1 00:00:04,019 --> 00:00:06,900 Sean Aylmer: Welcome to the Fear and Greed Business Interview. I'm Sean Aylmer. 2 00:00:07,170 --> 00:00:09,869 Sean Aylmer: We're heading into earning season on the ASX, the time 3 00:00:09,869 --> 00:00:13,590 Sean Aylmer: when companies report profits and perhaps more importantly, let the 4 00:00:13,590 --> 00:00:16,379 Sean Aylmer: market know what they think is going to happen. Today 5 00:00:16,379 --> 00:00:18,449 Sean Aylmer: I wanted to get an idea of what to expect, 6 00:00:18,449 --> 00:00:20,790 Sean Aylmer: the trends and companies we should be keeping an eye on. 7 00:00:21,000 --> 00:00:25,590 Sean Aylmer: The Australian Foundation Investment Company, AFIC, is Australia's oldest and 8 00:00:25,590 --> 00:00:30,480 Sean Aylmer: largest listed investment company, specialising in Australian equities. It reported 9 00:00:30,480 --> 00:00:32,580 Sean Aylmer: last week. It reported a drop in profit, but that 10 00:00:32,580 --> 00:00:36,690 Sean Aylmer: was mostly thanks to a mega dividend from BHP 12 months ago. Remember, 11 00:00:36,690 --> 00:00:39,420 Sean Aylmer: this is general information only. You should seek professional advice 12 00:00:39,420 --> 00:00:43,050 Sean Aylmer: before making any investment decisions. Mark Freeman is the Managing 13 00:00:43,050 --> 00:00:45,900 Sean Aylmer: Director of the Australian Foundation Investment Company. Mark, welcome to 14 00:00:45,900 --> 00:00:46,560 Sean Aylmer: Fear and Greed. 15 00:00:47,070 --> 00:00:48,030 Mark Freeman: Yeah, thanks for having me. 16 00:00:48,719 --> 00:00:50,668 Sean Aylmer: Just before we jump into it, can you give us 17 00:00:50,670 --> 00:00:54,600 Sean Aylmer: a 101 on list investment companies and exactly what you 18 00:00:54,600 --> 00:00:56,100 Sean Aylmer: guys do and how you invest? 19 00:00:57,150 --> 00:01:00,690 Mark Freeman: Sure. I guess the difference between a listed investment company 20 00:01:00,690 --> 00:01:04,020 Mark Freeman: and a managed fund is given the name, we are 21 00:01:04,020 --> 00:01:07,139 Mark Freeman: like managed funds, but we're in a company structure rather 22 00:01:07,139 --> 00:01:11,099 Mark Freeman: than a trust structure and being in a company structure, 23 00:01:11,100 --> 00:01:13,890 Mark Freeman: we then are listed on the stock market and we 24 00:01:13,890 --> 00:01:18,120 Mark Freeman: put out monthly updates that says what is essentially fair 25 00:01:18,120 --> 00:01:22,018 Mark Freeman: value for the portfolio. We call that an NTA (Net Tangible Assets per share). And 26 00:01:22,020 --> 00:01:25,530 Mark Freeman: I guess, we see it's an advantage of having a 27 00:01:25,530 --> 00:01:29,639 Mark Freeman: portfolio within a company structure, is that we've got a 28 00:01:29,639 --> 00:01:34,530 Mark Freeman: limited number of shares on issue. So we don't have 29 00:01:34,770 --> 00:01:37,410 Mark Freeman: funds flowing in and out of our company on a 30 00:01:37,410 --> 00:01:40,560 Mark Freeman: regular basis, which requires us to keep buying or selling. 31 00:01:40,889 --> 00:01:44,880 Mark Freeman: We've got a fixed capital base, and so we can 32 00:01:44,880 --> 00:01:48,359 Mark Freeman: essentially control how we manage the portfolio and are not 33 00:01:48,359 --> 00:01:51,720 Mark Freeman: forced to transact based on whether money is coming in 34 00:01:51,720 --> 00:01:56,490 Mark Freeman: or out of the company. We do pay tax, so 35 00:01:56,490 --> 00:02:00,120 Mark Freeman: we are a tax aware investor. I guess that puts us 36 00:02:00,120 --> 00:02:04,409 Mark Freeman: into a