One of Australia's most high-profile fund mangers that managed to raise more than a $1 billion from largely retail investors in April 2018 has eviscerated Australian growth shares as 'incredibly expensive' and on "extreme" valuations that set them up for a big fall.
The L1 Long Short Fund Ltd (ASX: LSF) run by Mark Landau has suffered a rocky start to listed life with its net asset value per share falling to $1.68 compared to a raising price of $2 per share. While the exchange traded stock changes hands for just $1.44 at a big discount to NTA as investors perhaps lose faith that the value-investing style favoured by L1 will ever come back into favour.
In its latest fund report L1 mocks the valuation of growth shares multiple times referencing research from Goldman Sachs and Morgan Stanley to back up its view.
It even quotes a Morgan Stanley research report that reads: "Value is currently trading at the biggest discount ever and offers the largest premium over the last 30 years. The oversold condition of Value is at par with or worse than during the 2000 TMT growth bubble."
L1 also blames the exponential rise of index investing (with 60% of assets under management in the US now apparently passive) for artificially inflating the valuations of growth shares.
It also acknowledges that falling rates and the scarcity of growth names in Australia are factors to consider, but dismisses them as irrelevant in the context of valuations that it clearly believes are basically crazy. You can read the unadulterated polemic on growth shares here.
Fortunately for investors L1 also bets that value names will outperform going forward in asking:
"Why a rational investor would feel more comfortable owning a 'growth' stock at an extreme valuation or a 'yield' stock with minimal growth on 20-25x P/E that is allocating all available free cash flow to dividends (and therefore not reinvesting at all in its business for longer term growth) as opposed to another company that is trading on 10-15x P/E that is growing nicely and may only be allocating half of its cash flow to dividends."
One stock L1 is tipping as a good value bet is engineering group Worleyparsons Ltd (ASX: WOR) it claims that on its forecasts it's "trading on a P/E of only ~12x FY21 EPS (once the majority of the synergies of the ECR acquisition flow through). This is a material discount to its historical average P/E of 17.5x and its P/E pre the ECR deal announcement of around 20x."
As such L1 believes Worley is undervalued and set to deliver good returns in the years ahead.
I should disclose that I have met the L1 fund manager Mark Landau and although recent performance has understandably come in for some criticism he's an impressive investing thinker in my opinion. Seemingly as smart as any professional fund manager I've come across.
As such I expect the L1 Long Short Fund is worth holding onto, especially if you buy into the idea that value is about to surge as an investing style.
