Finding value with Kate Howitt

-- | 08/04/2021

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Lex Hall: Kate Howitt oversees Fidelity's Australian Opportunities Fund. She is also on the list of the top 30 Women Fund Managers as rated by Citywire. Today, I thought I'd check in with her to look at the outlook, her investing approach, and where she sees value.

Kate Howitt, welcome to Morningstar. Thanks for joining us.

Kate Howitt: Thanks very much.

Hall: Now, the first thing I wanted to ask you was you guys use a bottom-up approach. That is, you look for companies with superior management, good cash flow, little debt. But I've noticed lately that your commentary, Kate, has a little bit more macro top-down focus. Is that you giving us any particular insights there? And should retail investors take something from that?

Howitt: No. Actually, that's more a quirk of our marketing where we want to make sure that the insights we get on stocks primarily go into the funds and unitholders of the funds. Having said that, we are probably more likely to be at a macro inflection point than we've been through the past decade, and it's pretty ironic that it wasn't the onset of the pandemic that brought about a rotation in stock markets. But here we are a year later now looking at a rotation of sorts in markets. So, we are at an interesting point.

Hall: And I suppose retail investors can't ignore what's happening throughout the world. They might look at a company and look and see whether it's got sound fundamentals, but it's nevertheless affected by what's going on elsewhere.

Howitt: Well, it all comes down to time horizon. So, for example, if you said in 1999, I'm a long-term holder and you happened to own the actual long-term winners out of the dotcom, so companies like Amazon and Google, it still took those companies, I think, about 16 years to regain their previous highs. So, if you are truly a long-term winner and you're not in a position where you might be a forced seller in a downturn, then it's fantastic to be able to take a long-term view. But you certainly don't want to be in the position where you've got so much of your portfolio in the markets that if there were a drawdown, you'd be a forced seller. That's not the way to position yourself.

Hall: And on that note, Kate, I suppose a question for investors is, how long should they stay in your fund to sort of get the value-add, if I could put it like that?

Howitt: Well, I'm certainly managing it for the longer term. I've got plenty of holdings in there that I've had for over a decade. So, I'm looking at a three to five-year horizon, and it's particularly important in a small market like Australia, you don't have that many opportunities. So, you do want to find the long-term winners. And also, we have capital gains tax. So, where you can identify those long-term positions, you want to sit there and let them accumulate rather than cutting the tax office in and out every couple of years.

Hall: OK. And I should point out that the Australian Opportunities Fund has—since its inception in 2012, it's outpaced the benchmark S&P/ASX 200 Accumulation Index by about 1.8 per cent. How are you positioning, Kate, for your portfolio to benefit from the multitude of outcomes from vaccine distribution?

Howitt: Yeah. So, as you mentioned, it is a fund designed to capture the opportunities from bottom-up stock picking. Ironically, the way to do that is to try to minimize our other risks. And so, that includes kind of macro positioning risks, sector risks, factor risks. And so, I'm always trying to keep the fund in a fairly balanced position. I never kind of swing too far into individual sectors or individual thematics. So, different times, different holdings in the fund will come to the fore. So, right now, the more cyclical or kind of value holdings have been doing the heavy lifting in the fund. So, maybe names like BlueScope Steel, Lendlease Group, some of the smaller mining companies. Those are the ones that have been rewarded by the market over the last couple of months. But I still maintain my broad array of holdings into Commonwealth Bank on the banking side, Goodman Group on the property side, CSL on the healthcare. So, I always keep the fund with the best names I can find right across the market spectrum.

Hall: OK. And I should say we'll drill down into a few names in a video after this one. I noticed that Telstra is on your list of cash cows too, you use that term. What do you see there in particular?

Howitt: Well, we think that telcos run in broadest cycles around the technology upgrades. And so, half the cycle you've got the companies investing their CapEx very heavily, and then after that you get a couple of years of them being able to harvest. And so, we think Telstra is at the tail end of a very heavy CapEx period into 5G. And now, it will begin to monetize that and more of the customer base will buy 5G handsets and pay slightly higher pricing to access the 5G network, and that historically has been a good time to own Telstra. So, we think that there's really attractive cash flows that will come out of that business to support the dividend even as the NBN one-off payments roll off.

Hall: OK. Another stock you hold this Treasury Wine Estates, and they're facing a bit of strife from China. How are you factoring in that broad-based China risk and the tariffs imposed this week, for example? Does that alter your view at all?

Howitt: Well, the announcement this week was really just formalizing what we had heard the initial rumblings of a couple of months ago. So, we don't really think there's much information content in that. When the initial tariffs were announced, the market pretty much responded—you can kind of infer back from the share price that the market just kind of zeroed out the China line for that company. We think that's a bit simplistic. We think that some of the revenue that would have been earned from that line that wine because it's a luxury, it can be cellared for longer and held off for future vintages. That's part of the answer. The company was already going down a path of broadening out the brand. So, wine has historically been a kind of cottage industry where the brand attaches to a plot of land. And Penfolds is now going to be produced in California and in France. And so, you'll get that brand extension across other regions. And so, in a couple of years, Treasury Wines will be able to turn around and sell Penfolds into China again, making the advantage of that really strong brand by using Californian grapes and French grapes. And so, we think this notion that you just zero out that revenue from China is a bit short sighted and therefore the company has room to surprise on the upside. But it's not a near term or immediate thing. This is going to take a couple of years to play out.

Hall: OK. Kate, ESG is a big part of your investment strategy and you've said recently that if we're to decarbonise, we'll need a lot of metals. Which companies therefore do you think are primed to sort of lead that and benefit from that?

Howitt: Well, the most obvious one is BHP. It's one of the largest metals producers in the world. It has a portfolio that still has a little bit of petroleum in it, and the company, I think, will look to realize value from that at the appropriate time in the market. But it's also got exposure very heavily to copper and nickel. Nickel, especially—on BHP's analysis, we will probably need—the world globally will need about three to four times as much nickel over the next three decades as we've required over the past three decades. So, that's a really attractive demand setup for that commodity through time. So, we're not calling for cycles to go away in the commodity space. There will still be cycles. There will still be individual commodity price fluctuations for the individual metals. And so, a company like BHP, particularly for the longer haul, allows you to kind of be exposed to that thematic without having to kind of pick individual commodity cycles. Right now, similar to Telstra, the company is also in a very attractive cash flow part of the cycle, because its CapEx has been quite restrained and yet with increased demand, you should get strong demand and therefore underlying price performance of the commodities. But the majority of that cash flow will be able to come to shareholders rather than being sucked into massive multibillion-dollar developments.

Hall: OK. And we'll look at—in a next video we might look at how to play that nickel option that you suggested. Final question, Kate, without notice. Where do you stand on cryptocurrency?

Howitt: Well, I think the big question on that is, is it digital gold or digital tulip? And perhaps what tips a little bit against it is the huge energy consumption. So, at a period of time where the world has this desperate need to decarbonize and a lot of decarbonization of the transport sector and the manufacturing sectors is going to require increased electrification. So, we have this enormous task to switch our existing grids to renewable sources. Then we have to massively expand those grids to cover transport and industry. And now, we layer on top a financial service derivative that uses—I think I saw that it's about the same size as the electricity usage of the Netherlands. So, that's a pretty big increment. And I really question the necessity of that in today's environment.

Hall: OK. Kate Howitt from Fidelity, thank you very much for your insights.

Howitt: Thanks.


Hall: I'm Lex Hall for Morningstar. Thanks for watching.

This report appeared on 2022 Morningstar Australasia Pty Limited

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