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Investing in Choppy Waters with Alliance Bernstein

About this Webinar

Yield Financial Planning is pleased to bring you this insight from one of Australia’s leading equity managers, about their view of the economy and where the share market is heading.

The Alliance Bernstein (AB) Managed Volatility fund returns are ranked, 7, 4 & 5 against more than 285 of their Australian peers, over 1, 3 & 5 years respectively.

About our Guest

Ben Moore, has a dual role as the leader of AB’s retail business in Australia and as the investment specialist for AB’s offshore strategies in both equities and fixed income.

He joined the firm in 2014, shortly after AB launched its retail strategy in Australia, and has been responsible for leading the company’s growth in the sector, based on AB’s client-centric ethos, which involves bringing innovative strategies to the market and sharing investment knowledge with financial advisers.

Moore’s 20-year career in the financial services industry includes working as head of wholesale distribution at Russel Investments, and various distribution roles at AMP Financial Planning, ING Australia, Colonial State Bank and Aviva Australia.

He holds an MBA from the Macquarie Graduate School of Management and a Diploma of Financial Services from AMP Adviser Academy in conjunction with the securities institute of Australia.

AB is the winner of 3 coveted awards in 2019, which included:

    1. Winner of the Domestic Equities Large Cap category – Morningstar Awards.
    2. Money Management – Longsec Fund Manager of the Year.
    3. Their Managed Volatility Fund won the Australia Equities Large Cap category – Zenith Fund Awards.

The fund’s historical performance speaks for itself, especially when ranked against their peers in this space.

As always, please feel free to reach out to the team at Yield Financial Planning if you would like to know more about this topic.


“Having only just begun my journey with Yield this was my first webinar. I found it very informative to hear directly how Alliance Bernstein approach their investments, especially in these volatile Covid-19 times. It gave me a better understanding regarding fund managers in general. It gave me confidence that they review their investments regularly to create the best returns and aligning to their purpose.”

Jorgen Romijn

“The recent webinar was the first time I’ve heard directly from a fund manager in 20 years of investing. It helped me gain an understanding for the how and why of the fund’s investment style and an appreciation of how much work goes into it. I came away thinking that my investments are in safe hands and provided much needed reassurance at a difficult time.”

Tim Prosser

“It was well led by Yield with a very insightful presentation by Ben who handled the queries with comfort and expert opinion. The major benefit I took out was gaining the insight, assessment and decision making that an experienced fund manager works through diligently and then pro-actively takes immediate steps in anticipation of events unfolding.”

Michael Slattery

“Informative session at a most appropriate and challenging time for investors”

Peter Affleck

“Will be back for any further episodes. Gives us confidence in those decisions you make on our behalf. Seeing and hearing the logic and the bigger picture always adds strength to the bond with clients.”

Stephen Jackson

Webinar Transcript

James McFall:

Good morning and welcome, for those of you who don’t know me my name is James McFall and I’m the Managing Director of Yield Financial Planning.

I also chair our investment committee which includes our partner stockbroker and head of our of research at our licensee.

These are certainly highly unusual times. I’m currently presenting to you from my loungeroom as my wife and kids work in other parts of the house and no doubt a number of you will be in a similar situation right now.

It’s clear that the economy is being impacted by this pandemic, in fact we’re currently in what would we recognize as a recession right now which is Australia’s first for more than 28 years and with that backdrop it’s time to reflect on how share markets have been performing and how they’re likely to perform moving forward.

With that in mind we’ve invited Benjamin Moore, Australian Managing Director at Global Fund Manager Alliance Bernstein. Ben brings more than 20 years of investment experience and Alliance Bernstein run a very interesting fund that is designed to manage volatility, making a perfect manager to ask to speak to today.

The Managed Volatility fund has been a top performer over 1, 3 and 5 years when measured against his peers and is unique as it aims to take to only half of the market downturn when markets are negative while still capturing at least 80% of market upside when things are more positive.

Ben will provide some insights into how they have been managing their share portfolio and this pandemic to this point and also some insights Alliance Bernstein’s outlook moving forward. Also, with us today is Yorkie Au, who is a senior financial planner with yield.

Yorkie and I will be asking been a series of seven questions and also as part of this you will be able to ask questions, you’ll see on your screen the option to write your questions which can be anonymous if you like. Our intention will be to interject and ask Ben these where relevant and time permitting however if there are questions that we don’t get it to answer live we will respond to you after the presentation.

Before we get going it’s important to state that this presentation is general in nature it’s not personal advice but if you would like to speak about any aspect of what we cover here today or have a review of your financial plan, we’ll welcome the opportunity to talk to you later at a later point. Ben we’ll have a more robust disclaimer to share with you I’m sure.

