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OMBA’s Sean Ashton, a stock-picker of some repute who was formerly with Anchor Capital, is back on BizNews after a break of almost a decade. In this interview, he reminds us the ten stocks which have delivered all of Wall Street’s 2023 performance have still not recovered from 2022’s losses. It provides some valuable thoughts on US interest rates – the critical variable for all investment markets – and the growing role of geopolitics in all of our wealth-creation strategies. He spoke to Alec Hogg of BizNews.
An edited transcript of Alec Hogg’s interview with Sean Ashton, Portfolio Manager of OMBA
Alec Hogg: Sean Ashton is a well-known name amongst South African investors from his time at Joburg-based Anchor Capital. And that’s when we last interacted. Couldn’t believe it. I had a look at the archives of BizNews today and found out that the last discussion we had was back in 2014. Sean is now London-based with OMBA, a company we know very well at BizNews through Mark Perchtold, his colleague. We’ll find out where he’s been in the interim and exactly what he’s doing at OMBA. If you remember, OMBA’s into exchange-traded funds. Mark is a, well, a stock picker. So, where do the two collide? We’ll find out in a moment. Good to see you, Mark. So, let’s fill in the gap for all your hordes of fans here in South Africa.
Sean Ashton: Thanks for the intro, Alec. Just a small correction: I am South African-based. I’m working with the OMBA team, but I physically sit in SA at this stage.
Alec Hogg: Okay, so I was half right. I said the London-based Omba. So you work with many South Africans who have a company in the UK, but you are still home. Are you still in South Africa?
Sean Ashton: It’s on full base in Somerset West, so that’s largely a personal family setup, but it works for us for now and is very much connected to the team in London.
Alec Hogg: And the intersection there between OMBA being exchange-traded funds and you being a stock picker of some repute, how did those two intersect?
Sean Ashton: I think the most important thing first to establish is these are people businesses, first and foremost. If I’m looking for a particular fit, or not just me, but the OMBA team, it’s always about people due diligence. Is there a cultural fit? Can you work together? We very quickly established early on that with the number of conversations that there was absolutely a cultural fit.
I think there’s a complementary skill set. The OMBA team would be a lot more macro-focused, not to say that I don’t think deeply about macro, I do. But also remember that there’s a fairly new product which OMBA’s launched in the last couple of years. They run a handful of ETF-focused mandates, both segregated and unitised, depending on which client set you’re talking about, one of which is a thematic fund. Now that the thematic fund has the mandate to invest up to 40% in direct stocks, I’m going to be quite deeply involved in helping them do stock selection research for those specific picks.
Alec Hogg: Ah, okay, it makes sense now. So in the thematic fund, which you need to unpack a little more for us, that will not be 100% invested in exchange-traded funds, which is what Omba has done with the other parts of its product. So how does this work, the thematic fund?
Sean Ashton: Alright. So it’s still a top-down starting point to identify global themes. It might be clean energy. It might be infrastructure. They might want to take a tilt on saying S&P 500 is sharply outperform mid to small cap. So we might take a mid to small cap tilt and put a trade on in an ETF product there and but within that, within those global themes that are identified, those top-down themes, there might be certain ETFs that cannot fully express the particular view that you want under saying that there might be too much concentration in the stocks that you don’t want to own in a particular ETF. Then there’s another one that you do want to own. So that mandates, very specifically that mandate allows a 40% allocation to direct stocks to get a pure take on a particular theme.
Alec Hogg: And what are the themes?
Sean Ashton: So I’ll give an example. So e-commerce is one of the themes in the thematic fund. And Amazon is quite a sizable weighting within that portfolio. The single stock weighting is capped at 3%. So just to be clear, they try to limit idiosyncratic stock-level risk across all of their mandates. You’re unlikely to see a scenario where one big bet in the portfolio takes you after the needs. It’s a far more diversified approach, but the ability to take more direct picks is within that specific mandate.
Alec Hogg: So, what other themes can you invest in? In other words, what thematic funds does OMBA run?
