Ask A Fund Manager
The Motley Fool chats with fund managers so that you can get an insight into how the professionals think. In this edition, Alphinity Investment Management client portfolio manager Elfreda Jonker tells of the 2 ASX shares set to cash in on long-term themes.
Investment style
The Motley Fool: How would you describe your fund to a potential client?
Elfreda Jonker: Alphinity Investment Management is a boutique-sized active fund manager based in Sydney. We run 5 different equity strategies. We've got two Australian core funds, one global core fund, and then we also have an Australian sustainable fund and a global sustainable fund.
All these funds are managed using the same investment philosophy. We invest in quality companies, that are in an earning upgrade cycle, that we can buy at a reasonable valuation. So all our funds are pretty much concentrated, style-agnostic with a core focus on delivering consistent, strong, alpha through different market cycles.
MF: In the context of the ASX shares we'll talk about today, they're from one of the core Australian funds?
EJ: Yes. The Australian share fund, which is around 35 to 55 companies normally.
Biggest convictions
MF: What are your two biggest holdings?
EJ: If we exclude the really large caps like BHP Group Ltd (ASX: BHP) and the big banks, I think it's probably more interesting to talk about our biggest active weights. And currently, two of those names would be Macquarie Group Ltd (ASX: MQG) and Medibank Private Ltd (ASX: MPL).
Macquarie probably does not need a huge amount of an introduction, but effectively it's a banking advisory investment and funds management business. It's been one of our core holdings in our portfolio since 2012, which has just consistently been in an earnings upgrade cycle, and really is one of those companies that can stand a portfolio for a number of years. If you look at the current situation of Macquarie, it is definitely seeing very strong growth in assets under management, which is driving the fee growth. There's lots of demand for infrastructure-style investments, which they clearly benefit from the high-interest rates.
Then, specifically at the moment, they've just continued positive asset realisation from a long-term period of equity investments coming across. They've got energy, transport, technology infrastructure — a lot of the investments that they've been making over the last number of years are all really coming to realisation now.
They're also really benefitting from the commodity business… benefitting from the energy crisis and volatility in commodities this year. Their banking business is deploying technology to take material market share in the retail banking space.
Then of course the big thing is also their green energy assets. They're, in our view, one of the leaders in that space and one of the world's largest funders and developers. So they're really perfectly positioned to benefit from this whole energy transition.
MF: Macquarie shares have done pretty well this year, haven't they? Recently Macquarie became one of the big four banks.
EJ: Yeah, absolutely. It's been a phenomenal rally. It's up, I think, 168% since the COVID trough — and up around 43% in the last 12 months. So it has done very well.
If you look at the valuation, it's trading on a PE [ratio] of around 19 times, so that's ahead of its long term average of around 16. But in our view, we do think that the way they are busy changing the business model and really just expanding the different business avenues that they're in, we think this company can continue to generate really strong earning scores, particularly over the next number of years.
We do see the potential to also expand that multiple even further potentially. So even after the last big run-up that we've had, we very much view it as a longer-term quality holding in our portfolio overall.
MF: How about Medibank?
EJ: Medibank, that's effectively a health insurance business. They offer private health insurance coverage for hospital and ancillary services. They also offer a wide range of health insurance products like health, travel, [and] pet insurance.
One of the big things that they are doing is that they are now really transforming the business, focusing on health support and wellbeing. So rather than just being an insurance company, they're also trying to really drive to be a health company. And that's really the exciting thing for us is that they are really transforming this business model as well.
If you think about the 2 sides of the business on the insurance side, they are definitely benefitting from lower claims [volume] in the last 2 years through COVID and all the shutdowns.
Also, they're returning some benefits to customers through lower pricing so that they're cementing that recent brand improvement and the return to customer growth. We are seeing that insurance side of the business really benefitting from some of the larger trends that we've seen in the insurance space.
But also, specifically to them, I think they've done a lot to really focus on their brand and also using a lot of the provisioning to smooth over the results in the next 2 years. Also, I think the focus on the health side, health support and wellbeing, is this really big growth spot of the market. Specifically, growth and in-home care businesses is where we think they're specifically underestimated by the market. They've got very big plans to grow that part of the market.
At the moment, the market is probably more focused on just the insurance business and giving them a lot of benefit for that. But I think this whole health side that they're focusing on… that's just the trend of the future.
So that's really where we are seeing a lot of potential upsides. They're really enjoying a lot of earnings upgrades, which, as I've mentioned, is one of the key things that we look at. But also from here onwards, we think there's a very strong underlying gross margin, but also then just strong earnings growth from the whole Medibank health side.
MF: There's a perception with the private health insurance sector that they're at the whim of changes in regulations and how the government of the day feels at the time. Are you worried about that for Medibank?
EJ: No, I think Medibank specifically over the last number of years has really worked very hard at that… to improve the relationships and really to improve that perception in general.
I think any sector always has some sort of risk from a regulation perspective. And that definitely goes for banks as well as general insurance and health insurance sectors.
But I think at this point in time, we do think that that sort of risk is priced. And specifically, Medibank has really worked so hard in building the brand and building those relationships and to smooth over some of the historic issues that might have been.
So we are not particularly concerned about any immediate or really rising risks in the shorter term, that can really negatively impact them. But I do think that it is something that investors always need to bear in mind when you do look at the valuation of the company, is that risk price at the current levels.
