Regulation is replacing disruption as the key theme to watch among institutional investors.
Airlie Funds Management’s Matt Williams, a portfolio manager of the Airlie Australian Share Fund, says governments and regulators are “quite emboldened by the public’s desire to see change”.
Williams, speaking at the Magellan-backed fund’s national roadshow presentation this week, said that while disruption – from technology and new market entrants – was “the big theme five years ago”, regulatory risk has now become a key market factor.
“Regulation is just everywhere in our industry,” he said.
Explaining that public lobbying for change across industries has forced the government’s hand, Williams said, “this has led to a bit of blindsiding in some areas.”
He used the example of one of the Airlie fund’s own holdings to illustrate the point.
“One stock we own in the fund is Aurizon – a coal haulage company from Queensland,” Williams explained. “They copped a regulatory decision on the rate of return they can get from their asset and it was way worse than what we were expecting. The stock suffered accordingly.
“We’re seeing more and more of those things. Talk of capping private health insurance premiums, the [Australian Competition and Consumer Commission] ACCC in the energy space last week, plus whatever comes out of the royal commission.”
Williams mused briefly on the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, noting that AMP faced a bumpy regulatory road and that the fund was “underweight the big banks and three of the four are not owned” by the fund.
He did note, however, that while “there’s no doubt sentiment is against” the banks, he believes this will pass and opportunities may present themselves among the big financial institutions.
Before taking advantage of those, however, the fund would first need to “cover off as best we can on regulatory risks”, he said.
From B to C to B to B
Emma Goodsell, also portfolio manager for the Airlie fund, identified an over-saturation of investments in business-to-consumer entities as another area of domestic risk for funds.
“We are aware of our exposure to the customer,” Goodsell said, “because we think that, incrementally, things get slightly harder from here.”
She explained that for business-to-consumer [B to C] entities to make it through the fund’s quality filter, they needed to be dominant franchises, with “some sort of competitive edge”. While companies such as Qantas, Bunnings and Reece fit the bill, many other retail sectors involve too much exposure to the discretionary spending habits of the end customer.
“It would be very unlikely at this juncture, given our macro view, that we would invest in a women’s discretionary fashion retailer, for example, because we think that’s the canary in the coalmine if people are really putting away their wallets,” Goodsell said.
Williams agreed, reiterating that consumer spending would be one of the areas that could hurt investors.
“When the downturn does inevitably come, I think it’s the consumer who’s going to really send a jarring through the markets, because of this kind of overexposure of B to C businesses,” Williams said. “So we’re always on the lookout for good quality B to B businesses.”