So, with that introduction, I’d like to welcome you Ben and so welcome you here today.

Ben Moore:

Thank you, pleasure to be talking to you.

James McFall:

Thank you, well as a first question can you just tell us a little bit about what you’re seeing in the world economy at the moment.

Ben Moore:

Certainly, and before I do that James I will use my robust disclaimer and then I’m going to talk about Alliance Bernstein’s views on the economies around the world, which include stock markets and bond markets and we’ll even get into some stocks. So just confirming, its information that we work as a firm, we’ve got the likes of huge oak to provide advice to clients. We don’t know your clients, so it is very much general in nature though, the stocks that I talked about today. But very happy to take questions on stocks and markets as they go through.

So a great question to start about how do we see the world economy, and it’s tough, I would say challenging in a word is a way to look at it, and unlike the GFC or past crisis we’ve seen is this is everywhere. There’s no one, there are some countries that have done better and when we look at lives lost Australia is actually done considerable better than more developed countries around the world.

Nearly 330,000 people have died since the outbreak of COVID-19 and that is just a tragedy. To see that impact on lives is huge and that has an amazing impact on how people feel and think. You can imagine in those countries that’ve been hurt the most, I think Italy, Spain, France and the US – in parts of the US you’re definitely seeing it different in New York to other states – it’s had a dramatic impact on those economies. 38 million Americans are unemployed, 6 million Australians around, that hurts.

Where you James, you’re doing this from your Loungeroom, I’m in my wonderful office here in Randwick in Sydney. This is week 10 for us that we’ve been working from home, so we haven’t been going to cafes, we haven’t been going to restaurants. The money that greases the wheels of economy, is just not happening.

So, I’d also add our concerns are with the developing nations as well because we’ve seen in country like Italy and Spain who have had outbreaks but haven’t had the health care system to look after them. They just weren’t ready for them and if you look at their debt position, technically Italy was already in a bad position anyway and broke. It doesn’t have the money to pay back the debts which were already borrowed and hasn’t invested in its health-care system either over the decades, and the same for Spain, so they weren’t able to respond with the isolation and the ventilators and the healthcare required that we’ve seen here in Australia.

I want to add to that that I just tip my hat off to healthcare workers and if you know them, they’ve been amazing. The shifts that they’ve been having to work on and off particularly in Melbourne and Sydney have just been phenomenal. Times that by 10 if you know anyone who’s working in New York and London and the effort they put in has just been amazing.

So when we look at the impetus that goes into the economy which by enlarge is people spending, traveling – there’s no world travel how often have you looked up into the skies at home and just not seen any planes. I live not far from Sydney Airport and get to go down the park a lot because we too have a dog and there are no planes traveling so there’s no travel. Entertainment’s different – we’re not eating out. So the way we look at economies right now is if they’re slow, everyone’s in a recession and it’s going to take some time to grind out of this.

Yorkie Au:

And with the above in mind what does Alliance Bernstein think about how share markets have responded and what insight can you give us about where we’re headed from here?

Ben Moore:

It’s a great question Yorkie, because it depends on the month and I say that because we saw a sharp sell-off in equity markets around the world as particularly in February. Now we started to get an understanding of what was wrong sort of from that first week in January as the cases out of Wuhan started to grow quickly and that multiplied over time. It didn’t really come as news to markets around the world until mid-February and into March, and I remember speaking to my colleagues in the US at the time and America didn’t really pick up on this until March. They didn’t really think this an American issue at that point in time and then we saw sell-offs around the world, including our market, so we think there is so much irrationality in markets. We see people selling stocks for the wrong reasons and we see people buying stocks for wrong reasons as well, and April was a great example of that.

We just saw a bounce in markets in April and the main reason we think about that and I’ll put it into two camps, there’s a bull case for equity markets and that bull case, or the reason I think equities are the way to go in general – so markets in general – [is] the amount of money being printed around the world to keep cash rates and bond rates low is phenomenal. Since January, America alone has printed 7 trillion dollars worth of money to keep their rates alive. That’s to grease the wheels to keep borrowing happening – the people need to buy property or invest using borrowed money. Rates are going to be low for some time. Japan has bought all of its own debt and we’re now seeing Europe’s done it for some time and we’re seeing smaller nations do this as well.

