Video: Investing in Australian Equities – Roy Maslen, AllianceBernstein

Posted on 21/1/2021

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Overview:

Peta Nunn, Director of Perks Private Wealth, recently spoke with Roy Maslen, Chief Investment Officer for the Australian equities fund at AllianceBernstein, who delivers some great insights on investing in Australian equities and investing with a focus on low volatility.

Transcript

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Hello to the Perks community,

I have the pleasure today

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of speaking with Roy Maslen,

who is the Chief Investment

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officer for the

Australian equities

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fund at AllianceBernstein.

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Roy has offered to

give us some insight

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into Australian investing

in Australian equities,

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investing with a focus

on low volatility.

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Now Roy, welcome and thank

you very much for your time.

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And perhaps if you can

begin, if you could please

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give me a bit of background

about yourself and also

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about AllianceBernstein.

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Thank you for that introduction.

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I’d like to start

off by wishing you

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and all your viewers today,

the best of health in what’s

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been clearly a very

challenging year.

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So to introduce

AllianceBernstein,

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we’re a large global investor

investing more than $500

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billion around the world.

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The reason that’s

important is it

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means we have investment

experts in all

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the major geographies that

can help our Australian team.

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So that means we can

pick up the phone

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and speak to our

friends and colleagues

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in China, Europe and the US.

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And other geographies around

the world, which clearly,

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in a COVID-19 environment

has been particularly cool.

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So a bit of introduction

to myself by background.

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I’m an engineer.

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Many years ago, I worked

for Rolls-Royce Aerospace

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and Shell.

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I joined

AllianceBernstein in 2003,

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originally covering

the resources,

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but then, since 2005,

had been building out

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the Australian Equity team.

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Much like my background, which

was started in industry, many

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of the people who I

worked with have also

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worked in the industries

that they now cover.

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So, for example, Hamish,

who covers that banks.

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I used to work for Westpac,

our resources analyst

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today is a chemical engineer.

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Anya who works on health

care, used to it for Cochlear

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and somewhat ironically, a

property analyst himself,

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a PhD in concrete.

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So together as a

team, we have launched

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the I’ve managed the AB volatility

equities fund in 2014.

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And that really came

around from a question

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we have from one of our

institutional clients in 2013

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that asked us.

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How could you build

a strategy that over time,

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that could provide really

strong performance

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in markets that are falling

and provide some volatility

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protection.

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So in terms of the

Australian market, obviously,

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it’s predominantly made up

of financials and resources.

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And can you sort of explain

for us why that really is.

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And what sort of I

guess, what obstacles

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this poses for investors?

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It’s a really

important observation

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that 20% of our market is

invested in banks and about 20%

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in resources.

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That is really a

function of history.

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So banks grew

rapidly in the 90s,

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resources in the early 2000s,

they performed very well.

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But they create a couple of key

challenges for US investors.

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Money is where do you

find future growth?

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And secondly, what does

that mean in terms of risk?

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Well, one of the reasons

that those areas, banks

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and resources are

so large and is

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a lot of the areas where we

believe that will be strong,

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future growth are

underrepresented.

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That might, for example,

include health care and buying

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through technology.

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In fact, if you look at other

markets, I look at banks.

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First of all, as I said,

about 20% of our market

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in the US market where other

areas have grown more rapidly.

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The big four banks are now

less than 3% of the index.

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Now, banks are currently

benefiting because

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with the success in

battling COVID-19,

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perhaps their bad debts

are going to be down,

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but they’re still

going to struggle

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to grow over coming years.

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Most market expectations are

that the revenue or income

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for the banks will be broadly

flat over the next three years.

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And one of the key

reasons for that,

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as interest rates

come down, that’s

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bad for the incumbent banks.

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So banks are really going

to struggle to grow.

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And in fact, just a standstill.

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They’re going to have to cut

costs to retain their earnings.

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In terms of resources

or similar challenges

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as well, in terms of growth, we

have some world class companies

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here in Australia that

produce and sell resources.

