How We Invest Your Money: Warryn Robertson

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Lex Hall: Hi, I'm Lex Hall, and welcome to the Morningstar series, "How We Invest Your Money." With me today is Warryn Robertson from Lazard Asset Management's Global Equity Franchise. We're going to talk about global stocks, his investment philosophy and a bit of the outlook for 2019.

Good day, Warryn.

Warryn Robertson: Good day, Lex.

Hall: Thanks for coming along.

Robertson: Pleasure.

Hall: Now, a cornerstone of the Global Equity Franchise is valuation-driven investing; that is, you guys seek excess returns with low risk. And since its inception in 2013 the fund has delivered more than 16 per cent versus about 13 per cent for the MSCI World Index. I want to sort of take a different tack in the beginning today and talk about stocks that you avoid. You generally never own banks, miners, oil and commodities. Can you tell me your sort of rationale behind that?

Robertson: Sure. The philosophy around the Global Equity Franchise strategy is to invest in companies that we believe are more predictable than the average industrial companies, essentially. And the rationale for that is, in essence, I spend my day doing two things: I try and pick an earnings number for a business that it's going to generate over medium to longer-term and then I try and pick an earnings multiple that I should put on that business to arrive at a value. Or I forecast cash flows and I use a discount rate to arrive at a value. If we can find a group of businesses that we believe are more predictable, and therefore it's easier for us to forecast those earnings or cash flows, we believe we are less likely to make a valuation error and therefore, in the long run more likely to make excess returns for our investors.

To address your question then, the reason we shy away from the miners and the resource stocks, the oil and gas producers, the banks and insurers, people like that is because we acknowledge they operate in competitive markets and we believe that forecasting commodity prices, particularly in the short to medium term, is fraught with incredible difficulty. And likewise, for banks and insurers. In the domestic economy, people have only ever seen great times, 28 years of uninterrupted economic growth. Banks have been a major beneficiary of that. But you only have to look outside of Australia to see the carnage that was created with the global financial crisis and what that meant for the earnings of banks during that time to understand that credit growth, bad debt cycles and the lure of very, very big numbers when you are dealing with financial institutions means that their earnings aren't always as predictable as a business that we would want to invest in. And so, it's that criteria that eliminates those types of investments.

Hall: And with that in mind, how different today, let's say, is the portfolio compared to, say, three years ago?

Robertson: Yeah. It's always a stock-driven scenario for us. So, it's bottom-up valuation of compelling businesses at what we think are attractive prices. But to answer that question, if you look three years ago, where we found significant value opportunities was in the information technology space, IT. And IT is sort of a grab bag for a whole bunch of technology businesses. But the ones that we saw had really exceptional value opportunities three years ago, were the old-school tech, so we are talking Microsoft, Oracle, Intel and also, you could add Google to that mix. And these businesses, although they generated revenues in very different ways, they are in that IT space, but the thematic that the market was troubled with was the transition from traditional offering to the cloud; how that transition would occur and the wind-down of the traditional offering and the uptake of the cloud. That transition was really what we thought was providing the opportunity for investors that had that longer-term view.

Yes, the quarterly numbers were looking a little messy. But if you looked at where these businesses were going to be in three to five years, you could see the path to generating superior performance to what they generated before.

Hall: On that note actually, I just wanted to delve a little bit further into some of those tech names you are talking about and talk about risk in particular. Because you recently said in reference to Google and Facebook, “once a business becomes dominant, the biggest risk is not that someone new comes along, but that someone who has been there for a long time and very old, i.e., the government, forces you to break up”. What sort of practical lesson does that statement have for individual investors?

Robertson: Yeah. Sure. And look, we've been fans of the Google business, Alphabet. We've owned it in the portfolio in large numbers going back three years. We have a much smaller position today as its share price is approaching fair value. We've never become comfortable enough with Facebook as a predictable business to include it in our investable universe, but we understand the strength of its economic moat. But both of them have that problem where they are in essence quasi monopolies. And you've seen historically in the past where particularly the US government under The Sherman Act has looked to break up those types of businesses. You've seen the Baby Bells come out of AT&T back in the 80s. You saw Microsoft confront the same issues in the early 2000s and Microsoft products were allowed to be run on other platform systems.

Government, if they feel these businesses are becoming too dominant, will find ways to take that dominance away from them. And it's a risk that is left-field and I don't think a lot of people think about it. But when we look at the valuation equation, particularly for Alphabet, it's one of the conservatisms we try and build into our numbers to have that bigger margin of safety, so we still feel comfortable owning Alphabet today in our portfolio.

This report appeared on www.morningstar.com.au 2019 Morningstar Australasia Pty Limited

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