So given cash rates are low and bond rates are low, the bull case is: “Well surely equity markets will go up because they’ve sold off so much”, and so that is what we saw in April. We saw the exuberance come back to the market and people think: “You know, I’m going to buy stocks again!”. However, what we saw happen in that month is we just saw companies, a great example is oOh!media – really good advertising agency that specializes in outdoor advertising – now if you think about any company right now I don’t think outdoor advertising is on the top of their list in terms of the spend they’re going to do because if you think about where they need to spend their money, it’s on their staff and on protecting their cash flow. Yet we saw this company go to the market to raise more capital in April and the stock price has bid up almost 20 percent, to us that’s irrational behaviour. We don’t own any media right now, that’s an area we want to stay away from. So, we think we’re going to continue to see bouts of irrationality.

The last thing I’ll talk about in markets is [that] the US is in the middle of its reporting season right now, so that’s where companies come to the market, say how are we and how are we looking in terms of our cash flow. Today 160 US companies have deferred any guidance, that’s 40% more than what happened in the GFC. So that’s companies saying to their shareholders we simply don’t know what our cash flow is going to look like, and we don’t think that has sunk in yet. We think when investors start to realize that “Hey, I own a company here that’s not going to produce any cash for some time. Why am I owning it?” and they may look to panic sell and we think it’s going to be the same here in Australia.

We think as our reporting starts season starts in July, goes through to August, there are many companies on our exchange that are just not going to be able to produce any cash, think Qantas, Sydney Airport, companies like Cochlear – Cochlear is an amazing company, they do great things but there’s no elective surgery happening anywhere. Queensland’s just about to start up again but until elective surgery is allowed and where that sits in terms of ear implants, they’re probably not going to produce any cash flow until next year. So we think the outlook for markets is grim, there’s opportunities, and I know we’re going to get to that later, but we think there’s irrational behaviour both on the buying and the selling side which has presented good opportunities for us.

James McFall:

I think that you’ve just highlighted really well what some of the, you know, the peculiarities and the uncertainty that we’re facing and Ben, on that note, given your fund is a managed volatility fund, true to label, you did really well in the March fall – you beat the market by 9 percent in that period – can you share with us some of the ways that you manage volatility?

Ben Moore:

Most definitely, and James it is worth noting we are a defensive bearish manager, we’ve got a role in a portfolio, that’s exactly what we’re designed to do so we’re always looking for what can go wrong.

The premise of the way we manage money, and we want to make you money, we’ll be invested in equities so there’s risk with that, we want to give you a better return over time. Our premise is, we think about three things, first, we want companies that are different from the benchmark that have stable share prices – they’re companies that are not as impacted in terms of general market conditions – so we think about things like Transurban and ResMed as examples there. By different to the benchmark or our market, 67 percent of the ASX is made up of banks, which we only own two in at very small weights, who have had a terrible run and will continue to for some time. Energy – so we don’t own any oil companies, and then lastly miners, we do own some and I’ll talk through that a little bit later, but we very much underweight those sectors.

If I go back to about how do we get to March and how do we perform[ed], well, in January, Roy Maslen, who runs the portfolio and myself and the team, we sat down and we think: “What do we think will happen and where are our risks?”, and straight away we looked at Qantas and Sydney Airport that we had in the portfolio and we sold them. Took us two days, we owned tens of millions of dollars in both those companies, because we could see this, our view was there was a risk to the downside, so let’s get out of that and making that decision then, we got out and took profits in both those companies at that point in time and they’ve gone on to fall well over 15% from that time. So that was the first decision we made.

We then looked at “Okay, what’s next?”, and this is as we got through to February which was: “Who’s not going to generate cash flow as lock down started to happen?” and then we looked at all the sort of more consumer discretionary – so shopping, eating that sort of thing – and we’d already been very much underweight in retail malls. So I think Camberwell is arguably the biggest mall, we’ve got Bondi Junction here in Sydney, we just knew the shopping patterns of people were going to change so we’d already sold out of our positions in retail malls about eighteen months ago and that was really to do with the impact of Amazon [and] people buying more online and that has helped us. But then we look through our portfolio, we had JB Hi-Fi in there as well, so we sold JB Hi-Fi which was good.

We then looked at REA group and then just went “You know what? People aren’t going to buy and sell properties as much”, and as you’ve seen in Melbourne and Sydney auctions have been banned. If you think about [it], the biggest turnover for REA group was:

  1. Advertising the property; and
  2. Advertising the auction

They’re slowly starting to come back but that’s quite literally why we wanted to be out of that as well.

And then Wesfarmers, we had a big position in Wesfarmers, and whilst we love Bunnings, we think Bunnings – we all love Bunnings, right? I like going down to Bunnings, I live near a Bunnings it’s one of my most favourite places to go. We own the Bunnings property trust but we didn’t want to take the risk on Kmart and Target because we just saw a real issue there, so we sold out of those and what we did is – we’ll go through later some things we’ve been buying – but as a result of not owning those things we did buy some other stocks and I’ll talk through those.

