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 gives his thoughts on three ASX shares that are deeply in the red this year.
Cut or keep?
The Motley Fool: Now let's take a look at three ASX shares that have fallen off the cliff recently, to see what you would do with them.
First is 4WD accessories maker ARB Corporation Limited (ASX: ARB), which has seen its share price halve so far this year.
Tim Carleton: This is one stock that we are looking to add to. We own it in the portfolio that we'd certainly be interested in adding to the exposure. A very, very high quality business.
You're right, they manufacture and distribute 4WD accessories. They've had a few transitory issues lately, but they still have a significant runway for growth overseas. So we're mindful of elevated demand through COVID, but there are lots of opportunities for them to grow revenue and earnings through organic expansion. And at the moment you've seen the multiple pull right back. So we would be looking to add to that exposure at the right point.
MF: How about Charter Hall Group (ASX: CHC), which has almost halved in 2022?
TC: If you own it, it's probably worth continuing to hold.
I mean, its issue is that it's facing macroeconomic pressure in the form of higher interest rates. So higher interest rates are negative for capitalisation rates.
[Charter Hall]'s a fund manager primarily in the real estate space and real estate fund managers have had this wonderful tailwind for a long time now of declining interest rates. And as interest rates fell, the relative attraction of the yields offered by REITs increased, which led to people bidding up those asset prices. As a result, capitalisation rates, which [are] the rates used to value property trusts, were declining.
That was pushing up valuations. That was a very, very powerful tailwind for fund managers such as Charter Hall.
We're now probably in the opposite environment. So what was a tailwind is probably a headwind. But I think that has been reflected in the multiple. It's currently trading on about 12 times, or a little over 12 times, earnings. A lot of their assets under management, I think, [are] reasonably sticky. So that's not a particularly large multiple for the quality of the business.
If you didn't have a position, it's probably a little bit more difficult because, like I said, you are most likely facing some headwinds over the coming years as capitalisation rates head north and therefore valuations come down, which makes it harder to generate performance fees — harder to accumulate further assets in that sort of environment than the one we just experienced for the last decade.
MF: Breville Group Ltd (ASX: BRG) shares have plunged 43% so far this year. What are your thoughts?
TC: Breville is, again, one that we would look to add to at the right time.
The market is concerned about pullback in appliance expenditure, and we think rightly so, and that's across the globe. And obviously, these guys operate in many, many different markets or have a presence in many markets around the world. But once this washes through, this business should still have plenty of organic growth as they can expand into new geographies.
They're creating products all the time. They spend a considerable amount of money on research and development each year. That means that they're always at the forefront of products in their space that are very, very highly regarded by consumers.
And that is their competitive advantage, right? Their competitive advantage is having products that consumers want. And it lets them earn a well above-average return on their capital, in selling those products.
So to the extent that we get an opportunity at an attractive price, and we're probably not too far off that at the moment, we will certainly be looking to add to our Breville exposure.