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However, at the

moment, they’re highly

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reliant on one key

resource, which

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is iron ore, which is driving

a lot of their profits

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and iron ore North of

$150 a ton at the moment.

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And that’s likely to

come down over time,

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which will create

a big hit win for them

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and make it harder

for miners to grow.

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Again, interestingly, if

I look at the US market,

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they’ve never had the same

mining exposure that we’ve had,

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that energy in the past

has been really big.

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Then again, with

energy prices coming

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under pressure, that’s now

less than 3% of their markets

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so a very big difference.

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So that’s on the growth side

that potentially the bigger

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challenge is around risk.

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And that’s because both

banks and resources

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are highly reliant on the local and

global economy being strong.

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So we call those cyclical stocks

because their earnings and cash

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flows are highly

reliant on the economy.

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What that means is

investors, though, they’re

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high beta stocks.

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And what does that mean?

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That means that when markets are

up, they often cost a bit more.

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But importantly, when

markets are down,

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they often fall

mulden the market.

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So they fall substantially

more than the market on average

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when markets are down.

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And that creates risk.

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The other thing is, with

those being very large sectors

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that we’re familiar with,

we all know the big banks

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and big miners are not creating

as much space for other sectors

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in our market that do well,

not just went to the economy

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is strong, but can

continue to do well

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when the economy’s weak.

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So when we think about

building portfolios,

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we don’t look to just

invest in companies

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that are big on a

well known, we look

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to have large allocations

to other sectors

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and other areas which have

more stable earnings and cash

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flows over time.

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And overall reduce the

risk of the portfolio.

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And you talked a bit

about risk, then and look,

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really, investors are

always concerned about risk

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I know our clients are, we’re

concerned about risk

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and every individual does have

their own appetite for risk.

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I’m really interested

if you can perhaps

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go through how your fund and

AllianceBernstein manage risk

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and what you do.

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So let me start off by just

talking about risk in equities

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in general.

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And then how we think about it.

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So the good news from

investing in equities

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over the last

several decades now

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is it might be able to deliver

growth, income in the franking

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credits that many people value so highly.

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So in the long term,

they’ve been good investment.

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The challenges in the short

term that markets can be very

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volatile and equities can fall.

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In fact, two out

of three calendar years

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the peak to trough movements in

markets can be 10% or greater so two

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out of three years.

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Perhaps more

importantly, if you look

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at the full history

of the Australian law lords,

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it’s kind of back now 80 years

that once every five years,

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we get a much more

substantial pool

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in the markets in

the order of 30%

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Now we see similar

drivers of that

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again and again, over time.

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That can be asset bubbles.

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It can be debt, can be conflict,

it can be technical shocks.

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But what’s really hard is

to pick when those corrections

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will come.

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So, for example, this year,

there were very few, if any,

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in the market that

really expected

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the substantial correction that

we had because of COVID-19.

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So investors, when

we think about risk,

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is how can you construct

a portfolio that

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will be resilient and outperform

when markets are falling?

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So what’s the cost of

building a portfolio that does

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well when markets are down?

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Well, the cost of

that is you have

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to give up some

of the upside when

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equity markets are running.

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Now, that leads to

an obvious question.

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If on average markets

over time if you’re not

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capturing all the

upside, what does that

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mean for overall performance?

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But perhaps

I can illustrate this just

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by theoretically looking at

market returns over the last 30

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years, all the way back to 1990.

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If you could build a portfolio

that when the market was done,

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only fell half as much,

but when the market was up

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and they captured

80% of the upside,

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that’s a lot of the upside

that will comfortably

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outperform over that time.

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So we think about that is

the upside of less downside.

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You can have less downside

when markets are full

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and you need capital to the

upside over time to outperform.

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So we’ve done a lot

of research on how

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you can provide some

of that improved

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performance in downside.

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And there are four

key elements of that

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that I’ll touch on briefly.

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The first starts with

what kind of companies

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do you want to invest in?

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And we believe that

strong, stable businesses

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with stable cash flows

have stable share prices.

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Those companies, fall less

than the market when the market

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is down.