Sean Ashton: So there’s just the one specific mandate, but within that particular thematic fund mandate, there are several themes that the broader team has identified. Clean energy, infrastructure, and e-commerce would be examples of semiconductors with a very strong secular growth outlook over the next number of years for semis. That’s a particular theme that’s been identified, and they would be taking exposure via ETFs and single stocks there. But to understand, the broader macro themes identified would have applicability to not just the thematic fund. It would also be the equity fund, the moderate fund, which has a fixed income element to it as well.
Alec Hogg: I think I’m getting this now, but maybe you can unpack it again. If, for instance, the OMBA team decides that construction in the U.S. will boom, could that new theme be put into the thematic fund? Okay. So you identify the themes around the world that appear to offer the best value, and then in those individuals…
Sean Ashton: Absolutely, yeah.
Alec Hogg: Themes, up to 40%, can be in single stocks. And that’s where Shaun Ashton comes in.
Sean Ashton: Yeah, 40% of the overall funds in NAV can be single stocks, capped at 40%. Yeah, so not perfect.
Alec Hogg: Okay. So I presume, given that OMBA’s got a global remit, that you’re not spending too much time looking at the JSE given its tiny percentage of the overall investable universe.
Sean Ashton: Yeah, that’s true. I don’t spend, I mean, me personally, I spend no time looking at the JSE. It’s been a global focus for at least five years.
Alec Hogg: So the Magnificent seven, let’s unpack them quickly. On Wall Street, Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla, and Meta. We’ve got in our portfolio, in the business portfolio, we’ve got Microsoft, Amazon, and Nvidia. So those three have done us very well. Do you spend time looking at the other four, plus those three, given that Wall Street seems to be in love with those and out of love with everything else?
Sean Ashton: Yeah, these are names that I spend a lot of time on, that’s true. I think it’s worth contextualising because this is a very topical point of discussion right now. And I did the numbers this morning. If you look at the year-to-date return on the S&P, you’re just under 13% for the overall index, and pretty much 10 stocks have given you all of that return. Those ten stocks account for 30% of the market cap and all the year’s return. Many of the names you mentioned are in there and a few others.
I think it’s worthwhile just talking about the… If you look at those specific companies, the average 2022 return across that group of stocks, the top 10 contributors to performance this year, were down 34%. Okay, just the simple average. So I think you need to contextualise this year’s gains for that grouping of stocks by saying, in most cases, you know, if you start at 100 and you go down 35%, you know, it takes you a lot more than 35% to get back to square. So, for pretty much all the stocks you’ve mentioned, you still haven’t reached a high watermark from, let’s call it, December 2021. I think the only examples would be Nvidia, that I can see in that top 10 grouping. And there’s a few other non-tech names like Eli Lilly in the pharma space that have come through as big contributors. But yes, I think it’s a recovery play from a very deep bear market, which wasn’t proportionately shared by companies outside of that grouping last year.
Alec Hogg: Every investor or investment professional looks for the art performer, the outlier. And if we look at that group of 10, as you say, the ten that have made the performance outside of that, if the rest of the market’s done pretty little. Are there now themes that are starting to jump out at you as AI was a theme that if you jumped into earlier this year, you’d have done very well from.
Sean Ashton: Yes, I mean, I’d say for me personally, there’s not an obvious small to mid-cap theme by sector that jumps out at me right now. I think that certain real estate stocks are starting to look quite interesting, but that’s not something that’s been implemented in the business as yet. It’s more a discussion point right now. I think some real estate players outside the office have been left behind as rates have risen very dramatically. And there could be a value play there. There’s one name I could think of off the top of my head that looks interesting right now. But I think even within the mega-caps that have shown you a lot of return this year, if you pick the eyes out of that, for example, Meta is a name in the thematic fund right now, which I think is up 160 odd percent year-to-date. People are saying, well, that’s surely too much.
