see the market at the moment and where it's headed?
TC: We don't have a strong view in relation to markets. We try to learn from history. Obviously, the market's very concerned about inflation and what that means for interest rates. But when the market is already pricing in a reasonably bearish scenario, then quite often the odds are tilted in your favour for investing at those moments because the market's already assuming a somewhat pessimistic outlook.
As we sit here today, we think inflation has most likely peaked in the US. And I think interest rates will respond to whatever happens in the US. We've started to see [inflation] fall. It hasn't fallen very much at this point in time. And obviously, most central banks globally are still talking a reasonably bearish outlook in the sense that they are raising rates relatively quickly. But if inflation continues to decline, potentially at an accelerating rate, then a lot of that talk may well abate.
At the moment you've seen a reasonable sell-off. It may continue for the new term. I'm not sure. That's why we focus more on knowing what we want to buy at various prices and then simply executing if the stocks get to those prices — because to do anything else is to try to presume that you can forecast where the market's likely to go in the short or medium term. I don't think anyone has successfully done that historically.
So we would rather have a shopping list of stocks that we want to add to, or we want to buy into, and having targets as to where we would allocate capital if stocks got to those prices.
I think that's a far more sustainable approach to making sure that you are adding to your exposure when the market's down, because it's the one thing that people tend not to do. You want to buy more stocks when they're on sale and less when they're fully priced. Well, they're on sale when everyone's worried about typically macroeconomic concerns. And that's what we're certainly experiencing at the moment.
MF: It's funny how the human mind works, isn't it? Everyone will buy jeans when they're half price, but when shares are at half price, for some reason investors are more reluctant.
TC: It's just bizarre.
If someone told you that the house next door was selling at 50% of what you thought your house was worth, then if you're going to the bank and saying, "Can I stretch myself and buy next door because this is a screaming bargain!".
And yet, you're right, the same approach is adopted by very few in equity markets. I think that's just because people have less experience in dealing with value in companies and they're also a little bit less tangible than a property. So there's a combination of factors that result in eliciting a different response from investors than they take in other situations.