We increased our cash position to 14% and that certainly was a great [decision], it was a big part of not taking as much of the hit, and then we saved almost 50% of what the market went down [by, which] is what we went down and we’ve since rebounded strongly since.

James McFall:

Yeah, I think that the fact that you’ve got that ability to own some cash and also having some flexibility to own some international shares but being investment agnostic, it’s certainly not a time for index managers is it? It’s you know, active management where you can completely steer away from certain sectors that are underperforming. It’s going to greatly improve your potential out performance.

Ben Moore:

Most definitely, the thought of owning everything in an index right now just has no appeal to us at all because there are so many companies that are impacted by no cash flow – people that just won’t spend. There are other companies that will continue to generate cash flow that we’re happy to own.

You mentioned the international components, twenty percent of our business is – well the portfolio is – invested in global stocks, where we also made some changes there. We own things like McDonald’s as an example and so whilst McDonald’s is still open here in Australia and we can go there it’s not in New York and it’s not in the UK and a lot of parts of Europe so that’s a global franchise we wanted to be out of that.

Adidas is another stock that we own, we just didn’t see people running out to buy trainers or although I look at my own wife’s online shopping patterns, they certainly haven’t changed, they’ve actually gone up in isolation we’re doing our bit for our economy here in Randwick and that’s for sure. But we moved those names into global healthcare names – things like Roche and any of the laboratories. We’re keen to invest in those and we also bought a company called Citrix which is basically a remote office working system that we’re all using today, they’re part of the componentry that’s in that but that’s certainly helped as well.

James McFall:

Thanks Ben, just before Yorkie asks the questions if you need any of your slides just let me know and I’ll bring them up.

Ben Moore:

Cool, we’re good.

Yorkie Au:

Ben, would you be able to tell us how you were able to pick the March fall when it happened so quickly?

Ben Moore:

Yeah, it was a lot of work. It’s a really good question and it definitely wasn’t a “Hey, let’s go to 14 percent cash” which I mentioned before. We spend hours on all of the stocks we own, all the stocks we could own, [considered] what’s the thesis for owning these stocks, and I think now more than ever good old-fashioned work is how you win. You’ve got to go and do the work on the company, you’ve got to know the CEO, you’ve got to know the CFO, you’ve got to know their senior management, you’ve got to know why they invested in the future cash flow generation of that company – which is where we spend an enormous amount of our time.

So then each of us [on the team] have names in the portfolio that we like, that we think will do well so all the analysts in Roy’s team would sit down and say “Hey look, I think Qantas could get through this”, and what Roy would do with our economists is give us reasons why it wouldn’t and clearly that was a good call. So as a team, you certainly can’t have an ego in these meetings because if you’ve got an idea that you think will work, you know you’re going to those meetings to have your peers give you reasons why [they’re] not [going to work] and I think that’s a great robust discussion to be having at this point in time. So we’re able to do that with our entire portfolio and we’ve had to a lot of work on the debt markets – so who is willing to continue to borrow, lend to companies even though they’re not going to produce any cash, so knowing that was important.

[We considered] what was the debt of all the companies that we owned, and Transurban is a good example where people were worried about traffic – now these are a toll road operator and there’s no doubt that traffic has gone down – but we’re happy to continue to own this company and the reason being is their balance sheet is amazing. Their debt is at a fixed rate of around 4 percent over 9 years and [they have] a lot of cash at bank and their cash flow has been hurt but it’s not been hurt as much as others, so when we’ve seen that sold off we bought that. I would say the reason we got March right goes back to what our process is; strong companies with great cash flow and future cash flow, we want them to have stable share prices, we don’t want to pay too much for them so as they get expensive we want to be out of those names.

But then we do things like “Where is each company in its cycle?” – most companies have a cycle, and where companies typically hurt us the most is when they get to the end of that cycle and sell off. Think about if we were 12 months ago talking about Qantas, Qantas was roaring, this was a stock if you go back five years ago got to 30 cents. It was going to the government saying “Hey I need a loan”, it got to $6.90 nearly $7, it was a wonderful airline and still is a wonderful airline, it’s really well run but clearly it’s got some issues right now. So, cyclicality is something that we think about. Think about when ALDI came to our market and what that did to Woolworths, we need to be aware of that when that happens.

