Crispin Murray

Head of Equities

Crispin Murray: the outlook for Australian equities

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Pendal’s Head of Equities Crispin Murray outlines his thoughts on the current market environment.

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Hello everyone. My name is Crispin Murray from Pendal Group. I thought I’d take the opportunity today to share with you our thoughts on the current market environment and how we at Pendal invest and manage money on behalf of clients.

One of the attributes we believe in is being upfront and transparent in our views.

If I was to summarise the current situation, I think it represents perhaps the greatest challenge for investors in many years, but also it presents some of the greatest opportunities we have seen.

This is because we’ve got a combination of a really bad economic situation with perhaps the greatest policy stimulus we have seen — and overlaying this, a huge health challenge and substantial technological change.

In combination this is changing the way consumers and businesses operate.

This leads to three levels of uncertainty — economic, industrial and corporate. We believe the more uncertainty there is, the more mispricing in the market there is, and that is what creates the opportunity.

We also believe this environment plays to our strength. We have a strong organisation. We have a real breadth of resources, a lot of experience across many cycles and strong corporate relationships.

Two key questions for investors

When it comes to investing, there are two key questions to answer.

The first is how you make money for your investors and the second is what is your competitive advantage.

When it comes to making money, we believe that anticipating change is the key. Investing is about what happens next.

When it comes to competitive advantage, ours comes from an information advantage.

We have a large team with a real focus gathering primary information. We think of the team as being similar to investigative journalists. We have a lot of meetings, gathering information we use to make good investments. We believe in a culture not of commentating, but of actually thinking and investing.

Three pillars

There are three pillars to delivering this:

1. The first is the business model.

We are an Australian listed company. We are independent. All the staff are shareholders and we’re very much aligned to our investors. In addition, we have a dedicated management team, which means there are no distractions for those investors. They can get on with the job of identifying good ideas.

2. The second pillar is the team.

We’ve got 18 people in our Australian equities team — 22 years average [industry] experience, 14 years within the group. This means they understand market cycles, they understand the industries they’re looking at and they have a huge list of good contacts.

It’s that experience and understanding that is critical at these types of points in the cycle.

Because it’s remaining calm, focussing on the controllables, identifying opportunities that comes from that, that is the thing that will make a difference.

3. The third pillar is process.

We’ve spoken about the philosophy of identifying what’s going to happen next. We believe that you make money when something is changing for the positive in a business — and [when] the market’s not realised that and it’s not yet in the price.

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When we do this, we need to then drill down into five key factors that we watch incredibly closely.

I want to highlight two of these.

1. The first one is business innovation.

Take a company like Xero, which is the cloud-based accounting software for small businesses. This is a company that has really been a leader in the industry in driving penetration globally. We believe it’s got a product suite that is still not fully appreciated by the market, that will allow it to drive penetration and increase their revenues from their customers.

That’s a good example of where innovation can drive opportunity.

2. The second category that I’d highlight is the self help category.

These are companies that are doing something themselves to improve their position. Often it comes in the form of cost and productivity.

Santos is a great example of this. They’re in a tough business — oil prices are very low, but they are a low-cost player with a good balance sheet.

They’re very proactive in terms of how they manage capital. We believe that will hold them in really good stead, particularly if you start seeing the economies improve.

So it’s a combination of these factors that we believe have allowed us to deliver strong performance over the long term.

And we highlight our Focus Fund performance. This is our concentrated best ideas portfolio and the basis of the SMA.

Not only has it been able to deliver very strong performance, but it’s also been very consistent performance and it’s been doing it for a long time. 

It’s been through many cycles. It’s been able to be very consistent. Even when there’s been periods of underperformance, they have tended to be limited in terms of the drawdown and the recovery of that performance has happened quickly.

Market outlook

If I turn now to our view on the market. We believe we are in the fourth phase of this market environment.

We’ve gone from the focus just being on China, to an indiscriminate sell-off, followed by strong bounce. Now we’re in what I would call a protracted discovery phase.

How bad will the economies be? How will companies fair? This is a time when information and insight can add a lot of value. You’ll see that we identified the key swing factors. 

The critical issue is the ability to restart the economy and how quickly and sustainably it recovers.

Four scenarios

To better assess this, we’ve presented four scenarios.

The first scenario to consider is the potential for a rapid medical breakthrough whether that be a vaccine or antiviral treatment.

If there was a dramatic breakthrough it would clearly be very positive for the market — and that would happen well before the availability of those treatments because it would impact on confidence.

This is a-low probability scenario, but it does have a very significant potential effect on the market. So it’s something that needs to be aware of.

The other three scenarios are less constructive but are more likely in terms of outcomes.

The most positive scenario one of these is the potential for certain countries such as Australia and New Zealand to actually eliminate the virus and then effectively close down their borders and remain separate until a vaccine was available.

The middle scenario is a more managed mitigation, which allows your economy to ramp up, though perhaps not to where it was before.

The third scenario is the most negative one, if we get waves of re-infection, which really impact on the economy.

Recently I was talking to some of the academic experts who’ve been working with the government. It’s worth noting that the difference between an elimination strategy in Australia, and a managed mitigation one, could be worth $2 billion to 8 billion a month just for our economy.

So it does highlight the variety of outcomes that we could see.

While we spend a lot of time understanding the developments and risks on the medical and economic front, the reality is we know it is really impossible to predict what’s going to happen.

What we need to do is weigh up these different scenarios and position the portfolio for that.

It’s important to stress as investors, we’re not going to be taking binary risks with our clients’ money.

We invest where we have insight and where we expect to get a good return. So we’re positioning our portfolios to find the best stocks for those different outcomes.

The categories of stock that we’re considering:

Firstly, recession protection; stocks that are policy beneficiaries; companies that are good businesses which we expect us to bounce back strongly when the recovery occurs; and finally, recovery plays and stocks that have been discounted the most heavily because they’re most immediately affected by the crisis.

We’re looking for different attributes in each of these categories in terms of the best stocks. But ultimately they do boil down to those factors we identified earlier — which reflect in terms of the quality of the industry structure, but also the quality of the management and their ability to respond to the environment we’re in and their ability to allocate capital well.

I hope that’s given you a taste of how we invest at Pendal. 

Yes, this is a really uncertain time for investors, but that also means it is a time where there are a huge number of opportunities.

I believe the experience that the team at Pendal has can deliver on those opportunities for you and your investors.

Thank you for your time and I wish you all the best.


Crispin Murray is Pendal’s Head of Equities. Crispin has more than 27 years of industry experience in equities and a strong track record leading Australian and European equities funds.

He is responsible for managing a number of our flagship funds and leads one of the largest equities teams in Australia. 

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This article has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and the information contained within is current as at May 15, 2020. It is not to be published, or otherwise made available to any person other than the party to whom it is provided.

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