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- Investing in a world of options and asymmetry
“The secret to wealth is finding the asymmetric payoff—small risk, big reward” Nassim Taleb Introduction When this writer first set about a career in finance we were tasked with uncovering how much each ASX energy company was worth, with little more direction than a basic understanding of discounted cash flows and net present values. The task was easy enough; to develop an asset by asset model that delivered a valuation per share, but how do you consider: Potential changes in commodity prices like oil? Assets that have uncertainty in their delivery like Woodside’s Browse project? And massive binary exploration programs like Karoon’s? (it was affectionately called Kaboom back then) A lot of it came down to pricing of options. We managed and believe this early entrée into markets has helped frame how we invest today. With a view to minimising risk and maximising returns, identifying the mispricing of options or asymmetric investing is a key part of what we now do on a day-to-day basis. It is similar thinking that has helped us: take positions in Austal, when the consensus at the time was that it faced extinction with key programs like LCS ending, load up on Origin at below book value when the market was capitalising trough earnings, and buy Stockland when it was one of the most hated REIT stocks in the market (among a litany of other examples). More than one observer has recently posited to us the thought that “valuations don’t matter anymore in markets… only narratives”. We don’t think this could be further from the truth. Our experience in options analysis has been put to test in recent months, in more than just trying to back a Melbourne Cup winner. We have recently faced the questions does Chris Ellison (MIN) and Richard White (WTC) leave and what does that mean for their respective stock price? How fast do interest rates go down and what impact does that have on share prices? Who wins the US election and what is the result if they do?! We continue to believe a flexible mindset with a focus on valuations (including option value) will be supremely important in 2025 as dislocation opportunities potentially present themselves. Within this article we explore our learnings in valuing options within equities, some historical examples of this and some further details on asymmetry in markets. Exploration – EMV – Options Value We start almost in chronological order with this writer’s journey in pricing options within equities. It was where this writer first heard the term ‘EMV’, at least I don’t remember it in the Uni textbooks. EMV stands for expected monetary value which is defined as “a statistical technique used to evaluate the potential financial impact of uncertain events on a project or investment”. So it was perfect this was one of the first things we learned in our first job in markets at Core Energy. Specifically when it comes to oil and gas we were utilising it in the pricing of exploration plays. How does this work? Effectively it was asking the question: What is the cost of exploration? What is the probability of success? And, if it is a success what is the value of that success? Without introducing too much confusion the below is an example of how this works in theory. Source: Chester Asset Management It is saying if the mean potential accumulation is 100 million barrels of oil and we estimate the netback or NPV per barrel of oil at USD10/bbl with the play having a 20% chance of commercial success then the upside case is USD950m or risk weighted EMV is USD150m. What makes it an even more interesting exercise from a mathematically minded individual is a lot of these assumptions are/were prevalent in public announcements, particularly for the more junior companies, with exploration plays the geologists have defined what is the geological probability of success of the play and the mean expected recoverable size of the accumulation if successful. Hence these could be input into our models. Source: September 2024 Karoon announcement Note the art would often be translating a geological probability of success into a commercial chance of success and further translating what that mean in terms of netback value but it provided a useful framework for helping identify what exploration assets were potentially worth. Individually pricing a portfolio of assets (Sum of the Parts Analysis) Conjunctively with learning what an EMV was and what it meant for companies this writer was discovering that in resource investing it was most appropriate to price assets separately, i.e. calculate the collective value of a portfolio of assets by calculating their individual values and adding all of these up. This approach was particularly useful given: Most companies had a combination of producing assets and development assets and it was inappropriate to assume the development assets had the same risk level of a producing asset, I.e. for Woodside pricing the North West Shelf and their other producing assets in a separate way to valuing Browse and Sunrise Differing ownership interests across a host of assets with that ownership interest sometimes changing over time Assets in various jurisdictions which attract(ed) different forms of regulation needed to be modelled with only those assets attracting that regulation I.e. Sunrise which probably has the same timeline to development now as it did in 2010 is subject to special Timorese government interest Exploration assets on top have an expected monetary value which can be calculated separately and thrown into the mix This approach is not necessarily a revelation for any resource analyst, it is the accepted standard, but it is an approach that contrasts with the analysis of industrials where a companywide DCF is the norm. In some ways we get sucked into thinking there is a solitary base case for each company given there is consensus and most analysts just think in terms of being above or below that. Rightly or wrongly the sum of the parts approach, although not always appropriate can allow for the greater consideration of risk, cash flows and uncertain options and can hence provide asymmetric opportunities within industrial companies. It can allow for the pricing of binary options on top, which are largely excluded by the sell side unless they are a near certainty, even if, as we discuss for ASB and some biotechs below those options are extremely valuable. Some examples beyond Austal and biotechs, that we have ventured away from the norm in this approach in industrial investing include: Blast Dog for Imdex, the Seeds business for Nufarm, land developments within Stockland and the Sum of the Parts within Aurizon. What are your favourite embedded options within stocks? Some of the first observations we have made that we still reflect on today are: The larger the company the less value analysts generally add for exploration (and other options) particularly when contrasting more pureplay exploration companies, I.e. within commodity companies with producing assets development assets are often underpriced i.e. BHP, refer ROTE The same applies in biotechnology companies, which we explore looking at TLX, CU6 and NEU below We further note that there is a certain asymmetry that comes from commodity company investing as the assets in the ground have exposure to a commodity price that can fluctuate and as we know with options the higher the volatility the more the option is worth. We explore the special case for gold equities at the end of this paper. Austal Case Study Austal (ASB) is a great example of this options scenario in practice. This writer first analysed Austal in late 2018 and we first invested in ASB during the early stages of COVID. It became quite a polarising stock during that time when in April 2020 they missed out on the large future frigate(s) contract to Fincantieri. The narrative at the time was that ASB faced an existential threat with the run-off of their Littoral Combat Ship (LCS) and Expeditionary fast transport ships (EPF) contracts however, particularly once it was announced (in June 2020) that the US Government was granting them USD50m to expand capabilities into steel [1] (1) for us it then became a matter of if not when they would win more work. Hence it became a great opportunity to put to work our learnings in Sum-of-the-Parts options analysis. Similar to valuing and then risking the individual assets of Woodside we set about determining the potential contracts ASB was vying for and coming up with a theoretical value of the company. It took hours of reading but US congress papers are very detailed around the different contracts, including: number of ships, revenue per ship and deliveries per annum. Hence the assumptions we then had to make were average margin (US Shipbuilders including ASB historically average ~8% EBIT) and the probability of winning each contract. At