Balance sheet – we spent a lot of time pouring over balance sheets and we just didn’t want to be in companies who had too much debt without the cash flow to make those debt requirements. So anyone that was thinking about mergers and acquisitions, we wanted to be away from that and then event risk is the last thing we typically look for as well, which is what could happen over the next month or quarter and that could have an impact and that was where we came to our decision on REA. We just looked at how much money they made in advertising and auctioning alone and given that Sydney and Melbourne is where they get the bulk of their advertising, given our high rate of our property markets, you turn that tap off that’s a huge hit to their cashflow for their earnings. So, we just knew that that was an event and we couldn’t continue to own that stock, [so we] took our profit and got out of it. When we did that, as I mentioned with the 14% into cash helped, but then we did buy other things and I know you’ve got some questions for me on what stocks we like which I can take later in the call.

James McFall:

Yeah brilliant, well no, thank you Ben and I think what that really highlights as well is it’s you know, investing it’s logical, we’re talking to our clients about their own personal economy and how they can manage any sort of liquidity crisis and so people you know, are earning less, they’re running businesses, and so we know when we’re planning for clients that these events happen, not this particular sort, but things happen and therefore it’s important to have a balance sheet that’s strong enough to get you through.

Well, in the context of investing, yeah it makes perfect sense that you would reflect first on companies that have got strong balance sheets that are in a position to basically ride this out. So thank you, and I guess it leads in well to our next question which is: What are the opportunities that you’re seeing in the market and are there any areas in particular that you’re avoiding? I know you’ve started to sort of talk about this a bit.

Ben Moore:

Yep and there’s others that I’ll get to there, but I’ll address your point around cash. You deal with small businesses every day, cash is king, and it’s no different for a big business and this is where we spend our time on balance sheets and cash flow statements. What sort of custodians of cash are they and you as an adviser are in that role for your clients as “I’m the custodian of your cash flow through your lifetime”, and we just think that is so important when you’re investing because then you don’t get into irrational behaviour, you don’t sell a stock because of its price falls and you sell a stock because the thesis that you built as to why to sell it. So, we think that cash is such an important thing to understand.

You mentioned indexes before as well, we don’t have any, we think indexes are a great provide to liquidity, but we think now the thought of investing in everything isn’t a great thing because it’s just too much irrationality there.

That irrationality, I’ve talked a bit about what we wouldn’t own and so what did we buy? What are we buying now? There are companies, so at the time that we sold the likes of JB Hi-Fi, Wesfarmers, etc, that I spoke about; we like Telstra, I know some of us have been around long enough to remember when T2 came out and you could get it for $9 – it’s crazy to think it was that price once.

We think Telstra is a stock that its dividend looks good because if you go back two years ago they cut its dividend dramatically – so that hurt coming out of it – and what are we all doing today, we’re using bandwidth, and isn’t it wonderful ringing Telstra to increase your bandwidth? It’s one of the calls we never want to make but they’re going to do well and we’ve been buying not just Telstra here but Telcos around the world. So Spark, New Zealand has been one that we’ve owned and Nippon in Japan, there’s another one, HKT in Hong Kong, because we just think bandwidth is how we are meeting today, we’re going to be doing this for years, we’re never going to stop doing this, the degrees at which we do it will change but the amount of data we use will [increase]. So, Telstra and Telcos are differences that we like.

If one thing of the work that we’ve done over time and we did some analysis going back to 1940 of all the things that go wrong in stock markets. If you’re worried about a bubble, at the end of last year when we looked around the world with our own market, there were parts of it that were very expensive, we had some of our tech companies at 60 to 70 times their earnings, so you’re paying a price today that you think is worth 60 times of earnings into the future, which for us is just ludicrous because that’s very hard to justify most those earnings. So given that, we sort of thought: “Okay, what do I want to own if there is a pull back?”, we didn’t know COVID was going to come around the corner in January but for the last 18 months we’ve been very happy to buy gold stocks. We don’t buy the physical metal because the metal just sits in a safe and does nothing. What we do own is we own the companies that can pass a dividend – so Saracen Mineral, Evolution, we’ve got a little bit of Newcrest, Regis Resources and Northern Star.

The reason we own five or six – it’s anywhere between four and six at any time – is each gold stock has got its own issues and opportunities, so we want to spread our risks there. Newcrest is an example, it’s the most talked about gold stock but its biggest mine is Arcadia around the Orange Bathurst region and it’s prone to earthquakes. Obviously, it may happen [and] its stock price will fall, so we wanted to spread our risk there.

So gold is definitely something was like, we continue like, and it’s one of those things that when we have these fearful days or months or weeks we see the gold price rally and those stocks rally as a result. We’re able to take profits at those point in times because we can see people are on that thesis of: “Hey I’m worried, I’ll buy some gold stocks”, we can trade out of those and reduce our positions.