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That’s a really

important starting point.

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The second thing, though, is we

want to avoid volatility traps,

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and we call the

volatility trap is

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as a company that looks

stable, that if something

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happens and the share price

becomes a lot more volatile,

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it falls dramatically.

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There are three main

reasons that we’ve

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seen that in the past.

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One is competition

within your industry,

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for example, possible

within supermarkets.

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The second one can be an event.

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For example, the

launch of the NBN

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and the impact that had

on Telstra and the third

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can do with balance sheets.

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For example, how

APRA’s asked the banks

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to raise more capital.

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So you want to avoid

investments in companies

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during those three times.

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The third thing that we

believe you need to do

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is only invest in companies

that you think are attractive investments

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and not just large.

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So to your first

question, this leads

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us to be much more

cautious about only

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selectively investing in banks

and resources and diversify

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the portfolio across

a broad range of areas

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that are more resilient

through the economic cycle.

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And importantly if we can’t

find the right exposure here

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in Australia, we selectively

have stocks from overseas

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to complement what we can

find here back and forth.

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And finally, we do think we

need to think about macro risks,

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whether those are global or

local, whether it’s an election

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overseas, a Brexit vote,

COVID-19 or interest

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rates or currency.

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We look to try and

build portfolios

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that are resilient to

each of those factors.

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As many people know, to

ensure buying power over time,

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we do need to hold equities

in a balanced portfolio.

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That being said, however,

a balanced portfolio

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can still be quite

volatile, especially

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in periods of big

market swings like we’re

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seeing at the moment.

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Can you walk us through the

role of a low volatility fund

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like yours at times like these.

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And comment on the

sorts of investors

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that it might suit?

thank you?

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00:09:47,490 –> 00:09:49,110

Thank you. Well, first of

all, I’d definitely

248

00:09:49,110 –> 00:09:51,800

point you to what your

financial advisors to recommend

249

00:09:51,800 –> 00:09:53,900

specific strategies

that would work

250

00:09:53,900 –> 00:09:56,810

for your own individual

investment needs and lifestyle.

251

00:09:56,810 –> 00:09:59,060

But what I can do

is shed some light

252

00:09:59,060 –> 00:10:01,780

by looking back in the

past how volatility

253

00:10:01,780 –> 00:10:06,092

in periods of downside that

impacted a number of investors.

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00:10:06,092 –> 00:10:07,550

So I’m going to go

back all the way

255

00:10:07,550 –> 00:10:11,930

to the global financial

crisis at the end of 2007

256

00:10:11,930 –> 00:10:16,130

to 2008 to 2009, and talk

about a number of investors

257

00:10:16,130 –> 00:10:18,980

and illustrate how that

volatility, downside risk had

258

00:10:18,980 –> 00:10:20,957

a negative impact on them.

259

00:10:20,957 –> 00:10:23,290

So the first of these investors,

you’re going to assume,

260

00:10:23,290 –> 00:10:25,720

is a buy and hold investor.

261

00:10:25,720 –> 00:10:29,050

Let’s assume that on the Eve of

the financial crisis in October

262

00:10:29,050 –> 00:10:33,200

2007, they invest $100,000

in the Australiana market.

263

00:10:33,200 –> 00:10:35,470

And they invest in the

market in a broad index

264

00:10:35,470 –> 00:10:37,480

fund or passive investment.

265

00:10:37,480 –> 00:10:39,340

What they observed

over the coming months

266

00:10:39,340 –> 00:10:43,030

was more than a 40% reduction

in the value of that capital.

267

00:10:43,030 –> 00:10:45,950

Now, they reinvested their

dividends and franking credits several years later,

268

00:10:45,950 –> 00:10:49,690

they would

end up with another $100,000

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00:10:49,690 –> 00:10:51,330

They would’ve recoup those capital losses.

270

00:10:51,330 –> 00:10:53,080

It would have been a

very painful journey,

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00:10:53,080 –> 00:10:55,640

but they got back to

where they started.

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00:10:55,640 –> 00:10:56,890

So that was a tough challenge.