the time our analysis looked something like this: Source: Chester Asset Management Hence the way we were viewing things it was a risked valuation of AUD3.30/share at a time the share price had gone <AUD2.00/share, but the NTA of the business was AUD2.05/share so it stood as a very asymmetric opportunity. Of course this analysis looks somewhat silly in hindsight as notably: ASB won the first of these options, the (USD3.3bn) Offshore Patrol Cutters (OPC) contract– 30/6/2022 Less than 12 months after winning OPC, ASB won the T-AGOS contract – 19/5/2023 ASB saw expanded programs with EPFs - medical ships – 21/12/2023 Missed out on the Philippines OPV contract which we though was a high probability – 27/6/2022 Has been announced as the exclusive manufacturer of ships for the Australian Government – 23/11/2023 That bet got even more asymmetric when after the first two of these points our probabilistic valuation had increased closer to AUD4.00/share and NTA of the business had jumped to AUD2.67/share however ASB had experienced some near term earnings headwinds, associated with the T-ATS contract which saw the share price drop <AUD2.00/share and trade at ~70% of NTA. At ~AUD3.20/share today, after a failed takeover bid from South Korean shipbuilder Hanwha and the award of a USD450m contract / grant from General Dynamic Boats / the US Government, for the building of submarines (SIB contract); and exclusivity for the building of ships for the Australian government; ASB is once again trading at an extreme level of upside asymmetry. Our understanding is that management is still determining the exact accounting treatment of the SIB contract but it has the potential to either a) be added straight to the asset base once complete, taking pro-forma NTA to AUD4.50/share or b) amortised over the medium term i.e. 10 years in which case USD45m would be added to earnings every year. Both of which are pretty bullish outcomes - either 70% upside to NTA or earnings! Although there is uncertainty remaining about ASB’s ability to execute on steel shipbuilding contracts. If they can and their portfolio options doesn’t push out to the right ASB is destined to produce FY2030 EBIT of AUD250-300m, which would have the company trading at <4x EBIT vs global shipbuilders trading on 15-20x (refer below). All this for 70% of pro-forma NTA means ASB remains one of the most asymmetric opportunities for us on the ASX. Source: Chester Asset Management, Bloomberg Orora Case Study Another recent example is Orora (ORA), where like many in the market during 2024 we were asking ourselves how much is too much on the downside? Source: Simpsons MEME, the Internet Below is some of our analysis from July 2024 when 8 months after the Saverglass acquisition completed we calculated you were effectively paying 25% of the Saverglass purchase price within ORA, in what was reported as a fairly competitive process. Source: Chester Asset Management, Bloomberg July Or looking at it another way, ORA took on additional debt to finance the deal which saw net debt (ex leases) increase ~AUD900m and the EV rise to AU3,572m from AUD2,972m (AUD600m) . With Saverglass contributing ~AUD280m EBITDA to ORA (pre AASB116) Saverglass was being valued at ~2.1x EBITDA. If you continued to believe in the quality of the rest of the business (and the management team), what should it have been down? This is not a perfect science but we inferred share price performance using ORA comps, remembering there were effectively downgrades to Saverglass and to OPS [2] (2) while Australian earnings were maintained in 2HFY24 Saverglass has some decent peers (refer below) For ORA’s Australian division we used the ASX300 (for want of a better comp) For ORA’s North American division BUNZL and Ball Corp were considered, note per Bloomberg both had seen downgrades similar to ORA’s North American division Source: Chester Asset Management, Bloomberg July 2024 Our analysis pointed us to the conclusion that per ORA’s peers it should have been down a lot less (4%) than it was Source: Chester Asset Management, Bloomberg July 2024 In rounding out the exercise we had to ask ourselves were Saverglass’ earnings overstated and was Saverglass’ downgrade in line with peers? To that point we noted that between 2019 and 2023 Saverglass’ earnings increased from EUR100m to EUR168m. Volumes during that period were up 13%, meaning price/mix/margin accounted for ~50% of the increase. Over that 5 year period ~EUR270m of capex was spent on growth projects. If we assumed a ROIC similar to ORA’s (15%) that equates to EUR40m of EBITDA. (EUR100m x 1.13) + EUR40m ~ EUR153m. Hence our bush maths didn’t point to massive overearning - maybe ~EUR10-15m. But with 11% volume decline in 2H24 the destocking set up a more reasonable base to consider going forward. Furthermore per the table below margins assumed are ~ 2.5% under at Saverglass vs peers if we consider accounting differences i.e. AASB16 [3] (3). Source: Chester Asset Management, Bloomberg July 2024 Furthermore on capex we noted that In the prior 5 years Saverglass’ capex had been ~EUR450m on sales averaging EUR560m, equating to 16% of sales. Peers are investing ~9% of sales in capex. Hence it appeared to us, that if anything previous owners were overinvesting in Saverglass reducing, our suspicion of dubious private equity practices. We also came to the conclusion in July that Saverglass’ depreciation was potentially more aggressive than ORA’s, which when adjusted could provide a buffer to insulate further earnings downgrades, which proved to be the case in August. Hence the Saverglass acquisition was poorly timed (unlucky is one word) but it did come from private equity. However there was enough evidence to show that comps had faced similar challenges and with the limited data we had there could be an interpretation that Saverglass outperformed peers in FY24, making the old adage applicable that management were “doing well in a tough environment”. Why rehash old news? Because the thinking is still valid today, particularly now that ORA have agreed to divest OPS to Veritiv [4] (4). we once again have to ask ourselves if trading at ~net cash and ~6x EBITDA or 9.5x EBIT is the right multiple for a global beverages company? We (and Lone Star) might argue it is at least one turn too low. Source: Chester Asset Management, Bloomberg December 2024 Biotechnology Companies EMV options, as described above, are everywhere we look in finance, but none more so than in Biotechnology. This writer has recently been fascinated by this space and highlights a few particular names we have been exploring for asymmetric opportunities. The calculations for these are in some ways very similar to the EMV calculation presented above for oil and gas with some slight differences. Replacing the size of the hydrocarbon accumulation however and the price of oil are estimates around: the total addressable market a drug addresses (TAM), the take-up rate and persistence of users and the price of a drug. A key determinant of persistence can often be if insurers or other entities cover the drug and hence there is limited gap for the patient. Probability of success factors, similar to a hydrocarbon accumulation, are somewhat idiosyncratic but in the absence of this analyst having the scientific background to assess these applications on individual merit we revert to historic probabilities of success and commercialisation. Hence at a general level we start with the question, what has been the probability of success of different trials, and what can that impute about stocks? Source: National Library of Medicine Paper (5) [5] From our reading including the National Library of Medicine paper from which the image above is lifted a drug that has completed phase III successfully has historically had an 88% chance of approval and a drug that is at a Phase III gate likely has a ~60% chance of being successful in that trial and passing to the approval stage. Hence we frame our thinking on biotech options around these cases (i.e. 50% for phase III trials and ~30% for phase II). We adjust this factor based on evidence that the drug has been successfully approved in another jurisdiction or has been pre-approved for critical use prior to final approval. Also noteworthy is the likelihood of a drug progressing from Phase I to final approval is about 8%. Success rates can also differ notably depending on the therapeutic area they are associated with. Telix The best example of a portfolio of different biotechnology assets is Telix Pharmaceuticals (TLX). For those unfamiliar with the company they are a biopharmaceutical company that focuses on the development of diagnostic and therapeutic products based on targeted radiopharmaceuticals or "molecularly targeted radiation" (MTR). The products in their pipeline are intended to address major unmet medical needs in oncology, particularly in prostate, renal, and brain cancers. The