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 this edition, Anacacia Capital’s founder and managing director Jeremy Samuel explains the international share investing strategy of Anacacia’s newly launched Global Fund.
MF: You’ve had great success with the Anacacia Wattle Fund, investing in small-to-medium sized ASX shares as well as your private equity funds. Why did you decide to launch the Global Fund focused on international shares?
JS: It really came down to our investors. They asked us to and we thought we could offer a valuable perspective to benefit investors in our Global Fund.
Our investors, including larger family office and sophisticated investors, were interested in getting exposure to globally listed companies through Anacacia’s methodology and record of investing into small-medium enterprises (SMEs) that are outside the main indices.
We generally avoid the smallest, illiquid and unprofitable companies, along with start-ups and very early-stage businesses. We also avoid the largest listed companies, which are well-served by brokers and fund managers. Rather we prefer the less efficient but still attractive mid-market SMEs that are often profitable or cash flow positive and with material growth potential.
In terms of international shares, that means that we’re focused on global listed SMEs, typically outside the MSCI Large Cap Index or with less than $10 billion market capitalisation or where the firm brings a perspective. Remember, small by international standards would be considered larger by Australian standards.
Also, we thought that the Global Fund perspective would make us better investors in our traditional Australian focused private and public equity funds.
Has it made you better ASX investors?
We are finding significant synergies with our other funds.
For example, when we look at a consumer e-commerce business, the competition usually includes Australian private, public and international companies. We can use our research and networks to track down the very best businesses and determine what appears to be a fair price.
If it’s listed overseas, then historically, we’d stop working and not have the capacity to back those companies. Now, for investors that want that exposure, we have a fund they can access that has our best international investment ideas.
We also found that internationally listed companies like getting approached by Anacacia. It’s unusual for them to hear from an Australian fund manager. Access has been relatively easy, particularly through the use of video conferences. I think the last year of COVID has assisted a lot here as companies are now so used to having video conferences.
Our extra distance from Wall Street also seems to provide an outside perspective. That means we often can look at things independently from what the “street” might want you to think about a company. This is very consistent with the Anacacia approach of dealing directly with companies and trying to understand the public information better than others with our dedicated focus.
Should retail investors consider looking beyond ASX shares as well?
Many Australian investors have a strong home country bias.
Personally, I think it’s tough for retail investors to invest in international stocks. That is unless they dedicate themselves full-time like fund managers, or they’re investing in an industry that they understand really well from their work or other experiences.
If you’re doing this on the side and you’ve got another job, that’s quite challenging to do.
I do think that retail investors can, and often should, access international shares through index funds or exchange-traded funds (ETFs). That’s a solid way for any investor to get exposure to the largest international companies like Amazon.com, Inc (NASDAQ: AMZN) or Microsoft Corporation (NASDAQ: MSFT).
Vanguard and BetaShares both have ETFs and index funds focused on the US market and international markets. Because they’re focused on the more liquid end, they typically concentrate on the larger companies.
However, accessing the smaller but still well-established companies is challenging for individual investors, unless they do so through a boutique fund.
Are there specific sectors you think Aussie investors should be targeting if they’re investing in ETFs?
At Anacacia, our focus is more bottom up on individual companies and less about taking a view on whether 1 sector is going to be stronger than another. More about looking at the quality of the management team, is it a strong business, and is it a fair price? That’s more important to us than the industry trend.
In a balanced portfolio, you do want to have exposure to a range of different sectors.
So you can find a strong company in any sector?
Most sectors, yes. We focus mainly on industrial, service and consumer businesses.
There’s clearly a lot of money going into healthcare, with a lot of funding related to COVID coming in. And technology is booming. But in terms of finding the right individual companies, it’s less about that sector and more about the individual business.
The Global Fund is quite new. How many holdings does it have today, and where are they predominantly listed?
Yes, we only started the fund two months ago.
We’re building the holdings and expect to have up to 30 established and emerging stocks, including high conviction stakes to seek long-term value. Right now, we have 10 smaller positions that we’re building conviction on. These companies are listed in the UK, Europe and USA. We are also looking at companies in Canada and Asia.
Our main focus is on developed markets rather than trying to take on country or exchange risk on emerging markets. Companies listed on the main exchanges that are operating in emerging countries are quite interesting as you can gain exposure to the growth but feel more comfortable on the governance.
It’s not to say there aren’t opportunities in emerging markets, it’s just a bit riskier than we prefer.
What’s the advantage of investing outside of the major large-cap shares?
There’s nothing wrong with investing into large caps but these tend to be more efficiently priced. Larger fund managers or index funds can focus on that sector.
We’re interested in the less efficient markets where fewer fund managers focus, but yet the businesses have significant growth potential still. SMEs or mid-sized companies on international exchanges can be an attractive niche market due to market inefficiencies.
Broker coverage on smaller companies is thin. Anacacia’s team spends considerable time with the SMEs’ directors and senior management. And we seek to analyse the publicly available information better than others.
What boxes does a share need to tick before you’ll invest in it?
Anacacia are longer term investors. Our investors expect us to take a multi-year approach. With that longer term approach, there are really 3 key factors we look for in any investment: people, business and pricing.
First, the management team and board have to be strong. We judge this by their track record, usually with the same business over time. We’re interested in how they are paid, more than what they are paid. Do they have shares alongside other investors? How are their short-term and long-term bonuses calculated? Are they buying or selling their own shares in the company? What do current and former staff, customers, suppliers say about them?
Secondly, the business needs to be strong. How you measure this can be different by industry and company. The financial statements and history of profits, cash flow, return on capital and disclosures are all critical. We’re interested to understand why customers or clients buy from the company. Is that sustainable?
We’re interested to learn what competitors, staff, suppliers and customers think of the offering. We try to look forward and estimate what the business might look like several years from now.
That leads to the third element, pricing. Does the current market price reflect what we think is the long-term value regarding the people, business and prospects? If it looks relatively cheap, then we can be a buyer. If it looks relatively expensive then we may move on or sell down our position if we’re currently invested.
We’re constantly assessing new information in the market to make this judgment.
How important are dividends in your investment decisions?
Dividends aren’t very important for us, particularly for international shares.
In Australia, there is a tax benefit for Australian investors from imputation credits. Our focus with international shares is much more on long-term capital growth. However, we are focused on cash flow. Dividends are often a positive sign that the business is making free cash. With excess cash, sometimes we see more share buybacks offshore.
Flipping that, when do you decide to sell a share?
If we own a stock and some new information comes to the market, then we need quickly to reassess.
For example, if the CEO resigns or the company changes the way that they’re paid, then we need to look at this again. If a key customer contract is lost or there is litigation, then we may reassess.
If the people and business are still solid but there is a very material appreciation in the share price that we do not think reflects the outlook, then again that might be time to sell some of our shares.
Tomorrow, in Part 2 of our interview, Jeremy Samuel explains how Aussie investors can gain exposure to international shares right here on the ASX.