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, SG Hiscock High Conviction Fund portfolio manager Hamish Tadgell reveals which bank makes his mouth water for fat dividends and how he still has a soft spot for a small-cap fibre optics telco.
Transition from hope to growth
The Motley Fool: When you spoke to us in January, you felt like share markets were in a transition from ‘hope’ to ‘growth’. Do you still think that’s the case, or has it moved on to something else?
Hamish Tadgell: I think it is still the case. The growth recovery continues to play out on the back of the [COVID] vaccine rollout, the easing monetary and fiscal policy and the economy’s continuing to reopen. Also, everyone’s learning to live with the virus a little bit better, I think. In terms of not just the social distancing, but just managing that.
The February reporting season was a bit of a litmus test for that growth recovery. That really affirmed that the growth recovery is in train. Sixty per cent of companies beat consensus EPS forecasts.
Having said that, the other thing which is clearly in play at the moment is rising inflation expectations and views around rising bond [yields]. With that hope to growth, there’s been a pick up in economic growth, and that’s now also fed into questions about ‘Will that deliver rising inflation?’.
This is going to consume a lot of the market’s focus for the next 12 months or so. There doesn’t seem to be a clear consensus on the inflation outlook at the moment.
The question is: Is it cyclical and related to the reopening and recovery? Or is it more structural in nature?
I think if you step back, the risk is that inflation expectations have increased, and that’s reflected in building rising bond yields. And shifting expectations actually matter because, at the end of the day, it’s that that really moves markets.
Great expectations for banks and telcos
MF: What are your two biggest holdings currently?
We’ll see it very much as a COVID beneficiary. I think COVID shone the light on the fact that fibre and fibre networks are critical social infrastructure.
The other thing that is working in Uniti’s favour, at the moment, is the recovery we’re seeing in the housing market – because Uniti basically rolls out fibre to greenfield residential development and high rise apartments.
Clearly, the high rise has been impacted, but we are seeing continued strong indications and I think the first homeowner initiatives the government’s put in place and the like are clearly driving the resurgence in demand for housing, and we’re seeing that also in house prices as well.
We continue to see Uniti very well-positioned, and it’s a smaller cap stock that’s fast becoming a mid-cap stock. And it’s really being driven by consolidation… it bought OptiComm Ltd, it also bought Telstra Corporation Ltd (ASX: TLS)’s Velocity business.
Fibre is now seen as social infrastructure, and that’s reflected also in Macquarie Group Ltd (ASX: MQG)’s recent bid for Vodafone. Also, super funds [are] taking a much more active interest in this area.
Our other second largest active position is National Australia Bank Ltd (ASX: NAB). That’s really just a more constructive view on the banks probably since about September, October last year.
That is reflective of the fact that we’ve come through the pandemic probably better than most would have expected 12 months ago. Loss rates and provisions look like they’ll be lower. The banks have taken significant provisions last year, and we think that some of those will be unwound over the course of the next 12 months.
Not to say that there won’t be losses and clearly, the JobKeeper unwinding is a risk that you will see more business failures.
But overall, we think that there’s the potential for the banks to release capital [and] increase dividends. And in an environment where rates are rising, albeit modestly, net interest margin [could move] to more neutral – maybe even slightly positive – for the banks.
So we continue to see upside in the banks, particularly on the dividend side.
Tomorrow in part 2 of our interview, Tadgell reveals two ASX stocks that were paralysed in 2020 but are raring to go this year.