first of these products Illuccix is a diagnostic imaging agent developed by Telix after it acquired TheraPharm in December 2020. It is used for the imaging of prostate cancer using Positron Emission Tomography (PET) scans. The diagnostic agent targets the prostate- specific membrane antigen (PSMA), which is overexpressed in prostate cancer cells, allowing for a more precise localisation and visualisation of the disease. This can assist in better patient management and can influence treatment decisions. Telix is partnered with radiopharmaceutical giant Cardinal Health for distribution of Illucix in the US market. TLX has also developed drugs for the imaging and therapy of renal cancer (TLX-250) as well as brain (TLX-101) and multiple other applications such as rare diseases and bone marrow as well as an exciting portfolio of prostate therapeutics products TLX-591 and TLX-592. Source: Telix 1H 2024 Results Presentation Analysing TLX can be somewhat complex but we have tried to (dangerously) simplify our detailed model below i.e. we have attempted to impute potential market share of key drugs below and risk each of those products based on stage of development (without a scientific overlay). The outcome to us suggests bias to the upside on revenue and hence earnings on a 5+ year basis. However, we appreciate that this is assumption heavy and will be more binary than this exercise suggests, particularly with the uncertainties RFK Jr brings to the US healthcare space and the intricacies of CMS payment changes. Source Chester Asset Management, Telix Source: Telix 1H 2024 Results presentation In relation to the above: We have chosen to only compare revenue but note Illucix at present has a GM currently of 65% and we assume a similar margin for most products Illucix is the base product for Telix, by estimates off the back of theirs and competitor Lantheus’ most recent quarterlies they already have ~30% market share in the US of PSMA PET however this is expected to increase further with a confirmed (40%) CMS pass-through price drop for Pylarify and the commencement of TLX-007 for Telix Global sales are more opaque but it is seen as a ~USD1bn TAM opportunity and within 3 years TLX could be doing ~1/3 of their US sales from the rest of the world. Illucix globally (like almost all drugs) is anticipated to have a lower average selling price (ASP) but similar gross margins to the US TLX250 (Zircaix) for kidney cancer, they have a 4 year head start on the competition. Although there was a slight delay after TLX’s submission to the FDA, announcements appear to suggest technical hurdles have been passed and only administrative hurdles remain. It is likely to be priced at a higher ASP to Illucix and if successfully approved TLX could achieve material early market share in an uncontested market TLX-101 Pixclara (F-FET) is a brain cancer imaging agent, PET agent, for the characterisation of progressive or recurrent glioma. It has been granted priority review and we note already included in international clinical practice guideline the imaging of gliomas. TLX see it as strategic as it potentially paves the way for TLX-591. So, if the trials are successful for Pixclara than it somewhat derisks their Therapeutics Therapeutics prostate products TLX-591 and TLX-592. Prostate TAM is USD8-10bn and TAMs for all cancer therapeutics is ~USD40bn. Hence why TLX want to play in that market but it is competitive. ProstACT GLOBAL Phase III trial is progressing but will be a prolonged process In summary for TLX, based on our analysis we believe there are potentially further upgrades implicit in earnings projections as: Global PSMA PET markets are penetrated TLX-250 and TLX-101 are commercialised Application of imaging products expands as the number of scans increases TLX progresses its Therapeutics business and TLX-591 and 592 are commercialised and scaled Further applications are progressed and developed such as Musculo-skeletal Chester CY2027 earnings and beyond remain meaningfully above consensus Clarity When we talk about TLX we are often asked what we think about Clarity (CU6). CU6 is a clinical stage radiopharmaceutical company developing next generation theranostic (therapy and imaging) products based on platform SAR technology, ideally suited for use with copper isotopes which is said to enable superior imaging and therapeutic characteristics. Their products are hence likely to play in the same space as some of TLX’s products (notably 591 and 592). As noted above we do not have a medical background and hence assess the economic payoff at an information disadvantage to other market participants but note that unlike TLX, CU6 doesn’t have a base level of earnings but 2 Phase III trials currently related to Cu-SAR-bisPSMA. Hence by the maths of above we would have to assess their value at 50% of their estimated share of TAM. We have heard glowing commentary on the potential of their product however for us without the requisite skills to assess the science, we would class the economic payoff as too binary for us to entertain. That’s not to say that it isn’t the right investment for others with the requisite skills. I.e. if it was potentially going to capture AUD10bn of value and had a 50% chance of payoff at <AUD2bn market cap that payoff is undervalued. However for us its binary not asymmetric. It does highlight maybe similar to resource companies the market may be willing to recognise these options in pure development companies rather than companies producing earnings, which is highlighted in the example below. Neuren Neuren (NEU) is an Australian biopharmaceutical company specialising in developing therapies for neurodevelopmental disorders that emerge in early childhood. Their lead product, DAYBUE™ (trofinetide), is approved in the US for treating Rett syndrome in patients aged two years and older. NEU is also advancing NNZ-2591, currently progressing to Phase 3 clinical trials for conditions including Phelan-McDermid (PMS), Pitt Hopkins (PTHS) and Angelman (AS). The company has granted Acadia Pharmaceuticals an exclusive worldwide license for trofinetide in Rett syndrome and Fragile X syndrome, while retaining rights to NNZ-2591 for other indications. We have recently been fascinated with NEU of late given it is a self-funding clinical research company with this portfolio of attractive options. Although there are a host of factors impacting the short term view of NEU: change in US administration and management change at distributor Acadia we are increasingly gaining conviction the share price is underwritten by DAYBUE’s value and the potential of NNZ-2591, despite being extremely material under a successful commercialisation, is being priced at near zero within the share price. We preface this analysis by saying we aren’t experts on the science of their assets and have leveraged off the work of some of the covering analysts to gain views on success, but NEU are currently the leading drug contender for the indications of Phelan McDermmitt and Pitt Hopkins disease. They are potentially third in the case of Angelman but their progress potentially provides them with 3 lucrative shots on goal. Source: Neuren November 2024 Presentation Key things we don’t know are: Whether Phase III trials will be successful – but refer averages from the studies noted above (we have assumed 50% in the US for PMS and PTHS) Potential level of market penetration – we have assumed similar stabilised levels for DAYBUE which is arguably conservative given the lower levels of side effects noted to date How much NNZ-2591 will cost - however we have used DAYBUE (gross USD575k) as somewhat of a guide. And despite higher potential efficacy, lower side effects + rarer diseases potentially suggesting a higher price than DAYBUE the RFK Jnr factor, and average of other orphan drugs as a guide has led to us reducing this almost by half (gross USD300k) as well as a similar gross to net factor as DAYBUE and a global discount factor of 30-40% Timing of roll-out. We have assumed consistent 1 January 2028 for all markets and geographies – however note that a 6 or 12 month delay to that matter doesn’t make or break the point of the exercise The Commercial model – We have assumed DAYBUE is the only drug that is under licence to Acadia and 2591 they distribute themselves. Notably 2591 could cannibalise DAYBUE for Rett but we have assumed no change here. Whether they will achieve comparable economics globally to the US. We have assumed a lower level of economics The net effect of all of these assumptions is an EMV Sum of the Parts that looks like the following Source: Chester Asset Management, Neuren ASX announcements I.e. our analysis suggests that NNZ-2591 is being priced at close to zero within the NEU share price. We have to ask ourselves if NNZ-2591 was sitting as the sold drug within a company would it be valued at <AUD150m? Asymmetric?! Botanix Botanix Pharmaceuticals Limited (BOT) is an Australian dermatology company focused on developing and commercialising treatments for prevalent skin diseases and infections. Its lead product, Sofpironium Bromide (Sofdra), targets primary axillary hyperhidrosis (excessive underarm sweating). In June 2024 Sofdra received FDA approval to be distributed in the US which sets them on the path to commercialisation and ultimately free cash flow. BOT will be employing a direct to consumer telehealth model to distribute the product and have already signed agreements with (including with Ascent) covering over 40% of the US TAM ‘commercial lives’. There are currently an estimated 10m people with Hyperhidrosis in the US with the disease obviously a global not just US opportunity. Sofpironium Bromide is being distributed in Japan by Kaken Pharmaceuticals in a product called Ecclock. We invested in BOT prior to it receiving FDA approval when it was priced like this was a meaningful risk. We saw the opportunity as somewhat asymmetric vs the risk implied by the share price at the time due to: The fact it had previously been approved yet there was a check of its packaging The product (with a slightly different formulation) had been distributed in Japan Ecclock meaning it already had market validation Furthermore once FDA was approved we further strengthened our resolve on the name after 3. Dr David Nayagam at E&P conducted a survey of the (US) Hyperhidrosis Society which highlighted some key facts about the product including propensity for sufferers to try the product (high at 95% of patients likely or highly likely to try SOFDRA) and required improvement on current condition (~50% which is low) indicated high penetration and persistence rates. The survey also indicated potential patients love the idea of telemedicine and direct shipping; and 4. Now more recently the announcement, that insurers will cover the product eliminates what we had heard from others was seen as the key risk Note it is difficult to determine what is the appropriate ramp-up of the product but again we have an addressable TAM, a price and economics of comparable companies to provide some assumptions to assist us in determining commercial value. Source: Botanix November 2024 presentation There is also an analogue for Sofdra with Ecclock in Japan but notably their healthcare system is very different to that of the US and has meaningful friction points that limit the ability to easily refil a script. The upside on this though is that with our understanding that patients in Japan average only 1.5 fills on average the sales data out of Japan is indicating a potentially extreme penetration rate for sufferers willing to try Ecclock [6] (6). The trouble is however the lack of refills. Hence assumption heavy but we have been able to develop the following scenario table with the results of the study and the Ecclock example potentially skewing our thinking towards the higher end of the potential scenarios, up from our initial base case. Source: Chester Asset Management, August 2024 Imricor Imricor (IMR) Is a relatively recent addition to the Chester cares list. IMR produce MRI compatible catheters and systems to enable cardiac ablation procedures to treat cardiac arrythmias (irregular heartbeat). The catheters developed by IMR are a world first, other manufacturers only have capability for X-Rays but given the heart is a muscle, use of 2D X-Rays for these ablation procedures (minimally invasive procedure to normalise heartbeat) is not optimal. MRI procedures are more accurate, quicker and IMR believe economic, hence present as a more effective outcome for both patients and cardiologists. The business similar to BOT is founder-led by Steve Wedan, who first designed MRI and ultrasound systems at GE and has painstakingly developed the full suite of products to make cardiology labs MRI compatible over the course of 20 years. Although IMR is a Medtech not a biotechnology company we feel it has a similar setup to Botanix (BOT) in that it is subject to an FDA trial for Atrial Flutter (AFL) that is somewhat derisked given pre-existing approvals in Europe and the Middle East and a history of performing heart flutter procedures almost without fault in Europe. The trial is for up to 91 patients with an early exit at 76 patients, hopefully in early 2025. Similar to BOT there is also granular detail on the expected number of procedures to be performed in a lab each year, the cost of equipment, catheters and hence what the opportunity available to IMR is if they can achieve FDA approval and penetrate the US cardiology industry. Source: Imricor July 2024 presentation Despite the prescriptive nature of these elements there is still risk to the downside that FDA approval isn’t received for AFL, VT or AFIB particularly because to date there hasn’t been a VT (Ventricular Tachcardia) or AFIB (Atrial Fibrillation) procedure performed with MRI devices, with which we hold our breath in anticipation of an imminent VT procedure in Europe. Given this risk and the more assumption heavy nature of this valuation we utilise a higher cost of capital to discount potential cash flows and determine low, base and high scenarios. Differences in the assumptions include the number of labs they ramp up to, hence the number of procedures performed per annum and the number of catheters reordered. Notably X-Ray Catheter players (BioSense, Webstar, Medtronic, Boston Scientific) are operating with GMs of 80% and potentially EBITDA margins of 40%. Source Chester Asset Management, August 2024 Not as asymmetric as the others for now but an extremely interesting upside case if they can prove out the commercialisation model. Book Value Asymmetry Of the examples above we believe set-ups provided/provides asymmetry from a value perspective but we get the most comfort, as is the case with ASB when the stocks trade below book value. ASB is a great example of value asymmetry. Some of our more recent successful investments have come from investing in companies trading below book value with the market missing an element of the mark-to-market of those assets. As we have previously noted the biggest issue with this type of investing is that often in this situation, after identifying and purchasing an investment at below book value there is an impairment of that company which invalidates the book value of those assets. Hence it remains important for us that this isn’t the sole purpose of investing in the business but rather one prong of the investment thesis. And on a further note the asset we are investing in is somewhat of an essential service and not a discretionary item or a mine. We recently heard the quote “In mining there is no asset backed lending only cash based lending” [7] (7). I.e. if a mine doesn’t produce the cash it will be shut down and also value potentially lost. Notes where we have previously highlighted this in more detail include: Not A Sequel but an Origin Story Hidden Property value within a property stock Earnings Expectations Asymmetry As part of the work we do at Chester, we compare our projections of modelled companies with that of the market to identify if the market is mispricing earnings. Although this can at times be a challenge given most stocks have multiple analysts covering them when these situations are identified they can be extremely lucrative. We recently read a great research note by Harris “Kuppy” Kupperman titled “ What’s Driving Stocks ”, reproducing some work by the Macro Tourist Andrew Muir considering some of the negative aspects of this phenomenon but it really is a powerful force particularly when combined with a lens of stocks that are underappreciated or unloved and hence (cheaper than average). We could list a bunch of names where we have done this internally but some of the public examples are: Select Harvest Austal Imdex and ALQ Nufarm What we like about these situations is we can be wrong but it increases the chances of asymmetric returns, that if the company beats expectations the stock price will follow by at least the extent of the earnings beat, but often more as the stock experiences somewhat of a re-rate. The article does a better job of explaining why EPS expectations = share price movement. Below we discuss how the ASX listed gold stocks could be the perfect set-up as being relatively cheap but subject to longer term earnings upgrades based on the gold price. Information Asymmetry Information Asymmetry is also worth mentioning here and the work we do in reviewing annual reports ( Why it pays to read the Account Notes ) and insider activity ( Why it pays to follow the insiders - Part 2 ) to gain any form of informational edge and tip the scales in our favour. We particularly note the section in the article linked above titled ‘The Book Deal Trade’ as one of the more asymmetric opportunities we can think of. We have been working on one particular Book Deal Trade for the better part of 2024 