(Pictured: Paul Moore)
PM Capital turned 15 years old over the weekend. As BT alumni, most of whom who have gone on to bigger and better things, Paul Moore and Ashley Pittard have also done well for themselves and their clients. They have now embarked on a campaign to get retail investors to put more money offshore.
The old Bankers Trust (BT) was an interesting company and an interesting fund manager. It was top of the pops during the 1980s, enjoyed a stellar ride through the 1987 crash and then fell foul of hubris and infighting at the top. It was sold and re-sold.
But perhaps the most interesting thing about BT was that in its hey-day it had two different equities teams: one for retail investors and one for wholesale. Paul Moore, who set up PM Capital in 1998, headed up international equities for the retail business. Kerr Neilson did wholesale. Both have been spectacularly successful in their own businesses, although Neilson tends to get most of the headlines, primarily because of his ASX listing.
PM Capital, Pittard said at a briefing last Friday, has provided a return of 190 per cent for its global equities fund since inception, against the MSCI index’s 30 per cent. The fund is retail orientated and has the ability to go to cash, which it has done in recent times. It is still 30 per cent cash but this is winding down as the managers become more bullish on the international outlook and bearish on the Aussie dollar.
But the main theme of the briefing was not so much about the currency, but rather about the opportunities that Australian retail investors are missing, especially those investing through SMSFs. According to Australian Taxation Office data, SMSF trustees invest just one per cent of their assets offshore.
Paul Moore says that not only has the currency been at an all-time high for more than two years, which happens only once in a lifetime, but also the local sharemarket is getting “very skinny”. The banks and other financials make up about 40 per cent of the market and the miners make up another 30 per cent, leaving only 30 per cent “of interest” to PM Capital. That 30 per cent is getting crowded out, too, because of the weight of super fund money.
“We think that the first catch-up is for the Aussie dollar to get to 80c, which is normalization,” he says. “Then it depends on China. The commodity sweet spot has passed. It will be a long bear market because it was a big boom. China’s switch to a consumer-driven economy has risks. It doesn’t make sense to have only one per cent of your investments overseas.”
Moore is a believer in the Great Rotation, whereby an estimated US$1 trillion – from US mutual fund data – is set to migrate back to equities from bonds. To date, however, the money which has left bonds since the end of last year when the term “great rotation” was coined, has tended to go into higher-yielding debt strategies.
“We think we’re at the end of stage one,” Moore says. This is where the stimulus packages have got people to the point that they are willing to go back into equities… Investors need to climb the wall of worry: there’s always an excuse not to invest. We’re saying they should get ahead of the curve.”
When there’s a lot of money moving into an asset class it is typically retail money and typically near the peak of prices. Moore says: “If you look at where the retail market has its least exposure, and go there, that’s not a bad strategy.”
In terms of stock comparisons, given retail investors have liked the Australian banks because of their yield and security, PM Capital points to three international stocks offering much better profiles – ING, Lloyds and Wells Fargo. ING is trading at about 6-7 times earnings and has a 70 per cent dividend payout ratio, compared with Commonwealth Bank trading at about 15 times earnings. Lloyds is selling at about one times book value versus Commonwealth’s three times and has a dividend yield of 10 per cent. Wells Fargo has a cost of capital of just 0.12 per cent, because most of its depositers are through cheque accounts and therefore has roughly double the interest margin of Commonwealth.
“You can’t replicate (those numbers) in Australia,” Moore says. “It’s a no-brainer.”