Dushko Bajic, the new head of equities at Colonial First State Global Asset Management.
For Dushko Bajic, a centralinvestment rule is this: in uncertain times, you have to hold the courage of your convictions.
"When the market gets in a funk, it double counts, triple counts," says Colonial First State Global Asset Management's new head of equities, who oversees $10.8 billion in funds under management at one of the market's largest growth managers.
Take DavidTeoh'sTPG Telecom. The stock a long-time market darling was beaten up in the second half of last yearafter a profit downgrade which quickly led to many investors reversing their long-held view thatTeohwas a master capitalallocatorand business builder.
In particular, concerns linger about TPG's strategy of expanding into the Singapore market though Bajic argues that, like many of the concerns relating to TPG, they are overdone.
"In a market like 2015it would have been 'Look at whatTeohhas done in Australia, he'll do it in Singapore'," he says. "Nowit's maybe it's different market, maybe it's a distraction, maybe they need to do a capital raising ... it's the anatomy of halving a PE."
TPG was also a target of short-sellers, though Bajic is pragmatic about that market dynamic.
"I'm happy for shorters to exist and to createefficiency and inefficiency, which sometimes means a good buying price. One of the remaining sources of competitive advantage is being able to be patient investors, which we're committed to being," he says.
As an investment style, growth isn't exactly flavour of the moment.The 2016 calendar yearwas the worst for quality and growth in 15 years, according toRealindex.
Since Bajic joined CFSGAM, the concentratedAustralian share fund return is 9.6 per cent per annum, compared to 9.2 per cent for the S&P/ASX 200 benchmark over the same period.
While Bajic may have a relatively low profile for someone who manages such a large fund, he has worked in financial markets since his first job as an analyst at Credit Suisse Asset Management.
Before joining Colonial nearly three years ago, the 43-year-oldBajichad worked at boutique Orion Asset Management with Tim Ryan.
Orion, which at its peak had funds under management of about $7 billion, ultimatelyclosed in 2013because of underperformance and an association with a high-profile insidertrading case.
Bajicsays there is much that was attractive about moving to Colonial the emphasis on strong research, the growth investment style and an existingstrong team.
But, ultimately, there was one moment which really convinced him he would take the role as deputy to Colonial's then head of equities, Marcus Fanning, in July 2014 with the understanding Fanning was grooming his successor.
"The way we convinced each other was we compared old portfolios," hesays."The ultimate measure is howsimilar your investment portfolio is."
In terms of macro, Bajicis sceptical about the impact being attributed toTrump reflation trade, arguing that better-than-expected economic growth in Europe, the US and China had begun before the new US president was elected and that was the key marketdynamic.
It was that view that led him to go overweight the two largest sectors in the market banks and resources last year.
Resources stocks arealways beneficiaries of economic growth, though Bajicnotes the performance would be far stronger if they had the disciplinedcapital allocation oftheir banking peers.
Bajicargues banks can organically generate the capital they need to meet their capital targets for the next three years, even if net interest margins are flat or decline.
And the banking regulator's decision to tighten lending by the banks on Friday?
Bajic says restrictions on interest-only lending to 30 per cent of new residential lending is significant, noting it contributes about 40 per cent of mortgage approvals at the moment. But he's broadly supportive.
"It makes sense to me. The result will be less of the type of credit growth you don't want and debt in the hands of those who can afford it. It won't choke off credit for new supply and that's important for keeping houses prices in check with incomes," he says.
Bajicsays REA Group is one stock he's added to the portfolio, on the basis that there's still plenty of advertising spend they will be able to capture. And he's impressed with the management team.
He also highlightsAristocrat Leisure which the fund has owned for averylong time asanother stock helikes for its recurringrevenueand its success in identifying and offsetting zombie machine risk by moving into the online market.
Mayne Pharma is another out-of-favour growth stock Bajiclikes, arguing the proposed Trump healthcare reform should benefit, rather than hurt, the generics manufacturer as it would likely push more of the healthcare spend to that segment of the market.
Bajic says Colonial'sability to invest time in strong research particularlyat a time when broking firms andresearch analysts are under financial pressure and investing far less in experienced analysts wasanother reason for accepting the job at CBA's funds manager. And he acceptsthat hiring analysts as portfolio managers isn't usually seen as a strong hire.
"Good analysts don't 100 per cent make good PMs, but a subset of goodanalystsdomakegood PMs,"hesays, noting that analysts who have become heads of equities tend to transition particularlywell.
While he's big on the importance of always doing the research, Bajicnotes that it's not foolproof.
"Youshould always do the research, sometimes you get the wrong conclusion," he says. But equally importantly, markets move fast and he warns that analysts need to have the capacity to do both quick and long-dated research.
That's why he has some other key investment rules: frequent testing of the validity of the investment thesis and creating a culture and process that generates ideas.
Read the rest here:
The anatomy and opportunity of halving a PE - The Australian Financial Review