and hope to inform of our efforts here early in 2025. We are super excited by it but acknowledge there are no guarantees in markets. The case for Gold Equities Last but not least we want to mention the asymmetry available in gold equities. We are well known at Chester for always having investments in gold equities at ~5-10% of the portfolio. We won’t rehash our investment pitch but essentially we are attracted to the defensive characteristics of it within our portfolio almost like an insurance policy. By its very definition however insurance is usually something that loses you money but you pay to have the protection. In the case of gold we don’t believe that to be the case. At Chester we don’t try to make commodity price calls, we rely on consensus prices for the commodities that we model, the primary exception being gold in which case we utilise a price more aligned with spot (or the futures curve), the lags in any period usually only represent the timing differences on when we last completed our detailed update and the gold price at the time (and also our desire to use a round number). The broker that is most closely aligned to this way of thinking is Canaccord Genuity but outside of that the street appears to use a commodity price assumption meaningfully below spot on a long term basis. Source: Chester Asset Management, Various broker reports Above is a sample of long term (LT) gold prices assumed by the sell side. In response to these differences we have asked a few select houses as to why and the responses are often a combination of: “that’s what we’ve always used”; “we are told to use that price"; or “higher costs will offset any differences in gold price” … But what if they don’t? Based on average all-in-sustaining costs (AISC) of the ASX gold companies of circa AUD2,000/oz it works out that they generate ~40% margins, providing ~2.5x leverage to the gold price. Putting it another way if the average (particularly ex Canaccord) were adjusted to spot there would be up to 100% average valuation increases or 65% to adjust to our most recent assumption of ~AUD3,600/oz. We don’t know where the spot gold price lands under a Trump Administration but we continue to contest that the spot price is as good as any other arbitrary number. DOGE may do their thing and potentially reduce US Government deficits but turning them into surpluses is another thing. Should gold price hold spot, and we don’t see a meaningful ratcheting up in opex and capex, the upgrades to long term free cash flows of these businesses are going to be material and maybe enough to get the pod shops involved. On this basis some gold equities are extremely cheap and getting cheaper. We show an example for WGX from September below (acknowledging some changes to WGX and consensus since) but the information is still valid. Notably WGX is the gold stock we have chosen to show but this is prevalent across most of the ASX names we look at, largely due to the gold prices assumed by the sell side. Source: Chester Asset Management August 2024 I.e. WGX’s leverage to the gold price is 2.5x Source: Chester Asset Management, August 2024 (notably some changes since) The above has shown to translate into higher FCF estimates of Chester vs the street. Closing Much like the holiday season, investing with options and asymmetry is about finding the gifts hidden beneath the surface. The right strategy can turn a modest outlay into a spectacular surprise—or at least save you from ending up with coal. Here’s to a happy holidays for all and uncovering some more asymmetric opportunities in 2025. [1] (1) (VIEW LINK) [2] (2) Orora’s North American business [3] (3) We believe European accounting standards haven’t necessarily adopted IFRS16 leases into depreciation hence we may be comparing their 25% EBITDA margins with ours, the difference being a 2.5% boost to our EBITDA margin. i.e. their ~25% compares to our ~22.5% pre AASB116. EUR739m x (100%-11%) x 22% ~ EUR145m [4] (4) Refer announcement 4 September 2024 [5] (5) The Current Status of Drug Discovery and Development as Originated in United States Academia: The Influence of Industrial and Academic Collaboration on Drug Discovery and Development [6] (6) On our calculations potentially as high as 20% of the patients seeking treatment in Japan i.e. 250-300k [7] (7) Sean Russo Money of Mines
- Quarterly Thoughts | September 2024
In his latest quarterly review, Rob Tucker analyses sector performance, identifying which sectors are overvalued and where Chester is taking a constructive portfolio approach. Rob also explores how Chinese fiscal stimulus and the looming US election could shape market dynamics over the next 12 months, and highlights some standout stocks within the portfolio, including Westgold Resources and Austal. Watch the full video below.
- Lonsec upgrades Chester High Conviction Fund to "Highly Recommended."
We are pleased to announce that Lonsec has upgraded the Chester High Conviction Fund to its highest rating, " Highly Recommended ." In its report, Lonsec stated, “The rating is underpinned due to increased conviction in the process which has generated persistent alpha since inception and is supplemented by conviction in Portfolio Manager, Rob Tucker, and the investment team, who are well-aligned with end-investors.” Key findings include: “The Fund has generated strong performance outcomes relative to the benchmark and versus peers over the long term.” “The Manager has demonstrated a willingness to utilise the full suite of risk management tools at its disposal to protect the Fund on the downside.” “Strong boutique culture which promotes a high degree of alignment of interests with end investors.” Rob Tucker said “We are proud to have received this rating which underscores the strength of our investment process and the dedication of our team. It is a testament to our focus on delivering consistent, long-term results for our investors.” About the Fund The Chester High Conviction Fund is an Australian equities fund that focuses on a concentrated portfolio of high-conviction stocks, aiming to outperform the S&P/ASX 300 Total Return Index. Established on a strategy over 10 years strong, the Fund has demonstrated success with a seven-year track record and now manages over $1 billion in funds under management (FUM). For more information, or to obtain a copy of the report, please contact the Copia Distribution Team . The rating issued October 2024 APIR OPS7755AU is published by Lonsec Research Pty Ltd ABN 11 151 658 561 AFSL 421 445 (Lonsec). Ratings are general advice only, and have been prepared without taking account of your objectives, financial situation or needs. Consider your personal circumstances, read the product disclosure statement and seek independent financial advice before investing. The rating is not a recommendation to purchase, sell or hold any product. Past performance information is not indicative of future performance. Ratings are subject to change without notice and Lonsec assumes no obligation to update. Lonsec uses objective criteria and receives a fee from the Fund Manager. Visit lonsec.com.au for ratings information and to access the full report. © 2024 Lonsec. All rights reserved. Past performance is not a reliable indicator of future performance. Returns greater than 1 year are per annum. The total return performance figures quoted are historical, calculated using end-of month mid prices and do not allow for the effects of income tax or inflation. Total returns assume the reinvestment of all distributions. The performance is quoted net of all fees and expenses. The indices do not incur these costs. Inception of the Chester High Conviction Fund for performance calculation purposes is 8 October 2013 (based on the underlying High Conviction strategy returns). The inception of the Unit Trust is 27 April 2017.
- Video | Reporting Season Update with Rob Tucker
The August reporting season has highlighted two ongoing trends that have persisted over the past year. Firstly, the banking sector continues to outperform the resources sector, solidifying its position as a leading force within the ASX 300. Secondly, the technology sector's strong earnings per share (EPS) momentum continues to be rewarded with price-to-earnings (PE) expansion.
- Video | Investment Update with Rob Tucker
Chester Asset Management Portfolio Manager and Managing Director Rob Tucker highlights key stock decisions within the Chester High Conviction Fund during the June quarter. The three stocks - two buys and one exit - reflect Chester’s focus on asymmetrical risk – the upside versus downside risk of all stock positions in the portfolio. Rob describes what’s top of mind for Chester looking ahead. In light of a relatively calm equity market in the first half of 2024, Rob believes several macro factors, including geopolitical tensions and US political uncertainty may introduce greater volatility in the second half of 2024.
