Ask A Fund Manager
The Motley Fool chats with the best in the industry so that you can get an insight into how the professionals think. In this edition, Discovery Fund portfolio manager Chris Bainbridge and Mark Devcich name the ASX share they'd back for years, and why PE ratios are not as important as you think.
The ASX share for a comfortable night's sleep
The Motley Fool: If the market closed tomorrow for four years, which stock would you want to hold?
Chris Bainbridge: Our answer here is we won't take you literally that the market was going to close, because if the market was going to close, it wouldn't be great news for the stock.
So the company that we believe is a great hold for the next four years is Hub24 Ltd (ASX: HUB), but appreciate that if the market truly closed down, it really wouldn't get business.
MF: I totally know what you mean. The scenario itself would be bad for the company, but if the question wasn't meant to be taken literally, that would be your pick.
CB: Yeah, absolutely. So what does Hub do? It's an investment and superannuation platform. What does that actually mean? As everyone's probably aware, Hub allows its advisors to manage their clients' interests, whether that's onboarding a client, buying and selling shares on a platform, or doing back-end reporting, whatever you like.
Hub was 30 cents back in 2015 and $28 today. We still believe it's a buy for a number of reasons. One, the platform industry is over $1 trillion. Hub only has a 5% market share of that industry, but is actually taking 11% of all gross flows and along with their key competitor, Netwealth Group Ltd (ASX: NWL), we believe that flows will continue to move towards the independent platform providers.
The second tailwind is the right[s] to managed accounts. So advisors, post the Royal Commission, have been [seeking] efficiency from their business, and one of the ways of doing that is utilising managed accounts. Now Hub's the leading provider of managed accounts and again, it's another strong tailwind for their business.
Hub's revenue is reasonably predictable. They pop an administration fee on, that's 3,700 advisors who use the platform. People are absolutely key in terms of the process… We look at key management at Hub, whether it's [chair] Bruce Higgins or [chief executive] Andrew Alcock or financial CO called Jason Entwistle, they all have long tenure and they all have, certainly, skin in the game — so gives you confidence. That's what we like to see.
Finally, it's just the earnings they've reached. Hub was moving $4.4 million in 2015 and in the most recent half, the platform business for Hub made over $80 million of annualised EBITDA and still growing strongly, so it's trading sub-20 times FY24, growing over 20%. Highly sticky recurring revenues and there's upsides from transitions, so we believe that Hub will continue to take share and continue to compound.
MF: Is there a move that you regret from the past? For example, a missed opportunity or buying a stock at the wrong timing or price.
Mark Devcich: I guess the biggest missed opportunity is probably not starting Discovery 10 years ago!
There has been this massive tailwind from equity for the last decade of compressing interest rate, and it has made sense to be fully invested in great stock over that time, and that if I was to probably put the biggest mistake I've made is not adhering to that kind of positioning and thinking about timing markets in the short term, which is very difficult to do.
MF: Anything regrets for you, Chris?
[Editor's note: Premier shares are trading around $26 now.]
There were definitely no issues with the company at the time, ticked a lot of the boxes we had, founder-led management team, high market leader, high growth in international markets, operating leverage, and we purely got hung up on the multiple. I guess we have learned that lesson.
A lot of people in the past have pointed out companies like Hub are expensive, but obviously you can see they've continued to compound for good reason. So just about being able to take a bit of a longer-term view rather than getting hung up on a one-year of good P/E.