Ask A Fund Manager
The Motley Fool chats with fund managers so that you can get an insight into how the professionals think. In part 1 of our interview, Hyperion Asset Management lead portfolio manager Jason Orthman tells why Tesla shares are still great value.
Investment style
The Motley Fool: What's your fund's philosophy?
Jason Orthman: What we're focusing on today is the Hyperion Gbl Growth Companies Fund (ASX: HYGG). HYGG is listed on the Australian stock exchange, so you can get exposure through that.
Our investment strategy is really quality structural growth over a rolling 10-year investment period. So what we mean by that is we can find these really high-quality businesses that are growing structurally at high rates. We can compound capital over a long period of time.
Some of the inefficiencies we exploit are, firstly, just that long-term versus short-term. I think a lot of people get caught in the short-term noise rather than acting as a business owner.
Secondly, actually identifying exceptional businesses. We think actually a lot of the best businesses are actually undervalued and mispriced. We're after, again, that quality structural growth investing over a sort of 10-year period.
MF: Being a global fund, which markets dominate your holdings? Is it mainly the US and Australia?
JO: We've got a mandate where we can invest anywhere across the globe in terms of listed equities. But to your point, at the moment we don't own any ASX or Australian listed names in the global fund.
Over time we've had Australian listed companies. We don't have any biases against Australian listed companies, but if they are the best in the world at what they do, we'll own them and we've done that over time.
But the only reason really over the last 12 months is the competitive set has got a lot harder for Australian managers to make the global fund because with COVID that's changed consumers' behavior. It's been really quite disruptive, but it's been positive for these sort of disruptive modern business models.
So we've found just more attractive opportunities offshore. We can own Australian listed names in the global fund… [It's] really more of a developed market product. We do own some businesses, predominantly Chinese, [in emerging markets] but we just think there's lower risk in developed markets versus emerging markets.
MF: To give our readers an idea, what are your two biggest holdings?
JO: Tesla Inc (NASDAQ: TSLA)'s our largest holding still at around a 12% weight and then Square Inc (NYSE: SQ) is our second largest, which is around 8.5% weight.
Even though those share prices have re-rated upwards as we were buying them over the last 12 months or so, we still believe that they're fundamentally misunderstood and there's a large shift in consumer behavior going on.
So it's still really day one for both Tesla and Square, hence the largest holdings.
MF: What would you say to the critics who say Tesla might be overvalued given it is now worth the same as the 8 biggest traditional car companies put together?
JO: Our first purchase was made in January 2020, and that was after watching it for 5 years.
MF: What great timing.
JO: It was off to a great start. Yeah, gone from US$100 when we started buying to, I think it was US$670 overnight. So it's gone up 6 or 7 times in a bit over 12 months, but that was pretty unusual. We thought it was worth a fraction of what the market was pricing it at that time.
But I think the [overvaluation] issue is too far away. The market values it as a traditional order company and there's a whole bunch of other revenue streams there that you need to analyse. So that's the first point.
Thinking about all those other revenue streams — software autonomy, insurance, energy, solar batteries — that need to come into your calculation as well.
And the second point, which is where you're coming from is you can't value it on 500,000 cars. You've got to look forward and think, well, even if you value it as an older company, how many cars will [it] sell in 10 years? We think that they can challenge for market leadership, which means they can serve 10 million plus cars.
Buying and selling
MF: What do you look at closely when considering buying a stock?
JO: It's a combination of quantitative and qualitative factors. Obviously quantitative is historical financials and track records… and that's a good starting point. But I think the qualitative aspects are much more important because investing is about the future.
You need to look forward… The strength of the value proposition of the business, the strength of the competitive advantage, the size of the addressable market.
A lot of people look at a stock and you can trade it in and out in a second — so they forget that that ticker is actually a business and that business is actually a product. So actually focusing on who gets utility from using that product, why they use it, those competing products, or will they continue to use it in tough conditions.
Those fundamental first-principle type questions are a good place to start in combination with the underlying economics of the business.
MF: What triggers you to sell a share?
JO: Again, it's a combination of quantitative and qualitative. On the quantitative side, we forecast our 10-year internal rate of return… If that internal rate of return reduces, we'll decrease our weight. And ultimately if the margin of safety above the risk-free rate is too low, we'll completely exit. That's something that we can measure day-to-day.
But again, the qualitative side of things is probably more interesting and that really is: 'Is something happening with the investment to change the status quo?'.
Some examples are, if they make a large acquisition, well, the business that you own has fundamentally changed. So large acquisitions will cause us to exit. If there is a complete overhaul of the management team and the stewardship of that business, that will cause us to exit. Or if there's just some disruption in the business model or economic environment around that business, that'll cause us to exit.
Overrated and underrated shares
MF: What's your most underrated stock at the moment?
JO: That comes back to Tesla because our most underrated stocks are our largest weights. So even though these businesses… look optically expensive on traditional short term metrics, when we actually forecast out what its earnings and cash flows will look like in 10 years, we… think the stock is actually fundamentally cheap.
We believe that [the] shift from combustion to electric vehicles is structural. And that Tesla [is] going to lead that and challenge for market dominance against the traditional incumbents. So we still think it's back to that 'day one', to steal Jeff Bezos' saying, that Tesla looks pretty good on that 10-year view to us.
MF: Most of the traditional car makers are now also trying to churn out electric vehicles. What do you think about that threat? Because many of them have deep pockets as well.
JO: Yeah, they do. But we actually believe it's a large positive for Tesla because Tesla doesn't advertise, it doesn't spend any money on traditional advertising platforms and [the growth] has been by word of mouth. Some of the Tesla owners are the biggest advocates.
We believe that moving the consumer away from combustion engines to electric vehicles will be a large positive for something like Tesla, which has got a better product. By shifting the consumers' focus, putting real money behind it and making that shift real and structural, Tesla will pick up a large share of those consumers that changed their habits.
Yeah, our thinking is probably contrary to most. We don't see a lot of these — Volkswagen Group (ETR: VOW3), General Motors Company (NYSE: GM) and others — as large threats. Because we think the product of Tesla — the instant acceleration, its technology around batteries, its software, the product — is completely years ahead of those traditional manufacturers.
MF: Electric cars are also essentially a different product, aren't they? Just because you have expertise in combustion engines, it's not like you have any advantage in making EVs?
JO: No, and that's the thing. I think people think the scale will translate, but I mean, the legacy OEMs don't have over-the-air software updates, for example, and the narrative that Tesla's only 1 or 2 years ahead of these traditional manufacturers, we believe, is false.
They've been going at this for the last 5 to 10 years and that's the lead that they've got. I think [traditional car makers] are going to actually struggle to match the product.