- A different kind of trend
“Life moves pretty fast. If you don’t stop and look around once in a while you could miss it” — Ferris Bueller’s Day Off Despite being released only a year after this writer was born Ferris Bueller was one of our favourite movies growing up. A movie about living in the moment, friendship and self discovery – what was there not to like? For us it highlighted the importance of fun (we try to enjoy ourselves irrespective of performance) and the occasional break from routine so we don’t miss out on what life is really all about. Most of us in markets would confess to at some point having focused on the day to day rather than zooming out a bit. Whether it be the minutia of the macro watch on inflation, growth and hence interest rates, it can have us sometimes miss the forest for the trees. At Chester Asset Management we do keep an eye on the economic environment as it is increasingly influential in where we invest, particularly in a macro heavy market such as the ASX, however we acknowledge that trying to pick winners and losers off short term macro data can be inherently fraught with danger due to the impacts of government intervention in stimulating specific sectors of the economy. One way we try to circumvent this is to focus on underlying megatrends. Some of our investors or people who have heard from us may be familiar with a version of the below slide, we have been rolling with it for 7 years with minimal changes, because that’s the thing about megatrends. Source: Chester Asset Management Below we try to summarise the key points around demographics for the two most populous nations on the planet; China and India, as well as Australia and try to provide insights in how these demographic trends may influence key market sectors into the future. China Demographics – The cyclical impacts of famine and ‘feasting’ As a consequence of questionable economic policies in China from 1958-1959 when millions of farmers were pulled off the land to engage in ill-advised rural industries, China suffered near famine conditions between 1959 and 1962. It is estimated (given the Government never officially acknowledged the famine) that it caused up to 40 million deaths. The presumed psychological impact of the famine (I know what I want to do when I’m hungry) was a heightened fertility rate, which saw the population boom between 1963 to 1973, from ~680 to 880 million people. The growth was so rapid the Government was shocked into action, introducing the “later, longer, fewer” campaign which encouraged later marriage, longer gaps between kids and fewer children. The fertility rate (children per woman) in the 1970s subsequently dropped from 5.8 to 2.4. Despite the drop the Government went one step further in the 1980s by introducing the infamous one child policy. The combination of the famine, baby boom, government reaction and fertility decline created what became known as a demographic dividend, evident from the dependency ratio; the number of young people (under 15) and old people (over 65) for every 100 working age people falling from 80 in 1975 to 36 in 2010! The demographic dividend helped contribute to China’s rapid growth over this time. However, as all market participants (except maybe the crypto and tech bros) know about tailwinds they will eventually become headwinds, it just depends on your time reference. Hence, as the baby boom workers from the 1960s and 1970s become retirees and the impact of the one child policy shrinks the workforce it leads to an increasing dependency ratio. I.e. in 2022 it is estimated that there were under 50 people outside the working age population (i.e. aged 0 to 14 or >65) to 100 people in it. Focusing on just the over 65 dependents, at present, each retiree is supported by the contributions of five workers. The ratio is half what it was a decade ago and, per the graph below is trending towards 4-to-1 in 2030 and 2-to-1 in 2050. Some specific actions to combat this dependency issue are: Relaxing the one child policy. This policy update was announced in 2016 to two children and amended to three children in 2021. Increasing the retirement age and trying to shift to more of a service based economy so the labour force can work for longer. The current retirement age in China is ~60 years old for men, 55 for female civil servants and 50 for female workers. In 2023 reports emerged that China was planning to raise its retirement age gradually and in phases to cope with this demographic challenge they face. The president of the Chinese Academy of Labour and Social Sciences in 2023 was quoted as stating that there was a “progressive, flexible and differentiated path to raising the retirement age” i.e. there is no specific timeline to implementation. Instituting a universal pension plan. The pension plan now effectively consists of three pillars the first of which was introduced in 1997 with a basic pension system in the 1990s. The second layer, enterprise annuities was introduced in 2004 and in 2022 the third layer, individual retirement accounts (IRAs) were launched. There was a notable push for adoption between 2009 and 2013 when China effectively tripled the number of people covered by the old-age pension system. Increasing the level of automation (and or focusing on productivity). We suspect the government will provide further incentives for automation and R&D into AI but there is another underlying issue at play in China that this can impact so it is a delicate situation. China’s youth unemployment rate is currently hovering around 15. On another note, China has net negative migration, more people permanently leaving the country than entering which further exacerbates the issue around working age population. In 2023 alone the WorldBank estimated China’s net migration at (310k). Note this contrasts with Australia, where some of the issues of the Baby Boomer generation have been somewhat circumvented by an expansionary migration policy, refer comments below. India Demographics – A more sustainable dividend Similar to China, India's demographic dynamics have been influenced by government actions, economic conditions, and social norms, leading to significant shifts in its population structure over the decades. India was rocked during the mid 20th century by famines, the first of which, the Bengal famine of 1943, occurred during World War II as a combination of food procurement for the war and crop failure. The Bengal Famine was thought to have caused the deaths of some 3 million people. Famine conditions also re-occurred in 1966 and 1972 as a result of drought but not to the same extent. The situation began to improve with the ‘Green Revolution’ in the 1960s, which introduced high-yielding variety seeds, improved irrigation infrastructure, and modern agricultural techniques such as mechanized farm tools, pesticides and fertilisers. This transformation in agriculture not only helped avert famine but also led to a significant increase in food production. The improved food security contributed to a population boom. However, India also benefited from improvement in living standards which helped see a meaningful decline in mortality rates as health conditions improved and life expectancy increased. Between 1960 and 1980, India's population grew from approximately 450 million to 700 million. Recognizing the challenges of managing such a large and rapidly growing population, the Indian Government initiated various family planning programs. During ‘the Emergency Period’ from 1975 to 1977, under prime minister Indira Gandhi, a controversial and coercive sterilization campaign was launched. There were even reports of police cordoning off villages and dragging men to surgery. It was believed that during 1975 ~6m Indian men were sterilized in just a year, a number reported to be 15x the number of people sterilized by the nazis in World War II(1). This led to a decline in the fertility rate but also sparked public outrage and political backlash. Whether it kickstarted the decline in the fertility rate further we’ll never know but the drop, per the graph below is quite stark since the Emergency Period began. In the subsequent decades, the Government shifted to more voluntary and incentive-based family planning measures. The introduction of widespread education about family planning, improved access to contraception, and economic incentives for smaller families gradually led to a decline in fertility rates. For context this has seen the fertility rate drop from ~6 children per woman in the 1960s to 3-4 in the 1990s and closer to 2.2 today. Source: Statista 2024 India's population, unlike China’s has created a demographic dividend, defined as the economic growth potential resulting from changes in a country's age structure. This began to emerge prominently in the late 20th century. With a larger proportion of the population entering the working-age group, the dependency ratio declined. This shift provided India with a substantial labour force, contributing to economic growth and increased productivity. From 1991 to 2018 India experienced a period of rapid economic growth, often attributed to liberalisation policies, increased foreign investment, and the rise of the IT sector. The growing working-age population played a crucial role in this economic expansion, as it fueled consumer demand, increased savings, and enhanced the labor supply. This period of prosperity has contributed to ongoing population growth with India reportedly overtaking China as the most populous nation in 2023 but unlike China, India’s population is anticipated to keep growing until ~2065. Today India has ~65% of its population under 35 years old! As the country’s population continues to age though, the demographic dividend is gradually diminishing. By 2050, the proportion of people aged 60 and over is expected to increase significantly, leading to a rising dependency ratio. UN estimates that the number of people aged 60 and over will increase from 149m in 2022 to 347m in 2050. Source: UN Population statistics Promoting higher fertility rates: Unlike China, India's fertility rate of around 2.1, remains close to replacement level. However, efforts are being made to ensure it does not fall below sustainable levels through initiatives that support families, such as parental leave policies and financial incentives. Improving healthcare and social security: The government is working to strengthen healthcare infrastructure and expand social security programs to support the ageing population. This includes initiatives like the National Health Mission and the Pradhan Mantri Jan Arogya Yojana (PM-JAY), which aim to provide affordable healthcare to all citizens. Encouraging skill development: To harness the potential of the young working-age population, India is investing heavily in skill development programs. Initiatives like Skill India and the National Skill Development Mission aim to equip the workforce with the necessary skills to meet the demands of a modern economy. Boosting economic growth through innovation: The Indian government is promoting innovation and entrepreneurship to create new job opportunities and drive economic growth. Programs like Startup India and Make in India are designed to foster a business-friendly environment and attract investments. By investing in healthcare, education, and skill development, and by fostering a conducive environment for economic innovation, India can navigate its demographic transition and continue its journey toward sustainable development and prosperity. We further note however that India’s national elections have just concluded with a surprise result that unlike 2015 and 2019 the Bhartiya Janata Party (BJP) didn’t win in a landslide. Hence despite Modi securing a third term he has had to form a coalition government for the first time. This means that Modi won’t have the same level of support during this term and will need to navigate