Ask A Fund Manager
The Motley Fool chats with fund managers so that you can get an insight into how the professionals think and their thoughts on various ASX shares. In this edition, TMS Capital portfolio manager Ben Clark explains why the Square-Afterpay deal is so fantastic for shareholders.
Investment style
The Motley Fool: How would you describe your fund to a potential client?
Ben Clark: Our High Conviction Fund has very much got a growth skew. So we'd look for businesses that we believe can materially grow their earnings over long periods of time.
It's an 'index-unaware' fund. As opposed to many of the funds out there, if we don't like parts of the market, we just won't invest in it. So probably the best example of that, the Australian share market is heavily weighted towards banks and resources — we don't own any banks in the fund and we only own one resource stock.
I say to investors, we truly practice what we preach. If we see a business that we really, really like, we'll take a very materially overweight position in it. We truly believe in long-term, patient investing.
So I think nearly three-quarters of the stocks that are held in the fund were held at the fund's inception on 1 July 2016 — and have been held by our company in IMAs, or individually managed accounts, for much longer periods of time than that.
It's quite a concentrated mix. We generally have about 20 to 25 shares.
In terms of what we'd look for when we're investing in a company, probably 4 or 5 key attributes. [We] heavily favour founder-led businesses with plenty of skin in the game with a proven track record. We like companies that have got their balance sheet in order and can ride through the unexpected, as probably COVID's taught us. Businesses that we believe have a structural tailwind behind them, and ideally businesses that can reinvest back into themselves at very high returns on invested capital, which we believe adds to long-term compounding effects.
Afterpay-Square deal makes 'a lot of sense'
MF: Afterpay Ltd (ASX: APT), which is a hot topic this week, would fit your philosophy pretty well?
BC: Yes, Afterpay is one of those stocks that has been held since the fund's inception. We are active in trimming and adding to positions as we see them go in and out of favour. And Afterpay… is one that has swung around dramatically in price over the last 5 or 6 years.
I think as of today, we've got about a 5% weighting to Afterpay and that's been kind of consistent through the last 5 years. So you would have to say that we've been trimming more often than we've been adding to it, given the rise in the share price, but it has definitely served us well.
MF: How do you feel about the Square Inc (NYSE: SQ) acquisition?
BC: I think it's an incredibly good transaction. Square is a business we know really well. In individual accounts, we do own some exposure to Square directly. We own a business called Tyro Payments Ltd (ASX: TYR) in the High Conviction Fund and we did quite a bit of work on Square when we were looking at Tyro, so I think it's an incredible business that the fit between the 2 companies makes strategically a lot of sense.
I was on the call last night, on the Square earnings call, and I really think that [for] the 2 founders of Afterpay, this is not an exit for them. They see this as the transaction [that] gives them the ability to accelerate the growth of Afterpay.
This is one of the strengths of the High Conviction Fund — that this index-unaware basis will mean that we will continue to own Square as a CDI listed on the ASX.
2 ASX shares still going strong after 5 years
MF: What are your two biggest holdings?
BC: Probably the last few years now… No.1 is Resmed CDI (ASX: RMD). We've got about an 11% weighting in Resmed at the moment. Again, it's been held since the fund's inception. It's one stock that I don't think has ever been trimmed, and we're still very bullish on the outlook for that business.
And the second is Xero Limited (ASX: XRO). We have about a 9% weighting to Xero. Again, I don't think it's ever been trimmed since it entered the portfolio and I think it was put in there about a year after the fund started running.
So they're the businesses that we really haven't tinkered with. They have been quite volatile — as most growth stocks are — and we've tried to take advantage of that volatility over the years.
How does the future look for these 2 shares?
MF: You've done pretty well out of both, but it sounds like you're happy to continue holding them?
BC: Yeah. Look, [they're] obviously very different businesses.
In the case of Resmed, we believe that Resmed was a massive COVID loser last year. Their main market is in the United States. If you were in the US and you were worried, or your doctor was worried, that you might have sleep apnea, you really weren't in a rush to go and get tested in hospitals, go into a doctor's surgery, sleep clinics, et cetera. I mean, there really was a realistic chance you would die if you got COVID in America last year. And hospitals were closed to non-COVID procedures, so it was a very difficult year for them.
But if you fast forward to this year, there's kind of 3 key things going in their favour. The reopening of America and a backlog of cases that will need to be treated. The first launch of their HVAC machine… This isn't a frequent product cycle. This is the first one I think in 6 years and you see last time we saw meaningful acceleration in sales when the new machine was released. And thirdly Koninklijke Philips NV (AMS: PHIA), which owns Respironics, has had a major product recall of their HVAC machine, which is the number 2 player in the US market.
To us, the stars are aligning to what is going to be a pretty good year for Resmed.
In the case of Xero, [it's] still probably going through somewhat of a troubled time with COVID. The recent lockdowns across the country are not good for a lot of small and mid-sized businesses.
Ultimately, as bad as it sounds, the accounting software is the last thing to be switched off if a business doesn't survive this time. Because they still need to do BAS tax returns, wages, all that sort of stuff. So they're incredibly resilient assets within the businesses, and the government's putting a lot of businesses back on life support, and hopefully this is the last of the lockdowns that we see.
But we just think there's so much potential for new adjacencies for Xero. Growth in new regions, et cetera.
