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, Maple-Brown Abbott portfolio manager Phillip Hudak digs up the ASX share that (somewhat) made up for his biggest mistake.
The ASX share for a comfortable night's sleep
The Motley Fool: If the market closed tomorrow for four years, which stock would you want to hold?
Phillip Hudak: The one that you'd want to hold is Generation Development Group Ltd (ASX: GDG). This is a financial services player specialising in tax-effective investment bonds.
It's a market leader with approximately half of the industry flow coming through for the company. It's highly defensive with average investment terms greater than 17 years. In addition to that, they made a Lonsec acquisition, which has outperformed expectations, and they've just launched an annuity product recently that is gaining momentum off a low base with key product differentiation, including more investment options and greater flexibility versus other annuity products out there.
The key risk for the company is potential changes on the regulatory side coming through there.
MF: I see the share price has lost about 30% since April. You're not too concerned about that?
PH: Yeah, look, the medium-term outlook looks very strong there. The trajectory of fund flow has been building each year… and the opportunity set's not only in the investment bonds part of the business. [The] Lonsec and the annuity upside potential there is reasonably positive.
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.
PH: Look, there's a lot of things you regret as a portfolio manager there and it's very, very hard to get things right all the time.
MF: I've heard from many portfolio managers that if you get six out of 10 right then you've had a very good year.
PH: That's right there.
I'll probably just use a recent example. Probably what I'd say is I've unappreciated the momentum behind the lithium trade, particularly at the smaller end of the market. I've probably underestimated the speed of the EV [electric vehicle] adoption and the result by governments around the world with subsidies for electric vehicle purchases.
Many of the lithium stocks that are listed in the Australian small cap market are concept stocks or in the development stage and the path to earnings for many of these companies is outside our investment process and valuations for many of these stocks look stretched. We've remained sort of true to our investment process and avoided many of these stocks.
How we have got exposure to the EV trade is through graphite, and that has been through a company called Syrah Resources Ltd (ASX: SYR). Graphite is actually quite interesting and it makes up a significant portion of the cell components on the anode side of the EV battery.
Graphite has strategic importance, with 80% of global production coming from China and a little bit less of that on the material processing side also comes from China. Syrah Resources has been a major beneficiary of the US Inflation Reduction Act, which has actually seen the US Department of Energy providing grants for downstream processing facilities in the battery material supply chain. Syrah Resources has been a beneficiary of a $220 million US grant for their Louisiana facility.
MF: Fantastic. It's interesting to hear of another battery ingredient aside from lithium.
PH: From our perspective, it's a stock that actually fits our investment process.