similar position that most retail investors are. As 37 00:02:04,410 --> 00:02:08,940 Mark Freeman: many people may or may not understand, managed funds tend 38 00:02:08,940 --> 00:02:14,580 Mark Freeman: to see themselves or measure their performance pre-tax and give 39 00:02:14,580 --> 00:02:17,820 Mark Freeman: you performance numbers on that base. Ours are actually post-tax, 40 00:02:17,820 --> 00:02:20,969 Mark Freeman: so we are aware that tax can be a considerable 41 00:02:20,969 --> 00:02:25,019 Mark Freeman: drag on the performance, but that's included in the way 42 00:02:25,020 --> 00:02:27,810 Mark Freeman: we run the funds. Being a company structure, we have 43 00:02:28,169 --> 00:02:30,869 Mark Freeman: a board of directors, group of people who are all 44 00:02:31,620 --> 00:02:35,578 Mark Freeman: experienced business people, often sitting on a number of boards. 45 00:02:36,000 --> 00:02:40,260 Mark Freeman: They provide oversight in terms of the company, so investors 46 00:02:40,260 --> 00:02:43,500 Mark Freeman: can take comfort that there is a group of people 47 00:02:43,500 --> 00:02:46,380 Mark Freeman: that oversee what we do. We have an investment committee 48 00:02:46,380 --> 00:02:50,669 Mark Freeman: that oversee how we manage the portfolios. There's transparency from 49 00:02:50,669 --> 00:02:55,258 Mark Freeman: coming with a listed company. You can see our financial accounts. 50 00:02:55,258 --> 00:02:59,609 Mark Freeman: We make ourselves available at AGMs and shareholder briefings. You 51 00:02:59,609 --> 00:03:02,880 Mark Freeman: can see what we do. You can interrogate us. We make 52 00:03:02,880 --> 00:03:06,870 Mark Freeman: ourselves accountable and we tend to be long-term investors. And 53 00:03:06,870 --> 00:03:09,480 Mark Freeman: so we're trying to find quality companies that we can truly 54 00:03:09,480 --> 00:03:13,950 Mark Freeman: hold the long-term and we understand the importance of paying 55 00:03:13,950 --> 00:03:17,070 Mark Freeman: out franked dividends to our investors. So that's a bit 56 00:03:17,070 --> 00:03:17,760 Mark Freeman: of an overview. 57 00:03:18,600 --> 00:03:21,300 Sean Aylmer: So some of your big holdings are companies that we'd 58 00:03:21,300 --> 00:03:27,450 Sean Aylmer: all know, BHP, Commonwealth Bank, CSL, Macquarie, Transurban. Your results 59 00:03:27,450 --> 00:03:31,919 Sean Aylmer: very much reflect how those companies perform. So the net 60 00:03:31,919 --> 00:03:35,609 Sean Aylmer: profit last week of $310 million, which was down a bit, 14%, 61 00:03:35,910 --> 00:03:38,820 Sean Aylmer: that was I think in part because of the special 62 00:03:38,820 --> 00:03:42,570 Sean Aylmer: div that BHP paid out, but am I right basically 63 00:03:42,570 --> 00:03:44,820 Sean Aylmer: saying if the companies that you are holding do well, 64 00:03:44,820 --> 00:03:47,100 Sean Aylmer: you tend to do well, as does your share price? 65 00:03:48,270 --> 00:03:53,789 Mark Freeman: Yeah, that's right. We're essentially a conduit between the investments 66 00:03:53,789 --> 00:03:57,210 Mark Freeman: that we hold and our end investors. And I think 67 00:03:57,210 --> 00:03:59,340 Mark Freeman: the other thing I didn't put out earlier is the 68 00:03:59,340 --> 00:04:06,060 Mark Freeman: cost to run efficacy is around 0.14% with no performance fees. 69 00:04:06,090 --> 00:04:09,630 Mark Freeman: So it's a very low cost to run it. Shareholders own 70 00:04:09,630 --> 00:04:13,319 Mark Freeman: the company. We're accountable to the shareholders. So therefore, given 71 00:04:13,320 --> 00:04:16,920 Mark Freeman: that very low cost to run the business, as you said, 72 00:04:16,920 --> 00:04:19,920 Mark Freeman: it means the performance we get out of our investments 73 00:04:19,920 --> 00:04:22,290 Mark Freeman: flow through to our end shareholders. 