Ausbil celebrates 25 years

Paul Xiradis, Executive Chair and Chief Investment Officer of Ausbil Investment Management, discusses portfolio positioning in the current climate and the outlook for Australian equities.

Melissa Darmawan: Hi. I’m Melissa Darmawan for the Finance News Network. Joining me today is the Executive Chair and Chief Investment Officer Paul Xiradis, from Ausbil Investment Management. Paul, nice to meet you.

Paul Xiradis: Great to be here, Mel.

Melissa Darmawan: It’s great to have you back.

Paul Xiradis: Thank you.

Melissa Darmawan: Before we start talking about your Active Equity portfolio, first off, congratulations on Ausbil’s 25 years in funds management.

Paul Xiradis: Yeah, it’s been incredible. I mean, time does fly I must say. I can still remember the first day, but 25 years on, we’re still here and very strong and growing. So, that’s fantastic.

Melissa Darmawan: Great to hear. So, why don’t we start off by talking about the performance of the fund?

Paul Xiradis: Sure. Look, we’re one of the few funds in Australia which do have a 25-year track record, something which I’m incredibly pleased about, and we have delivered well for our clients over those years, and we’ve seen quite volatile times. But the thing that I’m most pleased about is the consistency of performance. We’ve been able to deliver a bit over 3 per cent per annum on a compound base. That’s before fees and that’s up until 31 March. So, something we are very, very pleased about.

Melissa Darmawan: And what have been the key drivers to your outperformance in that time?

Paul Xiradis: Yeah, look, I think there’s a number of factors, but if I distil it down to one particular factor, it’s really just following our process. I mean, our process is quite robust. It is top down, bottom up. We look at the bigger picture first and understand where the risks and the opportunity do lie from an opportunity perspective. And then we do all the bottom up work research to find the opportunities from a stocks-specific point of view. So, I think the combination of having that top down, bottom up and having a fully fledged and focused research team looking for those opportunities has been the key to our success.

Melissa Darmawan: If we turn to the portfolio, what recent changes have you made?

Paul Xiradis: Leading up to the crisis — I’m now talking about the Ukraine Russian crisis — we were of the view that inflation and interest rates were going to trend higher. We have been of the view that commodity prices were going to increase from here, and that’s driven by a couple of factors. One is a structural factor, which is the ongoing decarbonisation and electrification of the world. And I think that’s a super trend which is going to continue for many, many years yet to come. And I think that, here in Australia, we’re also dealing with the fact that we’re coming out of COVID, like the rest of the world. So, all those factors were actually still there pre the invasion and now post. So, from our perspective we didn’t really have to change too much because we were positioned for that. I mean, we were positioned for the the decarbonisation of the globe. We have been positioned well for the green metals, because we believe this is a part of a super cycle which is going to be even more amplified as time goes on. We have been positioning ourselves for interest rates increasing.

Melissa Darmawan: In terms of your portfolio, have you shifted focus in terms of any sectors?

Paul Xiradis: Yeah, look, we have changed a few of our sector exposures. What we are after is something of earnings certainty in an environment where growth is going to slow. And one of the sectors which really displays or will provide that for us and has been quite depressed has been the healthcare sector. So, we see some pretty good opportunities in the healthcare sector, and we have actually shifted our exposure upwards over risk in times.

Melissa Darmawan: Talk me through your view as to how financials could play out in the Aussie equity market.

Paul Xiradis: The financials, we think, look pretty good from here actually. And part of the reason is that we are seeing a reversal of trend, and that reversal of trend that I’m referring to is inflation and also interest rates. Banks can expand their interest margin as rates do increase. And that is likely in our view after seeing many, many years of contraction. For the insurance sector, it does improve their insurance margin because they invest short term, not long term. So, as rates go up, they get the benefits of rates going up. And other groups, such as Computershare (ASX:CPU), for instance, also do get benefits of rates increasing, and quite pronounced in fact.

Melissa Darmawan: Currently we’re seeing treasury yields just continue to climb, and we’re seeing growth stocks like tech names really taking it on the chin. What’s your perspective in regards to the technology sector?

Paul Xiradis: Look, the technology sector’s been under a lot of pressure, and part of the reason is that a good part of the technology sector, their earnings are actually in the never-never. You know, further down the track. So, what happens when rates are falling, when you discount the future earning streams by a lower rate, the value of those securities actually go up. But the converse is true when rates go up, because you need to discount the future earnings by a higher rate, so the overall valuation does actually come under bit of pressure. Now, there’s a lot in the price right now, and some may argue that we’ve seen enough as far as a correction is concerned. I have a bit of sympathy with that view, in the sense there is some opportunities now, but you need to be very, very selective. And I think you also need to be exposed to those groups in the technology sector which can and do generate positive cash and also earnings growth, not in the too distant future. So, global leaders will do quite well after being depressed for quite some time.

Melissa Darmawan: In terms of being selective, what positions are you excited about?

Paul Xiradis: Look, I think where I’m really excited is really in the green commodities. I think that the market is not fully appreciative of the fact that we’ve seen supply come back quite dramatically, stock piles being incredibly low and demand increase. We do believe that demand is going to increase even more so and above what it would have been prior to the war. And part of the reason for that is for countries to actually really focus on security of supply of energy, but also security of country. So, we’re going to see military spend increase — that’s already been announced — and we’ve also seen alternate power being developed in order to wean off carbon or oil.

Melissa Darmawan: In terms of the M&As, last year, or actually over the last couple of years, we’ve seen quite an increase in regards to the M&A space. Recently we’ve seen, for example, the private equity giant KKR provide a couple of bids in terms of Ramsey Health Care and also recently some stuff with Macquarie, they’re just examples. Are we going to see more of this happening this year?

Paul Xiradis: Look, it is quite possible. Part of the reason is that we are entering into a bit of a slowing growth environment. So, earnings growth is going to be pretty hard to come by. And during that period, some of the businesses which perhaps aren’t performing as well as they would otherwise have done will come under a bit of pressure, which creates an opportunity for an aggressor to come in and take out a group. We are also seeing fairly significant cash balances in a lot of private equity funds, and they have a finite time. Either they use it or they lose it in the sense of the funds. So, they are quite aggressive in looking for opportunities. But we also may see some within industry as well when it makes sense. So, going back to my first point, if earnings are under pressure and you can’t grow earnings and you look for opportunities outside of your own group which are going to complement your existing business or has some synergy benefits, then there will be some acquisitions as a consequence of that.

Melissa Darmawan: Last question from me. What is Ausbil’s view for the outlook ahead in regards to the Australian equity market?

Paul Xiradis: We’re quite optimistic. I guess for a number of reasons. Part of the reason is that I think Australia’s well positioned for the recovery that we are seeing from COVID. We’re also quite well insulated compared to the rest of the world as far as the growth slow-down, which I think will actually occur this year. In fact, Australia is likely to actually expand growth rather than actually contract, which is a little bit unusual and against the backdrop of the rest of the world. So, I think that is positive. I also think that with interest rates moving up, we have a very large financial sector, which will be the beneficiary of that. So, we’ll see earnings growth. And we’re also, obviously, very well exposed to commodities, both soft and hard commodities. And if that is the case, and we do believe that commodity prices will rise from here, that puts Australia in a very, very strong position.

Melissa Darmawan: Paul Xiradis, thank you so much for your insights and congratulations once again on Ausbil’s 25 years in funds management.

Paul Xiradis: Thank you very much, and it was great being here.