Remember it was down two-thirds last year, so you still haven’t reached your high watermark again. And that’s a business which, despite the rally this year, you’ve had trading at a 5% free cash flow yield on still depressed margins relative to their peaks and still very high capex relative to peaks. So they are arguably under-earning, and the valuation looks fine. So that’s a holding that, despite the rally that we’ve had, I would say I’m still comfortable with that. Amazon’s probably another one which would have commonality in the thematic fund. So, yeah, I think there is a case to be made that perhaps if we can start to have line of sight to where yields are going to settle, you might see cash allocated away from some of the mega-caps to more small to mid-cap names.
Alec Hogg: You’ve touched on an important point there when you say yields, interest rates, in other words, where are they going to settle? I was listening to the FT, our partners at the FT this morning, discussing the Argentina election, and they say that, well, they explained that the leader in the Argentina presidential race is an economist who’s telling the country they need to get rid of the peso and close the central bank dollarize everything. But the problem with that, people are saying, is that would make Argentina completely exposed to American interest rates. But I guess the counter-argument is we’re all exposed to American interest rates. What the Americans do affects the rest of us. But where are you seeing that? Because then, having said that, it’s so important to the whole world, including us in South Africa.
Sean Ashton: It’s a challenge for emerging markets, and unfortunately, the US exports their monetary policy to the rest of the world. That’s just a fact. So and arguably they’re in a better position to cope with their own monetary policy than what a lot of other countries are because we’re not the issuer of the dollar. And there’s a big debate around this, and I wrote something recently on this, the interplay between the Fed and the Treasury is perhaps not as create the impression that they are a independent agency and they’re happy just to let the cost of capital float to a natural market-related level. I think that’s a little bit naive. It’s the elephant in the room, Alec. You’ve had rates sell off from 1% to 5% now. The most recent move from 4.25% to 5% has happened in a very short space of time. To me, it looks disorderly. Bond prices haven’t crashed like this in many years. And if you think about the US fiscal position for a moment, like just to, I won’t try to delve into too many detailed numbers, but it’s worthwhile just for the listeners to understand. Year-to-date, the Treasury, if you think about their budget situation, they generate revenue of $4 trillion year-to-date. They’ve spent $5.5 trillion. There’s $33.5 trillion worth of debt. So you’re adding to the debt pile by $1.5 to $2 trillion annually. But if you, inside that five and a half trillion of expenditure, there’s 600 odd billion interest payments, okay? But now you might think 600 billion on 33 trillion is only a two to two and a half percent coupon, okay? Across the debt that they’ve got outstanding. But guess what? Market rates are at five percent. So I guess what I’m saying is, if you were to reprice all of that debt today to market rates, and I don’t have a good line of sight to where the average maturities are, you would add an extra $1 trillion to the annualized interest bill.
That’s 25% of the budget. And another 3% to 4% on top of the existing budget deficit as a share of GDP. So you can quickly see that you’re in a situation where the fiscal situation is pretty scary. And I don’t think the Fed can blindly allow rates to explode to market-related levels without the federal government running into a bit of a debt trap at the end of the day. And there is historical precedent for the Federal Reserve and the Treasury acting in concert. And we had this as recently as three years ago. You know, you had the COVID crisis in March of 2020. A $2.2 trillion stimulus package was announced by Treasury, much of which was paid directly to households. And guess who funded that? The Fed directly funded that. They took an additional close to $3 trillion worth of debt onto their balance sheet. Their balance sheet expanded from $4 trillion immediately pre-COVID to $7 trillion. So for me, the argument that the Fed is entirely divorced from the Treasury is not right. And I think we are approaching a level now where I wouldn’t be surprised if the sell-off in Treasury yields becomes more disorderly, that you might find an argument that they have to rethink their quantitative tightening program down the line. I wouldn’t be surprised. It would be terrible for their credibility, especially given that they haven’t yet met their arbitrarily determined 2% inflation target, but inflation is much lower than it was. In my view, it might eventually give them breathing room to abandon the idea of quantitative tightening.