74 00:04:23,130 --> 00:04:26,489 Sean Aylmer: So with all that in mind, we've got earning season 75 00:04:26,490 --> 00:04:29,549 Sean Aylmer: kicking off properly this week. We had a few last 76 00:04:29,549 --> 00:04:31,860 Sean Aylmer: week, but basically things heat up during the middle of 77 00:04:31,860 --> 00:04:35,219 Sean Aylmer: this week and beyond. What are the key themes that 78 00:04:35,220 --> 00:04:37,560 Sean Aylmer: you'll think you'll see during reporting season? 79 00:04:38,370 --> 00:04:42,599 Mark Freeman: Yeah, well look, going into any reporting season, everyone's trying 80 00:04:42,599 --> 00:04:45,659 Mark Freeman: to predict how the market will go. I guess one of the 81 00:04:45,660 --> 00:04:48,870 Mark Freeman: factors I think about though is, where's the market at 82 00:04:49,140 --> 00:04:52,980 Mark Freeman: going into that reporting season? So if the market is 83 00:04:52,980 --> 00:04:55,710 Mark Freeman: very high or has had a very high run, it's 84 00:04:55,710 --> 00:04:58,710 Mark Freeman: quite likely that whatever companies produce will probably disappoint the 85 00:04:58,710 --> 00:05:02,219 Mark Freeman: market. If the market's at a very low level, once 86 00:05:02,219 --> 00:05:05,789 Mark Freeman: again, company results will more likely provide a movement upwards. 87 00:05:05,789 --> 00:05:09,390 Mark Freeman: So there's the results the companies produce, it's where the 88 00:05:09,390 --> 00:05:13,320 Mark Freeman: market is, but in particular, it's the outlook comments that 89 00:05:13,320 --> 00:05:17,339 Mark Freeman: companies make. And particularly going to this year, I think most 90 00:05:17,339 --> 00:05:22,139 Mark Freeman: market participants have been surprised at how well equity markets 91 00:05:22,139 --> 00:05:26,159 Mark Freeman: have held up here and globally. It's fair to say 92 00:05:26,160 --> 00:05:29,609 Mark Freeman: that going back three or four, five months, everyone was 93 00:05:29,610 --> 00:05:34,079 Mark Freeman: expecting the economy to really tail off with rising interest 94 00:05:34,080 --> 00:05:37,889 Mark Freeman: rates. Everyone was expecting a fair bit of pressure to 95 00:05:37,889 --> 00:05:40,949 Mark Freeman: come on the economy and certainly there are areas that 96 00:05:40,949 --> 00:05:45,360 Mark Freeman: are under that pressure, but broadly, company profits have held 97 00:05:45,360 --> 00:05:48,540 Mark Freeman: up pretty well. The US economy seems to have held 98 00:05:48,540 --> 00:05:52,319 Mark Freeman: up pretty well. And so we go into this period 99 00:05:52,320 --> 00:05:57,809 Mark Freeman: and probably results will be broadly be reasonable. So I 100 00:05:57,809 --> 00:06:00,599 Mark Freeman: think then what people will be saying, well, how are you 101 00:06:00,600 --> 00:06:04,500 Mark Freeman: seeing the next six months? Are you starting to see 102 00:06:04,500 --> 00:06:09,660 Mark Freeman: finally some signs of a slowdown occurring with customers? And 103 00:06:09,809 --> 00:06:12,119 Mark Freeman: when you talk about the resource part of the market, 104 00:06:12,719 --> 00:06:15,389 Mark Freeman: that's very leveraged to what China may or may not 105 00:06:15,389 --> 00:06:15,809 Mark Freeman: be doing. 106 00:06:16,289 --> 00:06:18,180 Sean Aylmer: Stay with me, Mark, we'll be back in a minute. 