It’s exactly the same on the other side, in April when the world was thinking I want to get into risk again, I want to buy banks, I want to buy resources, I want to buy expensive tech, they sell gold stocks and we do the opposite we buy them and we’ve done a lot of that.

James McFall:

Ben, before you move on on that point, there is a question from one of our attendees who’s just asked: “Can you explain why you wouldn’t own the physical commodity?”

Ben Moore:

Yep, if I own an ETF or buy the commodity it sits in a safe and I’m waiting for that price to move and then I’ve got to sell at a profit. I don’t get any income from that; it just sits there. Whereas I get the same impact on the gold price by owning a company that mines it because it’s hinged to the gold price to a degree but we then get dividends and share buybacks and franking credits from those Australian companies as well. So, we’d much prefer to own the company that mines it and we’ve got world-class gold miners here in Australia. They’ve expanded from what they were years ago, and they were used to just be Lihir and Newcrest who were the big two. Newcrest buys Lihir, we think Northern Star is a great operator, we think Regis is a great operator, Saracen and Evolution, so we’d rather own the company that gets the benefit of the gold price going up but we want to get the dividend and the franking credits as well.

James McFall:

Ben, I know I distracted you from your answer, there is another question that’s come in which might be timely to ask. Just with relation to property and I guess commercial property is something that’s an investment option you’ve got available to you. Residential property you may or may not have a particular view on but there’s a pretty wide view on the potential falls they might suffer. Do you have any observations or comments regarding property?

Ben Moore:

Yep, certainly, and happy to. We do have views and because there’s companies like Stockone that we have owned, we don’t [own], we haven’t owned in some time, that is both a retail mall and residential property play. REA group you could argue that’s also hinged to residential property to a degree there as well and we sold out of that.

Let’s break it into three areas, let’s look at retail, which we think is going to be bad for some time and it’s going to have to change. Our malls are going to have to move from just being about shopping to being a destination to go to to do stuff, which clearly isn’t going to happen for some time. How many people can you have in a mall? What’s there? And we’ve seen some success that in malls in Canada and the US, those that have become places to go and particularly in towns where there’s not much to do helps as well and it’s why when we look at the likes of Camberwell and Bondi we think they’ll be fine because they’re go to places. There’s so much there, you want to own those but it’s the malls that are only there for shopping that we think are going to be challenged for some time.

There are a few where they’ve got a Coles, Woolies and ALDI as their anchor tenants, if those three are paying rent, which in a lot of cases they’re not and that’s what I think a lot of people don’t realize is quite often for a mall to get off the ground they do a rent free period for anchor tenants, like those three supermarkets, so the rentals aren’t great. So we think retail is challenged, we thought it was anyway because we think the online habits of Australians will just increase, so retail is challenged and it’s going to take some time to work out what is a retail mall [going to] look like in the next five years.

We own Dexus, so that’s an office space, so we still have that, and we own Bunnings and the property trust, and Bunnings we’re very happy [with and] we will continue to own that. Dexus we’re doing a lot of work on because the office will change, the demand on office space is not going to be what it was.

We don’t agree with the thesis that everyone’s going to work from home forever though. Our own CEO, Seth Bernstein, I was talking to him in the week and he had been speaking to Larry Fink from Blackrock, he’d spoken to the head of Coca-Cola, he’s spoken to the head of Bank of America Merrill Lynch in that same week and they’re all in agreeance that the office does so much for morale and there’s things that you can do in an office that you just can’t do from working from home.

It will put some pressure on rents and we’re seeing renegotiation on rents but for every office that’s thinking we’re going to do more from home, there’s no doubt people will still want buy office space, so we think it’s where you own that office space is the key to that question.

Residential property is interesting. Australians are fascinated with residential property more than any other country in the world. Going into this crisis we were the most indebted household per capita nation in the world, that said our assets are of strong quality and we’re well ahead of our debt to what other nations are. So, if you look at the mortgage books of the two banks we do own, so Commonwealth Bank and Westpac, they’re good mortgage books, their borrowers are well ahead of their repayments. So even though we own a lot of property and we have a lot of debt we’re actually pretty good at repaying it and we’ve gone into this crisis a lot better than what we did into the GFC, we’re ahead of our mortgage repayments.

I think the exuberance though for buying an asset around Australia that’s going to yield less than 2 isn’t that appealing. Certainly in Sydney we’ve had too many apartments built, particularly in congregated areas like Zetland, around Homebush, and you’ve all seen on the news that these have been built with, you could say, questionable engineering standards which is a result of these issues there. So I think residential property, there’s not going to be a boom anytime soon and our views always been if you buy a good asset in a place where people will want to live and rent and you’re prepared to hold onto that asset then you wouldn’t sell it.