273

00:10:56,890 –> 00:10:59,680

But let me talk about two

investors that the even tougher

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00:10:59,680 –> 00:11:01,450

the first of these

are characterized

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00:11:01,450 –> 00:11:03,820

as a fearful saver.

276

00:11:03,820 –> 00:11:06,940

So somebody who’s watching an

erosion in their capital value

277

00:11:06,940 –> 00:11:10,940

during that period, capital

values were down close to 40%

278

00:11:10,940 –> 00:11:13,550

And the pain just got too

much for a range of reasons.

279

00:11:13,550 –> 00:11:16,092

Potentially, they were thinking

about their future retirement

280

00:11:16,092 –> 00:11:18,200

and they might have to

be delayed.

281

00:11:18,200 –> 00:11:19,840

Potentially they had a large

capital expenditure

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00:11:19,840 –> 00:11:21,910

that was coming up that

they wanted to fund

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00:11:21,910 –> 00:11:23,470

or just the pain

of seeing the news,

284

00:11:23,470 –> 00:11:25,220

every day the markets was down

that was too much.

285

00:11:25,220 –> 00:11:28,660

So they decided to move out of

equities and into term deposits

286

00:11:28,660 –> 00:11:33,130

that were paying higher rates

in 2008 than they are today.

287

00:11:33,130 –> 00:11:35,950

By the time the original

investors got $100,000 back,

288

00:11:35,950 –> 00:11:41,660

this investor only has $78,000

invested in the same market.

289

00:11:41,660 –> 00:11:44,530

But they ended up

$22,000 or 22 percent worse off.

290

00:11:44,530 –> 00:11:47,928

A very challenging

experience for them.

291

00:11:47,928 –> 00:11:49,720

Now let’s think about

a third investor, now

292

00:11:49,720 –> 00:11:52,480

a retiree they need to draw down

293

00:11:52,480 –> 00:11:54,130

on some of their capital each year.

294

00:11:54,130 –> 00:11:56,170

And let’s say that

they’re spending $10,000

295

00:11:56,170 –> 00:11:58,650

of that $100,000 per annum.

296

00:11:58,650 –> 00:12:01,980

Because their

annual expenditure,

297

00:12:01,980 –> 00:12:04,847

they have less capital

invested in the market.

298

00:12:04,847 –> 00:12:06,430

And at the end of

this period, they’re

299

00:12:06,430 –> 00:12:09,070

almost as bad off as the fearful saver.

300

00:12:09,070 –> 00:12:11,320

So what we’re trying to

illustrate through these three

301

00:12:11,320 –> 00:12:14,200

examples, the buy and hold

list have a challenging time,

302

00:12:14,200 –> 00:12:16,180

but the fearful

saver, the retiree

303

00:12:16,180 –> 00:12:17,867

is done significantly worse.

304

00:12:17,867 –> 00:12:19,450

What I’m trying to

illustrate by this,

305

00:12:19,450 –> 00:12:22,160

that this can have a profound

impact on investment outcomes.

306

00:12:22,160 –> 00:12:24,400

And it can have a profound

impact on lifestyle.

307

00:12:24,400 –> 00:12:26,770

And for that reason,

investors may

308

00:12:26,770 –> 00:12:28,930

be interested

investing in strategies

309

00:12:28,930 –> 00:12:30,270

that can actually .

310

00:12:30,270 –> 00:12:33,490

perform well in fallen markets and manage

some of that volatility.

311

00:12:33,490 –> 00:12:35,673

Again, I’m not getting

any specific advice.

312

00:12:35,673 –> 00:12:37,090

I very much encourage

you to speak

313

00:12:37,090 –> 00:12:39,280

to your advisor about any strategy

and how that might fit

314

00:12:39,280 –> 00:12:42,490

into your overall lifestyle.

315

00:12:42,490 –> 00:12:45,002

Yeah, that’s certainly

our job and certainly

316

00:12:45,002 –> 00:12:47,460

what we enjoy doing with our

clients, but that’s fantastic.