107 00:06:24,420 --> 00:06:27,269 Sean Aylmer: I'm speaking to Mark Freeman, Managing Director of the Australian 108 00:06:27,270 --> 00:06:31,020 Sean Aylmer: Foundation Investment Company. So let's take resources and the big 109 00:06:31,020 --> 00:06:34,589 Sean Aylmer: miners in particular, what do you expect to hear from 110 00:06:34,589 --> 00:06:39,060 Sean Aylmer: them over the next couple of weeks, given what's playing 111 00:06:39,060 --> 00:06:42,540 Sean Aylmer: out in China and the uncertainty around stimulus? Having said that, 112 00:06:42,540 --> 00:06:44,309 Sean Aylmer: last week they did come out and say they're trying 113 00:06:44,309 --> 00:06:46,738 Sean Aylmer: to help the property market, which will help commodities, but 114 00:06:47,010 --> 00:06:50,219 Sean Aylmer: consumers are still seemingly not a lot around for them 115 00:06:50,219 --> 00:06:51,899 Sean Aylmer: at the moment. How do you think it, what will 116 00:06:51,900 --> 00:06:53,639 Sean Aylmer: the BHPs and that be talking about? 117 00:06:55,049 --> 00:06:58,500 Mark Freeman: Look, I think it'll be, certainly they'll have healthy balance 118 00:06:58,500 --> 00:07:02,279 Mark Freeman: sheets. I think they'll probably talk about the cashflow and 119 00:07:02,279 --> 00:07:06,719 Mark Freeman: dividends they're producing and the big resource companies, the BHP 120 00:07:06,719 --> 00:07:11,279 Mark Freeman: and Rio, they have become important sources of franked dividends 121 00:07:11,760 --> 00:07:16,170 Mark Freeman: to Australian investors. And I think the model those companies 122 00:07:16,170 --> 00:07:19,590 Mark Freeman: have at the moment is to keep themselves financially strong 123 00:07:19,650 --> 00:07:23,490 Mark Freeman: and get dividends to shareholders, which we appreciate and applaud. 124 00:07:24,090 --> 00:07:27,480 Mark Freeman: And I think everyone will want to know what they're seeing out of China and 125 00:07:27,570 --> 00:07:30,089 Mark Freeman: as you said, the stimulus that comes out of China. 126 00:07:30,090 --> 00:07:33,030 Mark Freeman: I think there had been an expectation that perhaps they 127 00:07:33,030 --> 00:07:35,520 Mark Freeman: would start to pull that back a bit. They want 128 00:07:35,520 --> 00:07:39,510 Mark Freeman: to see their economy more driven by a consumer led 129 00:07:39,510 --> 00:07:43,860 Mark Freeman: approach rather than constantly having to do capital investments. But 130 00:07:44,670 --> 00:07:47,160 Mark Freeman: once again, it sounds like that sort of stimulus may 131 00:07:47,160 --> 00:07:50,550 Mark Freeman: continue, which gets resource stocks running in the short term. 132 00:07:50,550 --> 00:07:53,040 Mark Freeman: So I think that'll be a discussion about where they 133 00:07:53,040 --> 00:07:55,020 Mark Freeman: see China and its policies. 134 00:07:55,860 --> 00:07:59,039 Sean Aylmer: Among the big four banks only Commonwealth Bank reports in 135 00:07:59,040 --> 00:08:02,160 Sean Aylmer: the next few weeks. Macquarie Group also reports, but with 136 00:08:02,160 --> 00:08:05,789 Sean Aylmer: Commonwealth Bank particularly, is it that ongoing story of profit 137 00:08:05,789 --> 00:08:07,680 Sean Aylmer: margins as in net interest margins? 138 00:08:08,250 --> 00:08:12,750 Mark Freeman: Yeah, well that's the focus and probably increasingly though, everyone's 139 00:08:12,750 --> 00:08:16,890 Mark Freeman: watching what's happening with the bad debts. Are they rising? 