Melbourne and Sydney are not just Australian destinations they have global destinations, there are people we talk to every day that live in Hong Kong, Shanghai, Beijing, New York, London that look at Sydney and Melbourne as global cities and that’s how we think about those property markets.

It’s a bit different for Adelaide, Perth and Brisbane, although we think Perth will be a little better because there’s going to be a lot of activity around mining and exploration, same to Brisbane because you’ll see the fly in, fly out. However, the impact in Brisbane is there’s a huge student population there and they built way too many one-bedroom apartments in Brisbane. Given that they’re no students [that] have been able to come back particularly those who weren’t on Australian passports, so it’s not the bleakest outlook but we think you’ve just got to buy in suburbs where you know will be around that people will be looking to live in.

But poor rental yields – rental yields won’t be going up anytime soon.

James McFall:

Yeah, I think that’s a good summary. Certainly one of the concerns I have is around the immigration policy that they’re looking like they’re going to really slow it down over the next couple of years and if that happens, obviously Australia’s economic growth is largely attributable in more recent times to immigration levels and it’s certainly been supported with property prices, so with interest rates as low as that that’s likely to act as a support but losing any reduction in immigration is going to have an impact, certainly on price growth I would have though.

Ben Moore:

We are 100% aligned, it is. Particularly Sydney and Melbourne, we produce more jobs for the people that are prepared to take them and as a result we get highly skilled migrants come to our cities that spend money, buy property, their kids go to schools and they spend in our communities and if we stop that, all those job, we’re not producing the same amount of jobs.

Healthcare is our biggest employer today, I know mining has been in the past and building and construction and extra services is a big employer but healthcare is huge. So there is still a demand, therefore, particularly around nursing and paramedics et cetera, some speciality areas as well.

But you’re right, if we’re not allowing immigrants into our country to bring their families here and to buy a house and spend in our communities, it’s the reason we haven’t had a recession since 1991. A lot of people look to the mining booms and those sorts of things, but immigrations a big reason we’ve been able to keep the economic growth consistent.

Yorkie Au:

Ben, how well do you actually see Australia faring in all of this compared to the rest of the world?

Ben Moore:

Look, we’ve done a remarkable job. There’s a hundred people that passed away, it’s just so sad if you know those people. It’s a tragedy when people pass away as a result of a virus that was largely brought into the country. We haven’t seen the transmissions that we have seen in other countries, most of our cases have been brought in, so that’s people that have climbed back into Australia.

We were super quick, or well to be fair, in New South Wales we didn’t handle the Ruby princess debacle well. The fact that we let them all off when they weren’t well has clearly caused issues here and we’ve got the Newmarch house that has been a concern with it’s cluster as well.

But by and large when you look at how Australia has handled the isolation, to anyone coming back in they’re isolated. I know my wife works at ANZ, she goes to work two days a week, you may have to take their temperature as they go into to their headquarters. My son’s gone back to school this week, in Sydney they have to have their temperature taken every day they go to school, so we’ve actually done it really well. In Queensland they’re bringing back elective surgery because they’re through the worst of it. Tazzy, South Australia, Western Australia are getting close to that as well because they’ve just had no new cases which has certainly helped.

So, look, it’s been pleasing to seeing how Australia has handled that. I’ll caveat that with is, we are a wealthy nation and if anyone’s travelled, if you think about the big cities around the world, they’ve all got slums. They’ve all got parts of their cities that people are living on top of each other in not great conditions, that’s New York, London, Paris, Rome, Madrid that is just the nature of those cities. We don’t have that, we’re not living on top of each other, so that certainly has helped and we’ve listened, you know, the isolation has worked, people have stayed at home, apart from the panic buying of toilet paper which was just bizarre because that’s one of the easiest things to produce and get on shelves but for some reason we really worried about running out of a little roll and rice and pasta, all commodities that are available.

So, Australia has done well, we do think though it’s going to be a slow grind out of this, it’s not an immediate everyone gets back to work. It’s said 6 million Australians have lost their jobs, we have a huge service economy and by that I mean think Baristas – think about in our daily lives what we used to do, we buy coffee in the morning, if you’re me you had another one at mid-morning just to keep going, we bought sandwiches at lunch, sometimes for breakfast, we went out two or three times a week. Australians, we love to travel, both within the country and overseas, so you think about companies like Samsonite as example, some of our global peers who own that, they’re not selling anything at the moment because no one’s travelling, so it’s going to be a grind there that we’ve done well, it’s about getting those 6 million Australians back into some sort of work.