317

00:12:47,460 –> 00:12:49,085

Thank you for giving

us those examples.

318

00:12:49,085 –> 00:12:52,720

I think it’s really reflective

of the reality of what happens

319

00:12:52,720 –> 00:12:54,200

in different market conditions.

320

00:12:54,200 –> 00:12:57,280

So it certainly

sounds like your process

321

00:12:57,280 –> 00:13:00,400

to capital preservation

and stock selection

322

00:13:00,400 –> 00:13:02,020

is very, very robust.

323

00:13:02,020 –> 00:13:05,800

And I guess I’m keen to find

out in terms of looking forward

324

00:13:05,800 –> 00:13:06,760

in the future.

325

00:13:06,760 –> 00:13:08,740

Are there particular

sectors or stocks

326

00:13:08,740 –> 00:13:12,250

that you think would be ripe

for the picking for the next 5

327

00:13:12,250 –> 00:13:15,830

to 10 years in terms

of growth prospects?

328

00:13:15,830 –> 00:13:17,652

So we very actively

manage our portfolio.

329

00:13:17,652 –> 00:13:19,360

So the positioning

will evolve over time,

330

00:13:19,360 –> 00:13:22,060

but we’re particularly

attracted to stocks and sectors

331

00:13:22,060 –> 00:13:24,220

and things that we

think will be resilient,

332

00:13:24,220 –> 00:13:28,410

independent of a range of macro

outcomes and deliver ongoing growth.

333

00:13:28,410 –> 00:13:29,850

So let me highlight

a few of those

334

00:13:29,850 –> 00:13:31,860

that we think are

attractive today.

335

00:13:31,860 –> 00:13:35,290

The first is infrastructure in

Australia and around the world.

336

00:13:35,290 –> 00:13:37,920

Many governments are investing

in infrastructure as a way

337

00:13:37,920 –> 00:13:40,170

to recover from

the COVID crisis.

338

00:13:40,170 –> 00:13:42,750

Infrastructure has many

attractive characteristics.

339

00:13:42,750 –> 00:13:45,000

You often get ongoing

volume growth.

340

00:13:45,000 –> 00:13:48,120

You get price growth often linked

to with government contracts

341

00:13:48,120 –> 00:13:49,200

to CPI.

342

00:13:49,200 –> 00:13:50,850

So that gives you

revenue growth.

343

00:13:50,850 –> 00:13:52,980

And there are also major

beneficiaries of low debt

344

00:13:52,980 –> 00:13:54,420

costs around the world.

345

00:13:54,420 –> 00:13:55,950

So infrastructure

within that might

346

00:13:55,950 –> 00:13:58,072

be toll roads or

utilities or energy,

347

00:13:58,072 –> 00:14:00,030

we think is an attractive

theme in the current environment.

348

00:14:02,620 –> 00:14:04,270

Secondly, we’ve

clearly seen that we

349

00:14:04,270 –> 00:14:07,360

go through a period of

technological disruption

350

00:14:07,360 –> 00:14:09,460

and that’s creating a

lot of new opportunities

351

00:14:09,460 –> 00:14:11,620

for businesses to succeed.

352

00:14:11,620 –> 00:14:14,470

One of the challenges we

see as Australian investors,

353

00:14:14,470 –> 00:14:17,230

which is although there are

some very successful technology

354

00:14:17,230 –> 00:14:19,870

companies in Australia,

there aren’t many of them.

355

00:14:19,870 –> 00:14:21,740

So investors have

chased after them.

356

00:14:21,740 –> 00:14:24,300

And the valuations of those

are very expensive today.

357

00:14:24,300 –> 00:14:26,530

In our view, great

companies that

358

00:14:26,530 –> 00:14:29,763

are rich to expensive

prices create risk.

359

00:14:29,763 –> 00:14:31,180

So as I mentioned

earlier, we like

360

00:14:31,180 –> 00:14:33,850

to diversify and

selectively move overseas

361

00:14:33,850 –> 00:14:35,910

to complement the

Australian Equity portfolio.

