Pittard’s flight path for prudent global investing
The following article appeared in the Australian Financial Review, 31 October 2016. Reproduced with express consent from Fairfax Media Publications Pty Ltd.
By Vesna Poljak
Ashley Pittard got the investing bug when he was working at the local Coles, growing up in Sydney suburb Kogarah, through school and university. At the time, he was serious about becoming a fighter pilot and had clocked up enough hours at Bankstown airport to qualify for his unrestricted licence in year 11.
It wasn’t to be. Playing junior rugby league as a hooker took its toll, and Pittard endured two shoulder reconstructions. Worse, his eyesight started weakening, but it was early enough to figure out that he had the marks to get into petroleum engineering.
In the meantime, the seed of a clever investment idea was sown. The supermarket had an end-of-year bonus which employees could get in cash or stock. “I didn’t need the money because I was living at home and I thought, ‘That’s a great idea, owning a part of the business’. I owned a little stake. You had to be there for three years, so I ran around to all the other kids that were in the fresh food department, the dairy department and said, ‘I’ll tell you what, you’ve got stock that’s worth say $2000, what about I give you $1500 cash now, and I get the rights to your shares over a three-year period?'” He amassed a $5000 stake.
“My mum was a nurse and she always instilled in us work hard, take care of the community and save your money,” Pittard recalls.
He enjoyed engineering; his thesis was on the abandonment of oilfields. But the business side intrigued him more, so he got a job as an equities analyst at the old Bankers Trust. And, in a sense, that’s where he has returned decades later, managing BTIM’s global equities fund.
In the growing but sometimes insular world of global stockpicking in Australia, people often ask him how his strategy is different from that of Magellan or Platinum or PM Capital, where he worked before joining BTIM. Sure, they all have different investment styles. But they also are all loyal to their own process. “Nobody’s going to say, ‘Hey, I buy overvalued crap’,” Pittard admits. “It comes down to the fund manager, what are their inherent biases? Because everyone’s got a bias.
“My background has always been looking for number one and number two businesses, the largest market share, the dominant franchise, in a sector that’s out of favour. In commodities, the lowest-cost producer. If you look at a bank, it’s the largest market share, the CBA equivalent – no investment banks because they’re too risky.
“You look at technology companies, it’s the monopoly.”
Pittard sees the Brexit vote and unconventional monetary policy as huge opportunities, but there are other variations of that too. For example, his fund saw China’s crackdown on corruption as a way to take a long-term position on gaming in Macau by investing in Las Vegas Sands.
Though all operators have been decimated, Pittard is highly specific about why he believes Sands is the best fit. “It’s a mass-market casino, it has a very, very small VIP business, so it’s very different to Crown. What we like about Las Vegas Sands is virtually all of their assets are brand new, they were all built from about 2008 to now, they’re the largest market share in Macau.
“In 2017 they’re ex-capital expenditure. In other words they’ve spent all their money building new projects.” Billionaire Sheldon Adelson controls the stock, listed in the US. “We’re buying below replacement value. The only issue you have is when will Macau revenue increase? Effectively gross gaming revenue in Macau is down 50 per cent.”
Pittard admits he cannot predict when that happens. But “we’re getting a 6 per cent dividend yield to wait. We want to get paid to wait until the environment turns positive.”
Another way he is playing the long game is with global stock exchanges, specifically those that own huge futures trading arms that have seen volumes collapse in the era of zero per cent interest rates: CME, Intercontinental Exchange, and Deutsche Boerse. “When interest rates increase then so will their volumes, because at the moment no one’s hedging their interest rate risk because it’s effectively zero,” the fund manager explains.
A vindication of his thinking is that in the past month he has had two stocks under offer: Janus and Time Warner.
He doesn’t follow biotech because, as he puts it, “as a common sense business person, if I don’t understand something I’m not going to buy it.” He’s not interested in steel either. “Steel is so fragmented and such a poor-quality business that if there’s a downturn, what happens? They go broke.”
Pittard’s fund has one energy interest: Total. “It’s got assets that are low cost. They’re in Iraq, Iran, they’re in Oman, they’re in that lowest-cost quartile assets, but you have the governance of a European company.” In resources he has Turquoise Hill, the lowest-cost copper mine in the world.
The yield stocks such as property trusts, utilities or telecoms are all absent. “I would argue we won’t own them for at least five years,” he says. “They’re just expensive. They’ve got so much debt on their balance sheet. We can buy things like stock exchanges that are monopolies that have got no debt on their balance sheet, that have got a really good quality business of 40 per cent margins and are giving us a 4 to 6 per cent dividend yield.”
One of Pittard’s most intriguing ideas is timing a move into United Kingdom real estate listings. The data shows property prices have not moved significantly, but it is in the volumes where it’s evident activity has collapsed since Brexit.
“What we’re waiting for is the number one franchise in property – Rightmove – a UK equivalent of REA.” It’s trading at 22 times earnings, which the fund manager thinks is too high. “We believe, over the next three to five years, the number one franchise in property, AKA Rightmove, will come down to a valuation which is compelling. It’s got cash on its balance sheet, it’s been growing 6 to 10 per cent earnings forever, it’s a great little business.”
The first thing he and his team of four do when evaluating a stock is to go back and find every annual report filed. That gives them an idea of the business; then they rank the whole industry on return on invested capital and margins.
“Don’t be too smart, just be a humble person,” says Pittard, who in 2010 ran for the NSW state seat of Castle Hill as a Liberal Party candidate but lost. “Value the best quality assets you can find, and then let them play out over an extended period of time,” he says.
The strategy has 35-50 stocks. In United States financials he is favourable to Wells Fargo, and BB&T, a true regional bank.
Even though he agrees that Bank of America is the most leveraged to US interest rates going up, he does not own it. “You look at Bank of America and half of its business is an investment bank which is Merrill Lynch, so it’s very volatile. When people say to me, ‘We own Bank of America’, I say, ‘OK, we get it,’ but all you’re doing is punting the macro that interest rates are going to rise.”
With share buybacks and dividends, Wells Fargo and BB&T are yielding around 5 to 7 per cent. “You need to make sure that you’re not making a macro bet, because who knows when interest rates are going to go up?”