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The Montgomery Fund’s positioning through reporting season and Russia and Ukraine’s conflict


The Montgomery Fund’s positioning through reporting season and Russia and Ukraine’s conflict

In part two of this video series with Montgomery’s Head of Distribution Scott Phillips and Portfolio Manager of The Montgomery Fund Joseph Kim we take a closer look into the February reporting season, and discuss the conflict with Russia and Ukraine. Joseph also shares insight into holdings in The Montgomery Fund, including the Commonwealth Bank of Australia, National Australia Bank and Reliance Worldwide.

You can view part one of this two part video series here: The Montgomery Fund’s performance and positioning


Scott Phillips (00:08):

Welcome back to part two of my discussion with Joe Kim, the Portfolio Manager for The Montgomery Fund. In this section, I want to take discuss the recent reporting season, exposure to Russian stocks, the economy, take a deep dive into one particular stock, and then some general thoughts on investing in The Montgomery Fund. Joe, firstly, we’ve just come out of reporting season, which seems to have maybe fallen away a bit with the war in the Ukraine. Can you give me your thoughts around reporting season, your key observations, takeaways, and any sort of outcomes as a result of that for investors.

Joseph Kim (00:53):

We entered reporting season quite cautious on the outlook and there are four main reasons for that. The first one is the supply chain disruptions. And we did have a few companies pre-report on some of these supply chain issues that they’ve been encountering.

Joseph Kim (01:09):

The second part of that would be the COVID disruptions. We’ve had a lot of shopping centres closed. With retail closed, that feeds in partially to the supply chain disruptions that we’ve seen more broadly.

Joseph Kim (01:22):

The third thing is rising costs. And one of the themes of this reporting season is there is cost inflation. Now the most prominent one is wages, especially in the tech sector where we’ve seen 10 to 15 per cent increases in wages across a lot of the higher skilled labor.

Joseph Kim (01:40):

And finally we’ve had rising rates. Rising rates is less of a risk in terms of the companies themselves, but more of a risk in terms of the valuation profile of some of the longer duration companies. So not a lot of places to hide.

Joseph Kim (01:54):

One of the bright spots from reporting season was the banks. There were a lot of concern going into reporting season that banks would feel the full pressure of competitive pricing and mortgages. We thought that the bottom was in because you saw a lot of the competitive pricing pull away in October and now being the biggest beneficiary of a rising rate environment, we have seen a bit more invested enthusiasm coming into the banks. We’ve retained our big banks exposure. It’s the biggest bank exposure that The Montgomery Fund has had in its history for that reason.

Scott Phillips (02:27):

Now to a big question for everyone at the moment. The Russian invasion of Ukraine. We’re an Australian equity fund, but do we have any exposure in our portfolio to Russia or the Ukraine? And I guess with all of the sanctions going on, how do you look at that risk for Australian companies in our portfolio?

Joseph Kim (02:55):

If you think about Russia and Ukraine, the world is so connected that this will impact almost every company one way or another. There are going to be some pockets of companies, which are just Australia exposed, but it’s very hard to avoid that.

Joseph Kim (03:12):

Our view of the Russian situation, we weren’t expecting the war to be our base case, but obviously when it broke out, we quickly went through our portfolio and determined whether we had the appropriate risk or exposures and what companies had exposure. And do we think that exposure is large or small? One of the first companies that came out when we did this analysis was Aristocrat. Now Aristocrat, for example, has a digital business on the gaming side. They have some studios in Russia and in Ukraine.

Joseph Kim (03:46):

One of the first things we did was we spoke to the company. We asked them, what’s your exposure? And they effectively addressed those concerns in the past couple of days where they were anticipating the potential for a war and they’d been relocating a lot of their team out of those countries. And so we thought, well, yes, the share price is under a bit of pressure, but we do think that’s a very small exposure that over time, the market will become more comfortable with. And we’ve seen the share price recover as a result.

Scott Phillips (04:15):

So The Fund has no direct exposure to Russia and any stocks specific issue?

Joseph Kim (04:20):

It has very minimal exposure, Scott. So nothing that we are concerned about overall.

Scott Phillips (04:26):

It’s been a volatile start to the year for equities. Can you pass on any key notable buys or sells within the portfolio?