362

00:14:35,910 –> 00:14:38,590

So what we’re looking to

expose ourselves to technology.

363

00:14:38,590 –> 00:14:41,080

We can find interesting

opportunities overseas,

364

00:14:41,080 –> 00:14:43,450

for example, in the space

of cyber security, which

365

00:14:43,450 –> 00:14:45,612

I think will be an

ongoing and growing need,

366

00:14:45,612 –> 00:14:47,320

and also to support

some of the platforms

367

00:14:47,320 –> 00:14:49,737

around the world, such as

mobile phones, companies writing

368

00:14:49,737 –> 00:14:54,500

software for global

giants such as AT&T.

369

00:14:54,500 –> 00:14:56,210

A third area of

interest, in our view,

370

00:14:56,210 –> 00:15:00,740

is consumer staples, what’s

attractive in these businesses

371

00:15:00,740 –> 00:15:03,920

is this underlying growth in

demand for their products.

372

00:15:03,920 –> 00:15:06,380

And if you have a strong

competitive advantage,

373

00:15:06,380 –> 00:15:09,020

you can sustainably

grow over the time.

374

00:15:09,020 –> 00:15:11,180

So a couple of areas that

we like at the moment

375

00:15:11,180 –> 00:15:13,500

are strongly branded

consumer staples.

376

00:15:13,500 –> 00:15:15,530

Again, some of those

we find opportunities

377

00:15:15,530 –> 00:15:19,485

overseas producing some of

the world’s great essentials

378

00:15:19,485 –> 00:15:21,860

that we certainly need in the

current environment, things

379

00:15:21,860 –> 00:15:25,865

such as chocolate ice cream,

tea, coffee, those businesses.

380

00:15:25,865 –> 00:15:27,990

We think have strong

underlying growth over the time.

381

00:15:27,990 –> 00:15:31,820

And again, resilient, I think,

bring it closer to home.

382

00:15:31,820 –> 00:15:33,800

I think some of the

supermarkets in Australia,

383

00:15:33,800 –> 00:15:35,510

again, look very attractive.

384

00:15:35,510 –> 00:15:38,690

They clearly have strong sales

on the back of COVID

385

00:15:38,690 –> 00:15:40,160

and a lot of the panic buying.

386

00:15:40,160 –> 00:15:42,590

But we do believe that some

of the competitive advantages

387

00:15:42,590 –> 00:15:43,910

will be enduring.

388

00:15:43,910 –> 00:15:45,410

In particular,

some of the leaders

389

00:15:45,410 –> 00:15:47,270

have really accelerated

their rollout

390

00:15:47,270 –> 00:15:49,370

of online delivery,

which I think

391

00:15:49,370 –> 00:15:51,250

will be important to their

longer term growth.

392

00:15:51,250 –> 00:15:54,350

So again, consumer

Staples.

393

00:15:54,350 –> 00:15:56,300

Fourth and finally I’m going to

talk about gold.

394

00:15:56,300 –> 00:15:57,300

Gold’s a very interesting

395

00:15:57,300 –> 00:15:59,090

commodity and metal.

396

00:15:59,090 –> 00:16:01,910

Gold is really, to some extent,

a fear gauge where markets

397

00:16:01,910 –> 00:16:03,740

are fearful, gold

prices are lifted,

398

00:16:03,740 –> 00:16:06,560

and we’ve certainly

seen that this year.

399

00:16:06,560 –> 00:16:08,300

Now, one of the key

reasons for that

400

00:16:08,300 –> 00:16:10,040

is to do with money printing.

401

00:16:10,040 –> 00:16:13,130

So when a government or

central bank, rather,

402

00:16:13,130 –> 00:16:15,780

prints money that

devalues their currency

403

00:16:15,780 –> 00:16:17,780

and we’re seeing a huge

amount of money printing

404

00:16:17,780 –> 00:16:19,950

around the world in

Australia, New Zealand,

405

00:16:19,950 –> 00:16:23,600

Japan, Europe and the US, and

the amount of money printing

406

00:16:23,600 –> 00:16:25,160

is truly eye watering.