140 00:08:17,370 --> 00:08:21,750 Mark Freeman: They've been incredibly low for a number of years now 141 00:08:21,750 --> 00:08:26,790 Mark Freeman: and most people would say probably unsustainable, so everyone's expecting 142 00:08:26,790 --> 00:08:29,700 Mark Freeman: them to creep up a bit. But I think compared 143 00:08:29,700 --> 00:08:32,429 Mark Freeman: to perhaps where we were in the past is, the 144 00:08:32,429 --> 00:08:35,820 Mark Freeman: capital that banks have to hold now is far greater 145 00:08:35,820 --> 00:08:39,089 Mark Freeman: than it ever used to be. So they are in 146 00:08:39,089 --> 00:08:42,779 Mark Freeman: a financially stronger position. All the four banks have to 147 00:08:43,950 --> 00:08:48,059 Mark Freeman: focus their businesses. They've sold off what you'd call sort 148 00:08:48,059 --> 00:08:51,059 Mark Freeman: of non-core assets and got back to core banking activities. 149 00:08:51,630 --> 00:08:55,259 Mark Freeman: They have more sustainable payout ratios, so the dividends can 150 00:08:55,259 --> 00:08:59,549 Mark Freeman: be a bit more reliable. So in this environment, the 151 00:08:59,549 --> 00:09:02,189 Mark Freeman: dividends and the franked dividends they pay out, we are 152 00:09:02,190 --> 00:09:06,179 Mark Freeman: pretty comfortable with. And I think the part the market 153 00:09:06,179 --> 00:09:10,170 Mark Freeman: often misses with the banks is perhaps an under-appreciation of 154 00:09:10,170 --> 00:09:14,130 Mark Freeman: the value of the franking credits. And we certainly value that. We've 155 00:09:14,130 --> 00:09:17,279 Mark Freeman: been nibbling a little bit at NAB as it dipped, 156 00:09:17,279 --> 00:09:20,700 Mark Freeman: because we look for what we call temporary bad news 157 00:09:20,700 --> 00:09:23,400 Mark Freeman: in the stock. It tends to provide the best buying opportunities. 158 00:09:23,400 --> 00:09:26,400 Mark Freeman: So we have a list of companies that pass our 159 00:09:26,400 --> 00:09:30,480 Mark Freeman: quality criteria. Then it's often bad news that invites us 160 00:09:30,480 --> 00:09:33,270 Mark Freeman: to add more. With the banks, you had a double 161 00:09:33,270 --> 00:09:36,510 Mark Freeman: whammy between rates going up, but also there was obviously 162 00:09:36,540 --> 00:09:39,449 Mark Freeman: a lot of issues with the US banks recently. A 163 00:09:39,450 --> 00:09:42,270 Mark Freeman: few of the regional banks went under. That caused a 164 00:09:42,270 --> 00:09:45,450 Mark Freeman: lot of nervousness in our banks. They got sold off 165 00:09:45,450 --> 00:09:48,088 Mark Freeman: quite a lot and we were starting to see some value. 166 00:09:48,090 --> 00:09:51,030 Mark Freeman: So NAB, for example, got to a yield of about 167 00:09:51,420 --> 00:09:55,290 Mark Freeman: around 6%. When you add ranking to that, you're getting 168 00:09:55,290 --> 00:10:00,120 Mark Freeman: something close to 9% yield and that's when we start 169 00:10:00,120 --> 00:10:01,530 Mark Freeman: seeing some value in the banks. 170 00:10:01,890 --> 00:10:03,300 Sean Aylmer: What about, another one I want to mention when you 171 00:10:03,300 --> 00:10:07,500 Sean Aylmer: talk about seeing value is CSL. You hold CSL. It 172 00:10:07,650 --> 00:10:11,399 Sean Aylmer: has been a darling of the market until about the 173 00:10:11,400 --> 00:10:14,640 Sean Aylmer: middle of last month, and it's come off about 15% 174 00:10:14,640 --> 00:10:20,040 Sean Aylmer: there on some misses. What do you expect from CSL this 175 00:10:20,040 --> 00:10:20,790 Sean Aylmer: reporting season? 