High conviction stock selection image AFR: Antipodes sticks with Samsung, shorts Aussie infrastructure

Investing globally to address the trifecta of Aussie risks

a globe and cash close up

Domestic investors are waking up to the limitations and inherent risk of having all of their investment eggs coddled in one Australian basket. The trifecta is having high exposure to Australian property, Australian shares and/or the Australian dollar. But this can change by diversifying globally.

Antipodes Partners is a pragmatic value manager of global equities that deploys three investment levers that aim for favourable returns. They are to invest long (buy) in listed stocks, short (sell) stocks and manage currency risk.

Much of the market is focused on returns rather than risk. We think the opposite because if you manage risk well, returns should follow. To achieve this we apply three rules as part of our stock selection process.

At the stock level, there must be a deep “margin of safety” and “multiple ways of winning”. While at the portfolio construction level, the stock needs to offer a “diversified source of alpha”. There is no point considering a new stock contender for the portfolio if it only replicates and magnifies the same risk as an existing cluster of exposures. Ultimately, we seek an eclectic portfolio as downside protection.

1. Margin of safety

The concept of “margin of safety” should be familiar to most investors. It was coined by the great Benjamin Graham and later popularised by Warren Buffett. It is a quantitative measure that demands a generous buffer or gap from what an investor thinks a stock to be worth and what the market is paying for it.

2. Multiple ways of winning

“Multiple ways of winning” is a core driver of Antipodes Partners’ investment philosophy. The investment case for a stock cannot just depend on a single driver (or point of failure), but rather must exhibit resilience via multiple drivers that contribute to the expected outcome. This provides downside protection to the extent our judgement on a specific driver is misplaced. These multiple drivers include: competitive dynamics, product cycle, macro management, regulation and macro/quantitative factors.

For example, on the long (buy) side, we own cheap US incumbent software “defensive” stocks like Cisco, Microsoft and NetApp. We are attracted to the “multiple ways to win” by investing in US natural gas via stocks like Consol Energy. Across Europe and Asia there is restructuring, corporate self-help and generational change taking place in businesses like Samsung Electronics, Hyundai Motor Company and Telecom Italia.

3. Diversified sources of alpha

The portfolio provides both protection and alpha generating opportunities via shorting and active currency management. Through shorting, we are positioned against “expensive defensives”, infrastructure stocks masquerading as “bond proxies” in an ultra-low global interest rate environment, and “high yield” debt beneficiaries funding “adjusted EBITDA” and “adjusted EPS” growth with cheap debt – it won’t last.

In currency, we have long held a significant position in the Norwegian Kroner. Despite behaving like an emerging market currency, Norway is anything but emerging. Courtesy of its past oil bounty, Norway has an $US880bn[1] sovereign wealth fund more than double national GDP, a hot housing market and inflation that has just spiked to 4%[2]. Pressure mounts for interest rate rises and an appreciation.

We think our portfolio is carefully balanced by our experienced team to meet the pending challenges and opportunities that global markets could deliver in the future.

[1] August 2016, Investments in Government Pension Fund Global, Norges Bank Balance Sheet.

[2]  August 2016, CPI All-item Index, Statistics Norway.

Jacob Mitchell, Chief Investment Officer and Lead Portfolio Manager, Antipodes Partners.