407

00:16:25,160 –> 00:16:25,970

So in the US.

408

00:16:25,970 –> 00:16:27,410

This year, they

printed more money

409

00:16:27,410 –> 00:16:31,378

than they ever have done,

so in excess of $3 trillion.

410

00:16:31,378 –> 00:16:33,170

To put that in context,

that’s enough money

411

00:16:33,170 –> 00:16:36,380

to buy the complete output for

the Australian economy for two

412

00:16:36,380 –> 00:16:38,670

whole years when

money is printed.

413

00:16:38,670 –> 00:16:40,670

That’s very supportive of gold.

414

00:16:40,670 –> 00:16:43,442

So we like gold because it

is defensive characteristics.

415

00:16:43,442 –> 00:16:45,650

And it’s ultimately beneficial

to the money printing in the world.

416

00:16:45,650 –> 00:16:48,090

Gold companies

here in Australia

417

00:16:48,090 –> 00:16:50,600

are highly cash generative at

the moment with strong balance

418

00:16:50,600 –> 00:16:53,360

sheets and therefore, we

find a diversified collection

419

00:16:53,360 –> 00:16:57,050

of gold miners is an attractive

thing to add to the portfolio.

420

00:16:57,050 –> 00:16:58,940

Thank you for that.

421

00:16:58,940 –> 00:17:01,520

So in the world we’re currently in, where

we have low inflation,

422

00:17:01,520 –> 00:17:03,650

low growth, low interest rates.

423

00:17:03,650 –> 00:17:06,710

How important do you

think it is for investors

424

00:17:06,710 –> 00:17:09,440

to target companies

with strong cash flow?

425

00:17:09,440 –> 00:17:13,040

Yeah, so we’re much more

focused on cash flow, even more

426

00:17:13,040 –> 00:17:14,750

on cash flow than profit.

427

00:17:14,750 –> 00:17:17,180

And the reason that we

think cash flow matters is

428

00:17:17,180 –> 00:17:19,369

it drives share prices

over time is actually

429

00:17:19,369 –> 00:17:24,020

the cash that is used to invest,

to grow the business when times

430

00:17:24,020 –> 00:17:26,329

are tough to pay down

debt and importantly,

431

00:17:26,329 –> 00:17:29,420

to pay dividends to

return to shareholders.

432

00:17:29,420 –> 00:17:32,120

Now, I compare that to maybe

thinking purely about profit

433

00:17:32,120 –> 00:17:35,300

is an old adage, which is

cash is a fact of profit

434

00:17:35,300 –> 00:17:35,992

is an opinion.

435

00:17:35,992 –> 00:17:38,450

You can see at the end of the

month, the quarter, the year,

436

00:17:38,450 –> 00:17:40,230

how much cash you’ve

actually generated

437

00:17:40,230 –> 00:17:41,690

and you’ve got in the bank.

438

00:17:41,690 –> 00:17:43,580

But profit, even

though companies

439

00:17:43,580 –> 00:17:46,910

have their profits audited

by independent third parties,

440

00:17:46,910 –> 00:17:48,770

there’s still quite

a lot of flexibility

441

00:17:48,770 –> 00:17:50,450

and often doesn’t

reflect the underlying

442

00:17:50,450 –> 00:17:52,578

strength of the business.

443

00:17:52,578 –> 00:17:54,620

I’ll give another example

from a property company

444

00:17:54,620 –> 00:17:57,450

here in Australia,

where over 10 years,

445

00:17:57,450 –> 00:17:59,835

they’ve consistently

on an underlying basis,

446

00:17:59,835 –> 00:18:01,460

announced that they

had strong profits,

447

00:18:01,460 –> 00:18:05,167

but over a 10 year period

had almost no cash flow.

448

00:18:05,167 –> 00:18:07,250

Again, we think it’s cash

that matters, because it

449

00:18:07,250 –> 00:18:10,010

drives share prices over time.

450

00:18:10,010 –> 00:18:11,900

But there’s another

benefit to cash as well.

