'Then we got hit with the equivalent of a war'

-- | 15/06/2021

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Lex Hall: Warryn Robertson is Portfolio Manager for Lazard Asset Management's Global Equity Franchise. As the name suggests, the fund seeks companies that have strong competitive advantages and predictable cash earnings.

Warryn, welcome back to Morningstar.

Warryn Robertson: Good to be with you again, Lex.

Hall: Now, 2020 was a bit of a tough one for everyone, but for you guys in particular. You have a sector exposure as follows—healthcare 26 per cent, industrials 22 per cent, utilities about 14 per cent. It was a tough year for everyone, but you bounced back. How did the companies that you hold fare in particular?

Robertson: Yeah, look, it's a good point to start off with. If you look at our longer-term history, we had five or six years there where we did incredibly well, outperforming the market in various types of environments going back to 2013. 2019 was a strong momentum market. Absolute performance was pretty good, but we underperformed in really a strong, growth-driven momentum market being fundamental value investors at heart. That was tough. And then, of course, we ended 2020 in COVID. And as I've described to a number of our clients, we had a portfolio that was well-positioned for a normal recession and well-positioned for a normal operating environment. And then, we got hit with what can be best described as the equivalent of a war. The pandemic-imposed lockdowns and shutdowns, which really meant that traditionally very defensive businesses that you spoke about before were anything but.

Hall: I was just going to say that doesn't prompt any sort of existential crisis at the Global Equity Franchise Fund.

Robertson: Yeah, well, we've gone through cycles before. So, we've seen this happen with—we've been working together now in various guises for more than 15 years. And the strategy that we use leverages of an investment philosophy that goes back decades. So, we went back to first principles and looked at all of our companies and realised, yeah, look, there were some issues as they faced with COVID, but as you said, they're in strong entrenched incumbent positions and economic franchises, a predictable business which has a market leading position. And what that means is, they're able to adjust their operations in varying different economic environments. That simple story, win-or-lose argument isn't going to be the way it's going to be. Some companies can adjust, as ours have, and they will capitalise on this market environment, and we're seeing that with a number of the stocks that we own.

Hall: OK. I should just say since inception in October 2013, the fund has returned 12.34 per cent versus the MSCI World Index, which is the benchmark, which has returned 10.9 per cent. Warryn, before we do another video on a few stocks that you've sort of touched on, I just wanted to finish on inflation, because it seems that every day we're talking about this more and more. The shadow of inflation is growing larger, apparently. Are you concerned about this and should retail investors like me be concerned, too?

Robertson: I think it's a—look, it's still not in our core assumptions. It's probably not in anyone's core assumptions. But it's a fat tail risk that certainly is now more prevalent than at any time in at least the last 10 years, and possibly the last, I would argue, 20 to 25 years. So, most people's investing careers what they've seen is inherent disinflation in a world that has been really overtaken by the technological revolutions. The reason that this pandemic is different and how I suspect many investors have not considered why inflation is now coming at a time when we've got these weak economic conditions is, unlike a typical recession if you go back to your 11 and 12 economics, there's supply and demand curves. For every good economy, it's got supply and demand curves in aggregate. In a recession, supply is typically fixed and demand falls. And if you just think about how that moves, it means that that's deflationary for prices. In a pandemic, which is analogous to a war, supply and demand both moved to the left. What we had was government-imposed shutdowns which moved the supply curve to the left as well as demand curve from consumers moving to the left. Now, that's not deflationary. And that's why you're seeing certain pockets like timber, other soft commodities, just Panamax vessel, freight rates, all these little areas where supply has also moved and now as demand is shifting, you're seeing these shortages. And I think that's something that people got to just understand that this is not a normal recession. This is a pandemic and it's more analogous to a war in terms of the economic outcomes. And that's why inflation is starting to appear.

The second totally separate point is that we've been on this experiment called quantitative easing, which when it was kept within the petri dishes, I call it, of financial institutions and reserve banks and governments, and they all just lent money back and forth to each other, was fine because you controlled it. Well, as Bernanke said in his famous helicopter speech, we're now handing checks out to moms and dads and that creates a different type of experiment in terms of quantitative easing, which is the other side of the inflation conundrum that we all face. So, we've still got that technological revolution which is a tailwind, which will create deflationary environments, but coupled with the pandemic and this experiment called quantitative easing, I think inflations are much for your risk now than it has been at any time in the last 25 years. But it doesn't mean that we're predicting 10 per cent inflation as a base case. That's certainly not what we're saying. We're just saying it's now more of a risk than it has been at any time for most of our investing careers.

Hall: OK. Warryn Robertson, we will do another video where we, as I said, touch on a few stocks in the fund. But for now, thanks very much for sharing your thoughts with us.

Robertson: Thanks again, Lex. Pleasure.

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

This report appeared on www.morningstar.com.au 2022 Morningstar Australasia Pty Limited

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