Joseph Kim (04:35):

The most notable buys and sells are actually in the banks. We’ve held Westpac for a long period of time. It’s underperformed last year, relative to the other banks. And the most recent result showed some turnaround potential, but we do believe there’s a lot more structural challenges that the bank faces over a period of time. We’ve elected to consolidate our bank holdings into the Commonwealth Bank of Australia and into National Australia Bank. The Commonwealth Bank of Australia obviously is the quality bank. It’s demonstrated leadership in the banking sector time and time again. We feel very comfortable investing in that common stewardship. With National Australia Bank, we are seeing a lot of positive operational benefits coming out of Ross McEwan’s leadership. And with the bank being the most exposed to the business sector, which is recovering or actually seeing strong growth, we believe that those two exposures will best benefit our investors over the medium term.

Scott Phillips (05:34):

Any notable sales in the portfolio?

Joseph Kim (05:37):

We’ve sold a couple of positions. Tabcorp was one of the stocks that did very well for us last year. We’ve seen very good growth in lotteries but on the flip side we’ve seen wagering declining as they are losing market share. We are generally concerned with the trajectory of the wagering division, even though the lotteries business is going very well. We felt like Tabcorp was undervalued on some of the parts. Whilst we acknowledge lotteries is doing well, we feel that it’s fully valued relative to the prospects going forward.

Scott Phillips (06:10):

We talked earlier in the first video about Reliance Worldwide. Do you want to take a couple of minutes just diving into that business and why it is a cornerstone and a hallmark of a type of business that The Montgomery Fund would hold.

Joseph Kim (06:33):

We introduced Reliance maybe three years ago into the portfolio and Reliance has been a stellar performer during this COVID disruption. The things that we like about the business is a very good product for example. First and foremost, the plumbers use it to save time. It’s very important in this environment, where there is US labor constraints, to be able to find innovative solutions that allows the plumber to go and save time and do a good job for the end customer. So we like the product itself. And then there are some operational hallmarks with their business. For example, their field performance. During COVID everyone had supply chain difficulties. But if we look the actual execution, they’ve seen a significant pickup on the revenue side of things. So for example I think their compounded growth over the past two years in the US has been over 10 per cent.

Joseph Kim (07:28):

That’s phenomenal for a business which is essentially making widgets but having supply chain disruptions. The share price is at moment around $4, which going into COVID, it was around $4 too. The earnings profile of the business has increased by about 50 per cent. And they’ve actually made a couple of acquisitions to help that earnings growth profile. The ROE of the business has gone from say 11 to 13 per cent. We struggled to understand why the business is actually trading cheaper now than before. We can see that there are some concerns around sentiment in the US and around Reliance being a COVID winner. But again, our channel checks indicate that the backlog of work on the pro side of things, which is where they’re most exposed, is very strong over the next 12 months. So that’s why we have this as one of the foundation companies of The Montgomery Fund.

Scott Phillips (08:25):

Thanks, Joe. Last question, can you provide some overall guidance as to the positioning of The Montgomery Fund as we sit here on March 10?

Joseph Kim (08:39):

The overall shape of the portfolio is very similar to the one that we had in 2021. The majority of our investments are in quality companies. Whether they are a quality growth company or whether they are quality defensive companies, the shape of the portfolio is still very similar. We haven’t used this resources rally to chase what we perceive to be less sustainable earnings over the medium term. And we have a more of a defensive positioning, and that’s the result of the cash balance creeping up a little bit, but by and large, the portfolio shape is very similar. We are looking at some of these lower prices and looking at more attractive entry points. We are assessing what we believe is the risk around Russia and Ukraine and rates.

Joseph Kim (09:31):

Markets are very, very fluid at the moment, Scott. So we don’t want to move too aggressively, but we are going to take advantage of what we perceive to be lower prices. For example, we’ve used some of the selloff in Reliance to reweight up our position. So we’ve bought more shares at a lower price, and those are the sorts of opportunities that we’re looking for.

Scott Phillips (09:54):

I think it’s important to know at this sort of point in time, where there has been significant weakness in the unit price of The Montgomery Fund, when you’re investing in equities, you really need to take a three to five year view. Anything can happen from quarter to quarter or even one year on one year. As we talk to you and we talk to Roger and the rest of the team, we have a portfolio of really high grade companies that have valuation on their side, and we need to let those businesses continue to compound out. And the value will be realised in the share prices over time, but we’re in a risk off environment at the moment. And so with that sort of sell off, comes depressed prices.

Joseph Kim (10:37):


Scott Phillips (10:38):

That’s all we’ve have time for today. Hopefully you’ve enjoyed this video insight. If you’ve got questions, please reach out to any of the team at Montgomery and we’d be delighted to get back to you. Thank you for your time.

The Montgomery Funds owns shares in the Commonwealth Bank of Australia, National Australia Bank and Reliance Worldwide. This video was prepared 10 March 2022 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade these companies you should seek financial advice.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.


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