coalition politics. Australia Demographics – Why continue to build local when it’s easier to import? Australia’s demographic landscape is a fascinating reflection of its economic policies, migration trends, and social changes. Over the past several decades, these factors have shaped the country's population dynamics, leading to significant shifts in age structure and workforce composition. It bears many similarities to a number of other western countries such as the US. In the aftermath of World War II, Australia embarked on an ambitious immigration program to boost its population and workforce. The government actively encouraged immigration from Europe, resulting in a significant influx of new residents. This period saw Australia's population grow rapidly from ~7.5 million to over 13 million people by the early 1970s. The increase in population was driven not only by immigration but also by a post-war baby boom. The fertility rate peaked in the late 1950s and early 1960s, with an average of 3.5 children per woman. My grandparents helped lift the average! This population growth provided a substantial boost to the economy, as a larger workforce supported industrial expansion and infrastructure development. By the 1970s, Australia began to experience a decline in fertility rates, similar to trends observed in other developed countries. Several factors contributed to this decline, including increased access to contraception, greater participation of women in the workforce, and shifts in social attitudes towards family size. By the 1980s, the fertility rate had fallen to around 1.9 children per woman. In response to these demographic changes, the Australian government implemented policies aimed at supporting families and encouraging higher fertility rates, some of which are addressed below. Migration has also continued to play a crucial role in shaping Australia's demographic profile. The government has maintained a robust immigration program, targeting skilled migrants to address labour shortages and support economic growth. This approach has helped offset the natural decline in fertility rates and ensured a steady increase in population. In recent years, Australia has also focused on attracting international students and temporary workers, further diversifying the population and contributing to the economy. The combination of permanent and temporary migration has allowed Australia to maintain a relatively young and dynamic workforce compared to other developed nations. Australia's own demographic dividend became evident as the proportion of working-age individuals increased relative to dependents. From the 1970s to the early 2000s, the dependency ratio declined, providing a boost to the economy. During this period, Australia experienced sustained economic growth, supported by a strong labour force, high levels of productivity, and a favourable global economic environment. The mining boom in the early 2000s further fueled economic expansion, attracting investment and creating jobs. Similar to India, as Australia's population continues to age, the demographic dividend is reducing. The proportion of people aged 65 and over is projected to increase significantly, leading to a rising dependency ratio. By 2050, it is expected that there will be around 3 working-age individuals for every senior citizen, compared to around 5 in the late 2000s. Australia’s dependency ratio, Source: ABS Data The current fertility rate in Australia is 1.6, well below the replacement rate of ~2.1 births per woman. Source: Propel Funerals, May 2024 Presentation To address the challenges of an ageing Baby Boomer generation, the Australian government is implementing several measures: Encouraging higher birth rates: The government continues to support families through policies such as paid parental leave[2], childcare subsidies[3], and family tax benefits[4]. These measures aim to make it easier for families to have children and balance work and family responsibilities. Peter Costello’s 2004 baby bonus catch-cry of “one for mum, one for dad, one for the country” didn’t exactly lead to a wave of procreation. Jim Chalmers said in May 2024 “It would be better if birth rates were higher”, he doesn’t quite capture the headlines like Costello but the sentiment is there! Promoting skilled migration: Australia's immigration program remains a key strategy for addressing labor shortages and supporting economic growth. By attracting skilled migrants, the government aims to maintain a dynamic and productive workforce. Notably however after a recent high intake of ~740k migrant arrivals in FY2023 (net 528k) Australia has budgeted for a reduction in the number of migrant intakes for 2024-2025 down to net 260k Investing in health and social services: To support the ageing population, the Australian government is investing in healthcare and social services. Initiatives such as the National Disability Insurance Scheme (NDIS) and aged care reforms aim to improve the quality of life for older Australian. There are plenty of issues we can see with the NDIS but the sentiment behind it is a positive one. In our opinion the NDIS is in need of meaningful reform Enhancing workforce participation: The government is encouraging greater workforce participation among older individuals through policies that promote flexible work arrangements and lifelong learning. This approach aims to extend the working lives of older Australians and reduce the dependency ratio Source: ABS Statistics Demographic Impacts on ASX sectors Tabled below we have summarized some of the potential impacts across all ASX sectors Source: Chester Asset Management For those that prefer to visualize we have compiled some key graphs below Australia’s demographics are set to lead to a ‘death boom’ Recent ABS Data suggests the growth in spending per capita is growing at a faster rate the older we are. Is this indicating a structural tailwind as we age? Source: Property Update, ABS Data Asian demand for seaborne metallurgical coal appears to be increasing, driven by India Source: Wood Mackenzie / Whitehaven Coal Presentation August 2023 While Chinese steel production appears to be peaking. Source: Chester Asset Management, Bloomberg Does 16% of the world’s population still need to produce 53% of the world’s steel? Particularly if their population is declining and there is an oversupply of houses! (~1/3 of Chinese steel demand is driven from housing). Meanwhile medical spending increases rapidly with age Source: Peter G Peterson Foundation Retirement villages in Australia have a double tailwind from the ageing population and underpenetrated market. Source: The Weekly Source Closing Although each portfolio holding has idiosyncratic merit underpinning it (a combination of quality, value and insight), demographics can be partly responsible for some of our positioning below. Healthcare (overweight) – CSL, RMD, TLX Agribusiness (increased protein intake and need for yield) – RIC, NUF Energy and Energy infrastructure – AZJ, AGL Real Estate (retirement living) – EGH Materials (Iron Ore underweight) – limited exposure ex MIN You're still here? It's over. Go home. Go. [1] (VIEW LINK) [2] (VIEW LINK) [3] (VIEW LINK) [4] (VIEW LINK)
- The role of equities in your superannuation portfolio
Capital protection plus capital growth are the twin goals many of us have for our super. Here's how an actively managed share fund can achieve both. Equities have a lot to offer as an investment to grow retirement savings. Long term capital growth plus ongoing dividend income is a combination that makes shares a favourite among self-managed super funds (SMSFs) and retail investors. Fortunately, there are several ways to gain exposure to shares. Options include holding shares directly, investing via an exchange traded fund (ETF) or by purchasing units in an unlisted actively managed fund. These choices are not mutually exclusive. Investors can opt for a combination of all three. However, an actively managed fund can offer important advantages. Active management calls for discipline - and plenty of research Research shows that retail investors often mistime their entry into and out of share markets. Volatility can be a major factor here. Investors tend to buy when markets are booming (and share values are high), and bail out when markets dip and values fall. ETFs can help investors avoid this issue. The downside is that most ETFs are index funds that simply mirror the market. This keeps fund fees low though it comes at the cost of returns that match the market at best, rather than outpace it. An actively managed share fund brings an additional factor to the table - discipline. Investment guru Warren Buffett is credited with saying investors should be fearful when others are greedy, and be greedy when others are fearful. In other words, the winning strategy is to buy when markets are down, and sell when prices are high. It is the discipline to stick with this approach that allows experienced, active fund managers to deliver above-market returns. The Chester High Conviction Fund is a great example of this outperformance. As the table below shows, over the long term Australian shares have delivered average annual returns of about 8% though returns can be far more volatile over the short term. The Chester High Conviction Fund has far-outpaced the market, achieving returns after fees of averaging around 14% annually. When it comes to saving for retirement, this 6% outperformance can make a tremendous difference to an investor's wealth by the time they are ready to hang up their work boots. Investing in transformative companies How is the Chester High Conviction Fund able to deliver higher returns than, say, ETFs? The answer is simple. Unlike most ETFs, which track a given benchmark, we do not hold stocks that make up the benchmark. Let me explain. The Aussie share market, and market indices, are dominated by a few big names. Our biggest listed companies may be favourites among direct retail investors, but their sheer scale makes it hard for these corporates to generate returns above 7% annually. As a fund manager for over 20 years, experience has taught me that to consistently achieve returns in the low teens, a portfolio needs to concentrate on smaller and medium-sized listed companies - what we call the small- and mid-caps. These are the companies with the agility to transform as our economy transforms. It calls for a long term focus, but this matches the investment horizon for superannuation savings. The upshot is that the Chester High Conviction Fund looks for the high performers among the small- and mid-caps within the S&P/ASX 300 Accumulation Index. Finding those unloved, underappreciated or undiscovered stocks calls for plenty of research: It's not called a 'high conviction' fund for nothing. But the fund isn't just about high returns. Clever strategies to grow and protect capital The Chester High Conviction Fund has a mandate to grow and protect investors' capital. These are exactly the twin goals that so many of us look for in our superannuation portfolio. And we achieve them through a clever strategy. Around 6-8% of the fund's portfolio is invested in cash and gold. Holding cash allows the fund to buy attractively-priced stocks when they become available. That's the growth component. The appeal of gold is that it has very low correlation to other asset classes. Price movements are relatively independent. In this way, gold can reduce overall volatility and provide the element of capital protection. A fund that lives up to its promise The Chester High Conviction Fund team has worked together for over a decade. Our combined expertise really shows up in the fund returns. For investors who are looking to grow generational wealth while preserving capital, the fund lives up to its promise. It can make a valuable difference to the value of your nest egg when you're ready to exit the workforce.