451

00:18:11,900 –> 00:18:14,360

Not only does it drive

share prices over time,

452

00:18:14,360 –> 00:18:16,970

but it actually provides

more resilience and stability

453

00:18:16,970 –> 00:18:18,800

in share prices.

454

00:18:18,800 –> 00:18:21,380

So for those of you that work

with small business, you know,

455

00:18:21,380 –> 00:18:23,150

when times are

tough, cash is King.

456

00:18:23,150 –> 00:18:25,740

And is speaking to the bank,

having strong cash flows.

457

00:18:25,740 –> 00:18:27,410

Make that conversation

with the bank.

458

00:18:27,410 –> 00:18:30,650

That’s lending you

money much more easy.

459

00:18:30,650 –> 00:18:32,645

There’s companies with

negative cash flows.

460

00:18:32,645 –> 00:18:33,770

It’s much more challenging.

461

00:18:33,770 –> 00:18:36,540

And the world listed

equities is exactly the same.

462

00:18:36,540 –> 00:18:39,080

Companies with strong

cash flows historically

463

00:18:39,080 –> 00:18:41,090

have outperformed

markets falling,

464

00:18:41,090 –> 00:18:42,950

whereas companies

that are attractively

465

00:18:42,950 –> 00:18:46,160

valued on earnings interestingly

have often underperformed.

466

00:18:46,160 –> 00:18:49,610

When markets are full of cash

is really banking in the past.

467

00:18:49,610 –> 00:18:51,630

So when we think about

investing in companies.

468

00:18:51,630 –> 00:18:54,040

And we see their accounts

come out, yes, the market

469

00:18:54,040 –> 00:18:55,290

is very focused on the profit.

470

00:18:55,290 –> 00:18:56,998

And of course, we look

at that, but we’re

471

00:18:56,998 –> 00:19:00,590

much more focused on the

underlying cash flow strength.

472

00:19:00,590 –> 00:19:02,300

Now, this is not

a complete panacea

473

00:19:02,300 –> 00:19:05,630

because there are times when

the market’s very optimistic

474

00:19:05,630 –> 00:19:07,470

and companies with

negative cash flows

475

00:19:07,470 –> 00:19:10,400

can perform very strongly

in a recent environment that

476

00:19:10,400 –> 00:19:12,770

will include airlines

or technology companies.

477

00:19:12,770 –> 00:19:14,360

But we do believe

over time that you

478

00:19:14,360 –> 00:19:16,790

can build more resilient

portfolios with a strong focus

479

00:19:16,790 –> 00:19:17,900

on cash.

480

00:19:17,900 –> 00:19:19,920

Thank you very much

for your time, Roy.

481

00:19:19,920 –> 00:19:21,330

And it’s been fantastic.

482

00:19:21,330 –> 00:19:24,440

And and really, I mean, I’m

sure the Perks community are really

483

00:19:24,440 –> 00:19:27,260

going to be grateful for the

insights that you’ve given,

484

00:19:27,260 –> 00:19:28,820

not only about the

Australian market,

485

00:19:28,820 –> 00:19:32,390

but also about the importance

of low volatility within markets

486

00:19:32,390 –> 00:19:33,660

and that way of investing.

487

00:19:33,660 –> 00:19:35,270

So thank you so much.

488

00:19:35,270 –> 00:19:38,780

And to everybody watching,

feel free to pass this video

489

00:19:38,780 –> 00:19:40,940

on to any family and

friends who you think

490

00:19:40,940 –> 00:19:42,370

might find it interesting.

491

00:19:42,370 –> 00:19:43,760

Thank you so much.

492

00:19:43,760 –> 00:19:44,340

Thank you.

493

00:19:44,340 –> 00:19:46,710

And I’d like to thank you and

your viewers for their time.

494

00:19:46,710 –> 00:19:48,543

And I enjoyed this

discussion as well today.

495

00:19:48,543 –> 00:19:50,310

All the best to you.

496

00:19:50,310 –> 00:19:51,560

Thanks

Video: Investing in Australian Equities – Roy Maslen, AllianceBernstein

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