Alec Hogg: It’s a lovely context, Sean, because we’ve got here in South Africa our own midterm budget statement coming up on the 1st of November, where we are paying a heck of a lot in interest as well. And we forget it’s not just South Africa that’s got this problem. And the way you’ve impacted for the United States is a similar line. But it just appears as though the big stories in the world are the ones that affect all investment markets. And right now, geopolitics seems to be front and center not just Russia-Ukraine, but now Israel-Hamas. How much should this affect your thinking, and I’m talking your, meaning the whole of OMBA’s, thinking about these broad international trends? How important is geopolitics?
Sean Ashton: I think it’s worthwhile just acknowledging the human tragedy of what’s happened in the last couple of weeks. It’s terrible. I think the immediate direct impact on markets is less important than the indirect impact of what it means for policy. Okay, so if you’ve now got a US government that will be actively supporting the fighting of two wars, indirectly, albeit. If they’re sending capital and funding to Israel and Ukraine. It just means more deficit spending. Defence is already 13% of the budget in the US. It’s hard to see why the fiscal impulse of the US slows down while you’ve got a handful of wars around the world. Ultimately, I think the impact is more indirect by fiscal policy, and that’s naturally inflationary. So you’ve got a Federal Reserve that’s fighting against geopolitics and in a way their own government and their own government’s policies around where they’re spending money. So I think what we need to see is for all of us to calm down and for deficit spending to come in because that’ll put less pressure on the bond market, and under that, if you have less pressure on bond prices, we can take more comfort that there’s relative value in equities. The market is struggling to find an equilibrium point of pricing equities because everything’s priced off the long end of the yield curve.
Alec Hogg: And next year, Donald Trump, as things stand today, will be the president of the United States again. With that, he’s way ahead in the polls. We published it on Business Premium this morning, our latest, the latest polls from Bloomberg, who’ve just researched it. So it seems almost unbelievable to those who have question marks over Trump. But NGO politics again, a Trump presidency will throw another cat amongst the pigeons.
Sean Ashton: Potentially, yes, I’m personally not sure which would be a better or worse candidate at this point. I think Trump was obviously an enormously divisive character whilst he was president of the US, and the diplomacy policy via Twitter was exhausting. It created a very deep amplitude in the news cycle that was difficult to manage through certainly as a fund manager but I would like to think that perhaps he might be a little bit more inclined to implement policy that may see a little bit more peace. I don’t know. I’m not an expert on the subject matter, but it seems that the Biden administration hasn’t exactly run diplomacy in a way that’s calmed down geopolitics instead of amplified it. I’m not sure that he’s been better at that than Trump has been.
Alec Hogg: So I guess it is, as far as a fund manager is concerned, it’s not; you’re at rock bottom anyway. So it’s not going to make much difference on that score. When you look into the future in this very, very uncertain world that we live in, how do you find opportunities that you can be confident of and commit to?
Sean Ashton: Wow, that’s a very open-ended and difficult question to answer. I think that often happens through periods of dislocation, to be honest with you. So, and I think I guess what’s been frustrating is as a fund manager in the last few years, you’ve spent a lot of time within a time period where prices haven’t been very cheap. You’ve had a few moments with a major dislocation like in COVID. If I remember, think back to March 2020, certain share prices dropped to levels where it was blindingly obvious that this thing was valued unless the world genuinely was going to end. But in most cases, you did have prices that made a lot of sense. I don’t think we’re quite there yet, and that’s where it’s a little bit frustrating right now: broader indices are trading at, let’s say, 17 or 18 times forward PE if you look at the S&P 500. In the context of rates of 5% and real rates of 2.5%, that equity risk premium doesn’t look especially attractive. So it’s a case of, well, nothing is very obvious right now, is the message I would send you. Yes, you can always pick the eyes out and find individual opportunities, but at an aggregate level, there’s not a list of 20 names where I would say, wow, these things are an absolute slam dunk.
Alec Hogg: You’ve got to be trusting the professionals. Sean Ashton is with OMBA. I’m Alec Hogg from BizNews.com.
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