Chris Mackay, the fund manager behind the $1.4 billion listed investment company MFF Capital Investments, admitted that he hasn’t been able to find a single “compelling” buy that meets his selective investment criteria, and the market’s corrections have been “trivial” in depth.
Risks are building, he told MFF’s annual meeting in Sydney on Wednesday. Mr Mackay is a co-founder of Magellan Financial Group and his personal wealth is estimated at $680 million according to the Financial Review Rich List. The independent MFF’s biggest holdings are Visa, MasterCard and Home Depot.
“Accounting trickery, outright fraud appear more extensive at the moment. Promoters are promoting incredible get rich schemes, new technologies, worthy projects and frankly dreams,” he observed.
Reflecting on the past 12 months, he recalled that macro conditions turned almost exactly when the talent at Davos toasted the arrival of bullish synchronised global growth figures in January.
He has not found a single opportunity lately that he regards as “compelling”, symptomatic of elevated markets and it being late in the business cycle.
“We again found very few new opportunities to buy, and none, none, zero, that we have regarded as compelling. On the other hand we remain cautious about selling very high quality companies.”
Alternative stocks would have to be found, and “frankly put, a number of the businesses there are irreplaceable compared to the average quality of companies in marketplaces around the world”.
Caution over deep value plays
During the year MFF has trimmed some credit-based financials and out-of-favour consumer multinationals, which were held as an alternative to cash. The portfolio has 29 stocks and the fund manager expressed wariness with regard to deep value plays.
He challenged the view that the equity market is efficient, recalling that he was able to add to a significant holding in American Express at $US9.94 in March 2009 and the stock is expected to earn $US10 a share next year.
“Markets are not perfectly efficient, this is for a 125-year-old company with millions of happy customers all around the world.”
Mr Mackay’s large holdings are experiencing 20 to 30 per cent earnings per share growth, fuelled by the Trump administration’s tax cuts.
“Investors however must be realistic as business and competitive risks have increased in almost all industries and all geographies and the combination of sustained low interest rates, and higher market prices, are adverse for future returns. They reduce margins of safety and they increase our risks,” he urged.
Describing his investment strategy, he continued: “If we can use a cricket analogy in this place – we’ve been trying to protect our wicket.”
Last year, Mr Mackay revealed the board of his LIC discuss the “Amazon effect” at every meeting. Shares of MFF have advanced 35 per cent since then, even after retracing 9 per cent since their September high.
They opened at $2.64 on Wednesday versus the LIC’s last reported pre-tax net tangible asset value of $2.88 a share (excluding the benefit of a 1.5¢ dividend to be paid November 9).
‘Market volatility has returned’
Mr Mackay has bought in most downturns, but believes that may no longer be sensible.
“Downturns, dips, corrections, recessions, bear markets, depressions they all have different pathologies,” he said.
“Recent corrections have been relatively trivial despite expert commentary hence and obviously we are well away from the exceptional returns coming out of the crisis. The maths is straightforward.”
Large, highly liquid, profitable businesses with strong competitive positions and reasonable growth potential are what the fund manager is looking for, with their performance in previous late-cycle periods and pullbacks in mind.
“As markets have continued to rise, our fear has actually been of an irrational bull market, that’s the worst market conditions for us. Now, market volatility has returned.”
The rising equity market over the past year instilled a “moderate discomfort”, leading to a net cash holding of 11.5 per cent by the end of January. That was reduced to about zero by June 30, 2018.