176 00:10:23,070 --> 00:10:25,740 Mark Freeman: I guess it goes with these same patterns where the market, 177 00:10:26,099 --> 00:10:27,960 Mark Freeman: I think, was a little bit of ahead of itself 178 00:10:27,960 --> 00:10:32,880 Mark Freeman: in terms of the profit forecast. There's still an ongoing recovery 179 00:10:32,880 --> 00:10:40,559 Mark Freeman: from the COVID period coming through and downgrading a profit forecast. 180 00:10:41,400 --> 00:10:46,019 Mark Freeman: The market doesn't like it, and it was on probably, 181 00:10:46,020 --> 00:10:49,078 Mark Freeman: I would say a fairly full valuation, PE multiples in 182 00:10:49,080 --> 00:10:53,429 Mark Freeman: the low thirties, but it's had quite a significant pullback now. 183 00:10:53,429 --> 00:10:56,220 Mark Freeman: So it's back to more what I would call longer 184 00:10:56,220 --> 00:10:59,969 Mark Freeman: term multiples. So I'd say it's a very fair price 185 00:10:59,969 --> 00:11:03,960 Mark Freeman: for this stock now, and there's still lots of projects 186 00:11:03,960 --> 00:11:06,869 Mark Freeman: they've got in play. There's still some quite significant products 187 00:11:06,870 --> 00:11:11,670 Mark Freeman: that are going through trials. One in particular, the market 188 00:11:11,670 --> 00:11:15,059 Mark Freeman: is quite excited by, which is a product they've been 189 00:11:15,059 --> 00:11:18,509 Mark Freeman: working on for a number of years that, again, it's 190 00:11:18,509 --> 00:11:23,129 Mark Freeman: an outcome of their plasma product that they extract. They 191 00:11:23,129 --> 00:11:27,870 Mark Freeman: utilise components within plasma to produce the products that they do, 192 00:11:27,870 --> 00:11:29,790 Mark Freeman: but then a lot of it's wasted and they do 193 00:11:29,790 --> 00:11:32,520 Mark Freeman: a lot of research on the wasted product, and they're 194 00:11:32,520 --> 00:11:35,520 Mark Freeman: working on a product that if you suffer a stroke, 195 00:11:35,610 --> 00:11:38,460 Mark Freeman: you take this product and it'll help clear the arteries. 196 00:11:38,639 --> 00:11:42,539 Mark Freeman: But look, when you're in trials, these are very high risk. 197 00:11:42,750 --> 00:11:44,819 Mark Freeman: But I'm really trying to do that to illustrate that 198 00:11:44,820 --> 00:11:47,070 Mark Freeman: there are a number of projects the company's working on 199 00:11:47,309 --> 00:11:51,210 Mark Freeman: that'll take shape over a long period of time. But 200 00:11:51,210 --> 00:11:55,230 Mark Freeman: there's temporary weakness in the share price because I really 201 00:11:55,230 --> 00:11:58,739 Mark Freeman: think because market's expectations on profit growth were too high, 202 00:11:58,740 --> 00:12:01,380 Mark Freeman: they've really come back to much more reasonable levels and 203 00:12:01,380 --> 00:12:03,240 Mark Freeman: the stock's come back to a much fairer price. 204 00:12:03,840 --> 00:12:05,580 Sean Aylmer: Mark, thank you for talking to Fear and Greed. 205 00:12:06,510 --> 00:12:07,410 Mark Freeman: Pleasure. Anytime. 206 00:12:07,860 --> 00:12:10,800 Sean Aylmer: That was Mark Freeman, Managing Director of the Australian Foundation 207 00:12:10,800 --> 00:12:14,040 Sean Aylmer: Investment Company. This is the Fear and Greed Business Interview. Remember, 208 00:12:14,040 --> 00:12:16,588 Sean Aylmer: this is general information only and you should seek professional 209 00:12:16,590 --> 00:12:19,920 Sean Aylmer: advice before making investment decisions. Join us every morning for the 210 00:12:19,920 --> 00:12:22,770 Sean Aylmer: full episode of Fear and Greed, Australia's best business podcast. 211 00:12:22,830 --> 00:12:24,720 Sean Aylmer: I'm Sean Aylmer. Enjoy your day.