- A day in the life of an equity fund manager
What does the world of investment management really involve? Here is how growing wealth and preserving capital drive our daily routine. One of the great aspects of investment management is that no two days are the same. As an Australian equity fund manager, Chester Asset Management aims to find the high performers that can help our investors protect and grow wealth. As part of this goal, my day starts at sunrise. Australia's equity market is closely tied to US markets. So, I begin each morning checking what has happened overnight in the US, and making sense of the 'why' behind market movements such as changes to interest rates. After a quick breakfast with the family, I like to run or ride to work. I'm at my desk by 8.30 am, and the next two hours are usually taken up analysing the daily news flow. This can include announcements from the Aussie stock exchange, media releases about new products from individual companies, and quarterly production updates. This early activity gives me - and my team of analysts - a framework on which to base investment decisions. The Chester High Conviction Fund, which was awarded Money magazine's Best Australian Shares Fund in both 2023 and 2024, has achieved average after-fee returns of 14.4% annually over the past 10 years. Those sorts of returns don't happen by chance. Careful research plays a critical role. Afternoons spent with company leaders By the time midday rolls around, I generally only have time for a snack at my desk. That's because the afternoons are especially busy. This is the time our investment team spends speaking with fund investors, working on our quarterly fund updates, and meeting with company leaders. As a fund manager, being able to meet and talk with company executives directly gives us an advantage that retail investors don't share. On a typical day, my team and I engage with anywhere from three to eight companies. That's more than 1000 listed companies each year. These close encounters are absolutely instrumental to developing a sense of how a company is tracking. As a fund manager with a team of career investment specialists, we look for companies that are under-loved or under-appreciated by the market, yet have plenty of upside. Meeting with company executives can be particularly revealing on this score. It's about being able to read body language, and pick up subtleties that can shine a revealing light on a company's fortunes and future prospects. The remainder of my afternoon is often spent on further research, addressing issues that are not time-sensitive. Our team of five analysts typically review the various opportunities facing the 35 or so stocks in the fund's portfolio. But we have a watchlist of over 50 listed companies that we research on a daily basis. The aim of all this analysis is to minimise downside surprises while maximising the upside of investment opportunities. This is part of how Chester Asset Management approaches investing. Our goal of protecting and growing our investors' wealth makes it essential that we recognise the downsides of an investment, while being confident the upsides are skewed in our favour. Achieving the best results for investors As the fund manager, the buck stops with me. It's a significant responsibility, though, after 20 years in the role, I know when it's appropriate to back the stock selection suggested by my analysts - a team I have tremendous faith in. I guess one of the unique aspects of my job is that I personally know a lot of our unitholders. I also have my own money invested in the fund. It's a powerful reminder of the importance of the decisions I make. So, while the focus of my day is driven by our mandate to protect and grow wealth, we stick to disciplined processes. We know these will deliver the best long-term results for our investors. My day doesn't end when I leave the office. Last thing each evening, I check the news feed from home. Stock markets are impacted by a vast array of factors, and a single piece of information could make a difference to the returns that Chester Asset Management delivers to investors. And I am always mindful that our unitholders have put their trust in me and my team, to help them achieve their personal goals.
- Notice to investors: Changes to your investment administration
This article contains important information regarding your investment. As previously communicated by email, as a Responsible Entity of your investments, Copia Investment Partners (Copia) employs a panel of service providers that help facilitate the reporting for your investments with us. On 18th December 2023 ("the transition date"), Copia will be changing one of its service providers that manages the client administration and registration from Iress Managed Funds Administration (MFA) to Boardroom. This follows an extensive review by Copia to determine which provider is best able to deliver client services that is among industry best practice. As a result of this review, we have chosen BoardRoom who have a 30-year track record in managing client administration and registry services. Benefits for you: The new service will provide the following benefits: The ability to make new and additional investments online A portfolio view your investments in one central location ("InvestorServe") The ability to view and manage personal information including contact details, banking information and tax file number online Access to online statements and distribution advice Access to information on holdings including distribution details, tax and trust financial information being stored in a secure portal for future access at any time. What will change? Change to your account number Change to bank details for applications Change to email address for submitting forms Change to investor portal Investor account number Your new Boardroom investor account number will be referred to as a “unit number”. The unit number will be in the following format: U10 + Existing Account Number. For example, if your existing account number is 10023457, your new unit number will be U1010023457. Bank details for applications From 2pm on Friday 15th December 2023, Copia’s bank details for receiving application monies will be as follows: Account Name: Boardroom Pty Ltd ITF COPIA Funds - Application A/CBSB: 332-027Account Number: 556-074-208 Email address for submitting forms From 2pm on Friday, 15th December 2023, the following email address should be used to return completed forms for processing (e.g. Application Forms, Withdrawal Forms, Change of Details Forms): copia.transactions@boardroomlimited.com.au Accessing your investment via the investor portal The new investor portal will be called “InvestorServe”. Instructions on how to access InvestorServe will be communicated to you by email. If you have any questions, please don’t hesitate to contact our Client Services Team: 9am to 5pm Melbourne business days P 1800 442 129 (free call within Australia) P +61 3 9602 3199 E clientservices@copiapartners.com.au
- Winner: Money magazine's Best of the Best | Best Australian Shares Fund 2024
Chester Asset Management are thrilled to announce that the Chester High Conviction Fund has been recognised as Money magazine’s Best Australian Shares Fund 2024, marking its second consecutive win after also securing the award in 2023. We were delighted to attend the lunch in Sydney alongside representatives from Copia Investment Partners. How the winner is chosen: "Rainmaker, publisher of Money, has been reviewing superannuation, managed funds and their investment managers for more than 20 years. To conduct the banking products assessments Rainmaker and Money teamed up with InfoChoice, one of Australia's leading financial product comparison websites. When choosing which managed funds or exchange traded products (ETP) to invest with, investors are looking not just for funds that scored the highest investment returns but also managed their investment risks. This includes an assessment of which managed funds most protect your capital." More information: About the Chester High Conviction Fund Contact us Best of the Best Awards
- Making Sense of the Macro & Commodity Bull Market Thesis with Anthony Kavanagh
Chester Asset Management Co-founder and Portfolio Manager Anthony Kavanagh had the great opportunity to sit down with Jonas Dorling from Money of Mine. The conversation covered all things Chester, how the portfolio is built, the role commodities play as well as all things macro, from China to India to Australia. Click here to subscribe to the monthly report for updates on the current market outlook, Chester's performance and more.