Big bets on the bank stocks were nowhere to be found among 2017-18’s top performing Australian fund managers, whose preference for backing the earnings momentum of stocks such as CSL and Macquarie Group instead paid off handsomely.
Jelena Stevanovic of Platypus Asset Management found that well-timed positions in the energy sector and Aristocrat Leisure were equally a source of significant gains.
“We had a very good outcome, we’re very proud of it. But what gets us excited is the longer-term performance,” Stevanovic says, speaking after the release of the Mercer survey of Australian share fund performance for 2017-18 on Thursday.
The Sydney-based Selector High Conviction Equity Fund took the crown for the best performing fund out of the 95 strategies in the long-only category, returning 33.8 per cent versus the median return of 15 per cent. Mark East’s Bennelong Concentrated Equities Fund ranked second with a 33 per cent return, and is the best-performing long-only strategy over three years and five years.
The Platypus Australian Equity fund, which Stevanovic co-manages with Prasad Patkar, returned 28.9 per cent over the year and is also ranked third over five years with a 16.9 per cent annual return on average.
“The consistency over three to five years is a testament to our process and the depth and breadth of our team,” she tells The Australian Financial Review.
“The best way to outperform is pick companies that will produce sustainable, strong earnings growth but also have potential that hasn’t been fully recognised by the market, so there’s upside for the share price.”
Potential to move higher
Like 2017-18’s other top performing funds, Platypus found some of those firms in the energy and resources sector but not the banks. “The earnings growth profile of energy and resource sector companies just looked overwhelmingly better than the banks,” Stevanovic says.
Commodity prices were gaining, but earnings expectations for energy and resource firms weren’t fully reflecting that upward move and share prices had the potential to move higher.
Energy was the best performing sector of the S&P/ASX 200 Index last year, rising 38.2 per cent. Resources lagged slightly behind, with a 25.2 per cent increase in the sector’s value.
But for the financials, the picture was far less rosy, falling almost 4 per cent. Telecoms were worse, with a 35 per cent drop. Fund managers who succeeded last year tended to be the same ones who avoided banks and telcos by taking underweight positions or not investing in those sectors.
“Banks, for a raft of issues, have had a lacklustre earnings growth profile for a little while now,” Stevanovic says.
Australia’s financials have been under pressure in the last year from the royal commission, while a clampdown on investor mortgage lending has constrained loan growth.
“We’ve had system credit growth that is pretty anaemic especially across the four major retail banks. They are being quite cautious and competing very cautiously and just staying below their system growth, so it’s hard to see that change in the short term.”
However, Platypus does own Macquarie Group, having held shares in the investment bank for more than five years.
Other long-term positions include gambling machine maker Aristocrat Leisure and biotech CSL. Both stocks advanced slightly more than 40 per cent over 2017-18.
Seeking sustainable earnings
CSL has been a great long-term story, she says, as it has the lowest cost blood plasma collection network compared to rivals. CSL upgraded earnings in May, its second profit upgrade this year, on improved sales of its haemophilia drugs and a bad northern hemisphere flu season that boosted demand for its influenza vaccines.
“I think that it has strong management and they have invested into their network over the years. That, coupled with underlying medical demand for its products, gives it sustainable earnings and that’s the kind of profile that we look for.”
One of the big questions for the current financial year is the timing of a turnaround in bank-sector earnings and if share prices have fallen far enough to reflect the range of potential negative outcomes for the sector.
The royal commission has already impacted the sector because it has heightened the political sensitivity around the banks, making them less inclined to claw back higher funding costs by passing on rate increases to borrowers. Banks also face an enormous task in participation because of the scope of the inquiry.
“Our view is that, during this royal commission time, you have an increase in cost bases for no other reason than to deal with the compliance pressures,” Stevanovic says.
Potential political headwinds
The fund manager, who has been managing money for Platypus for 10 years now, says that while the financial year was a strong one for performance it was also volatile due to global political tensions.
Those potential headwinds remain, she says, with trade issues and slowdown in China being the biggest risks to the economic backdrop, she says.
Those risks aside, 2018-19 should be another good year for corporate profits, she believes. “There will always be companies that are fully valued and could disappoint and not come through, but there also is a good segment of the market that will have longer-term earnings growth stories.”
The economic environment with tightening labour markets, good growth and benign inflation supports this.
“With that in mind it should be a good environment for companies to grow corporate profits, to grow earnings,” she says. “We have a positive outlook on the equities market, the economic outlook is positive.”
She says that it’s not enough to succeed over one year, true success comes from developing a process that the investment team can rely on to repeat that performance year after year.