In the first of a new series of Meet the Managers profile, Money Management speaks to Lazard Australian equities portfolio manager, Aaron Binsted.
Binsted began his investment career at Lazard more than 20 years ago as a research analyst before being appointed as a portfolio manager on the Australian equities team in 2012.
The Australian equities investment team are bottom-up, fundamental investors who run concentrated portfolios for investors seeking stable cashflow with low volatility. Their three funds are the $174 million Australian Equity, $34 million Defensive Australian Equity fund and the $80 million Select Australian Equity fund.
Lazard’s flagship Australian Equity fund has returned 16.2 per cent over three years to 31 August versus returns of 10.6 per cent by its ASX 200 benchmark.
Its top holdings include BHP, Woodside, Rio Tinto, Santos and QBE, which Binsted discusses below.
Read on as Binsted discusses the Australian equity markets, his preferred stocks and how Lazard is working with financial advisers.
Money Management (MM): How are finding the financial adviser market at the moment?
Aaron Binsted, Lazard (AB): I would say there’s been a huge change in the industry, it was like a nuclear bomb went off and caused absolute chaos and people did not have the time to think about things. It was about chasing tails and documentation and I do think it seems, from my perspective, that things are starting to stabilise which is good.
What I’m really hopeful now is that now we have a bit more stability, maybe the government will ease things a little bit so that we can get more financial advice out there to people who need it which is a real positive.
MM: Do you think it’s easier for financial advisers to pitch Australian equity funds to their clients when they’re thinking about portfolio construction because it’s closer to home and they understand it more?
AB: We think Australia is actually a really good place for people who are interested in income and there’s a few reasons for that. First of all, if you look at equity markets globally, so the big bad equity market on the block is obviously the S&P 500. From an income perspective, if you look over the long term, the dividend yield is about 2 per cent per annum. That’s not a huge dividend yield, particularly when inflation is as high as it is. Then you look at the MSCI World Index, which is really just an accumulation of the developed market, equity markets globally. That’s been about 2.5 per cent in the long run.
Whereas Australia has been a bit over 4 per cent over the long run. And then you can throw in a bit over 100 basis points for franking. So you’re getting 5 per cent from the Australian equity market. From an income perspective, we think it’s by far the best place for people to look.
It goes back to the discussion about financial advice and making it accessible to Australians, simplicity is key and simplicity works. If we’re going to put financial advice in the hands of more Australians then it has to be focused or aligned towards simpler strategies and capabilities that are going to be most relevant.
MM: How do you position the fund, what is your niche in the market?
AB: One of the strategies we are putting in front of advisers at the moment is our Defensive Australian Equity fund which is positioned for the pension and pre-pension market. It’s been around for about 11 years now and it’s got a few core aims. One is to grow dollars of income for investors over the long run. And the other is to do it with less volatility and less drawdown than the general equity market. And one of the great things now is we have an 11-year track record that we can put in front of people and say, look at what we’ve delivered and total returns have been well over the benchmark over that period.
MM: Which of your fund holdings performed strongest in the last financial year?
AB: Insurance did really well for us, so that’s QBE, IAG and Suncorp, they did really well and were big drivers. We still really like insurance and the biggest driver of those stocks is insurance premiums, that’s basically the price you and I pay for our insurance, it’s all going up a lot and that’s the biggest driver of their profits and they have a huge amount of profit momentum. And on top of that, they are on a really, really modest valuation. QBE, which is probably the most extreme example, that’s trading on a PE ratio of about 9x. So we really like that and there’s a similar dynamic for the other two stocks.
The banks were in the mix but it’s not a sector we particularly like and we don’t think they are the best place to be now, although we have owned them historically.
We also like Woodside and Santos, they’re trading on very modest valuations. Woodside is yielding over 5 per cent and Santos is about 4 per cent but they have got really strong growth over the long run. And the key driver to that is Asia burns lots and lots of coal, if they are going to decarbonise then they need to use a lot more gas.
MM: Are there any sectors that the fund is staying away from?
AB: We are very, very underweight real estate investment trusts (REITs), we only own one. The one we own is Waypoint REIT who own the service stations for Viva, of which the biggest brand is Shell. And the reason we own that is it got sold off to levels where we thought it more than compensated for any risk to those valuations. We’re really comfortable with that one but the other REITS have big risk.
The other area we are being quite cautious is on consumer discretionary so we’re watching that sector. It’s really early days and there could be big earnings headwinds. So that’s another sector we are staying away from right now.
To listen the full interview with Aaron Binsted and a range of other experts, you can access the Relative Return podcast here.