We’re going to have a lot of debt to repay. Who will we repay that back? A little bit of inflation, but we do see some upside around our mining  and metals, particularly around iron ore, coking coal, thermal coal has got some challenges around tariffs but agriculture will have a – looks like it’s going to have its best season and sometime particularly on the East Coast, so think dairy, think grain, think beef.

James McFall:

Excellent, well we have got quite a number of additional questions, some of which we’re going to have to get back to after this directly. But one question, just given CSL is the biggest company on our stock market, it’s also in that health care sector you mentioned, do you have a view on it at the moment? Do you hold it? I don’t know if for example you know Avita, also a US – but that might be a bit more obscure.

Ben Moore:

Yep, Avita I know it, we don’t own that at the moment. We tend to go a little bit larger on the global health care names, so things like Abbott Laboratories, Roche, those sort of companies is typically where we play in health care.

CSL is an amazing Australian company, they’re well run. We have owned a lot of CSL since we launched our fund in 2014, it’s been a big part of our portfolio. As it became a bigger part of the index though, what we call the beta of that stock got bigger to the point where on the days the market felt it was falling more than the market. So over that two and a half years ago we started to reduce our position in CSL, got over the 300 mark, as its position got bigger in the index we reduced our position because it was just falling more than the market. It wasn’t anything to do with the stock it was just now moving with the market and we didn’t want to do that.

We own it, we’ve got it, it’s in our portfolio it’s at about 60 basis points of our portfolio but it’s 10% of the index so it’s a big underweight. We have started to buy a little bit more of it and the reason we had is we were worried about its ability to collect blood in the US because that’s where they get much to their blood from and because US is one of the few countries in the world you can pay for blood and they do an amazing job at this because they set up their centres in suburbs that aren’t as well off and they’ve got them near bus stops, so on your way to work you can go and give blood and if you never been into one [of] their centres in the US, they do an amazing job. They pay less than some of their competitors but the way they make you feel as you leave, you know exactly what they’re using your blood and plasma for and they let you know post that as well, so they get very good repeat donors come back to donate there. Clearly the big issue is places like New York who can’t donate if they’ve been infected or been around an infection, we think they’re on the other side of that now as to screening those who they can.

The other thing we were worried about and had sold more stock in CSL at the beginning of this year was one of their biggest factories in terms of processing, in terms of blood into plasma, is in Switzerland and Switzerland had initially the highest COVID outbreak rate per capita than any other country in Europe, but they’d handle that exceptionally well. They’ve got a lot of deaths rate and they’ve then had more recoveries than any other country as well, so we’re a little bit more bullish on the stock. We’re going to remain underweight because as I said, it’s just the biggest stock in Australia, it’s basically one or two at any point in time and so as a result we just can’t own it because it will mean our portfolio will fall in line with what the market does.

James McFall:

Excellent Ben. Well last question from us today, if there’s one word that you could share with investors right now to sum up your thinking what would it be and why?

Ben Moore:

Defensive. We continue to be defensive, we think the reporting season that’s about to hit us, there are going to be companies that come to market and say I don’t know what my cash flow is going to be. I mentioned oOh!media and Cochlea, you can throw to pretty much anyone around advertisers, I think Southern Cross media as well. Who is going to pay for advertising in this environment? So we think they’re challenged.

We think the banks, you know they’ve been their stock market darlings for some time and said we own two. We don’t own, we haven’t owned NAB and ANZ for the best part of eight weeks and the main reason is they’re more exposed to small business lending than the other two and they do not have the quality mortgage books that Commonwealth Bank and Westpac do, but we own both at 3% and if you think, their index weights are close to 8, 9 [or] 10 depending on if it’s the 300 rule or the 200, so we’re defensive but we are finding companies to invest in.

I gave you some names earlier, but I should also mention companies like ResMed, we really like ResMed, we think they’re an amazing company. They produce, if you know anyone with sleep apnea, they’re the ones that produce the masks and the machines that are behind that and they sell an extraordinary amount of these in the US and they’re also a research firm as well because they’re able to use patient statistics and things that are now, they can connect the machines online so we’re very happy to own companies like that and to be fair I mentioned CSL before, you know Sonic we like, Ramsey we like you as well. We think Sonic is going to be the biggest player in pathology in Australia so we’re very keen to own those as well.

So we’ll always be defensive, James wear your airbag that’s the role we want to play in and we look to people like yourself to sort of blend us with other managers to do other things in more qualities.

James McFall:

Well Ben, I’d like to thank you very much for your time today and wonderful insights. I certainly found it interesting and I expect the audience did too.

I also want to thank everyone for attending, we know your time is valuable but before you go, may we just ask that you provide us some brief feedback.


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