What is the stock?
How long have you held the stock?
We’ve owned it for over four years across our funds. It has been a good performer, the share price has more than doubled over that time and it has got a reasonable yield, a 5% cash dividend.
What do you like about it?
It’s a very dynamic company and it’s certainly changed its spots a little bit. It has always been known for its infrastructure investment but post GFC over a third of its profit comes from funds management. This was acquired at pretty cheap multiples post GFC and now a third of its revenue is annuity-based long-term revenue.
It has a good long-term income and fund mangers are usually priced at a much higher multiple.
How is it better than its competitors?
We would argue that it doesn’t have investment bank competitors in Australia and even if you look globally, particularly at the US ones, they don’t have that focus on fund management and that annuity stream. Macquarie is a lot more risk focussed and they got through the GFC clearly a lot better than a lot more investment banks.
I also don’t think they pay people quite as much as some of the big Wall Street banks.
What do you like about its management?
They have top quality people who are very smart. They are very sharp people, they can seize opportunities very quickly and they can change the direction of the company. For example, in the way they have pulled back a lot of the broker side and now focus more on funds management.
It is a very sharp team. You’re buying the management team.
What is your target price?
We don’t actually have target prices. We sort of continually assess how they look in terms of valuation. We’ve held it for four years and it keeps looking good, and while it ranks well in our process, we will keep holding it.
At what point would you sell it?
At the moment we have no intention of selling it but we would say the investment management industry, and even the funds management industry, is somewhat linked to the cycle. So if that cycle turns, our view on Macquarie would turn very quickly.
How much has it added (subtracted) to your overall portfolio over the last 12 months?
It has added 20 basis points in excess returns. That means 20 basis points of outperformance has come from one stock. Also we added 12 basis points of additional income over the market from our Macquarie holding, which is pretty significant because the market yield is 6% (gross), so our Macquarie holding alone boosted it to 6.12%.
Where do you see the value?
Its growth opportunities, its annuity stream from funds managements and the fact you can buy it a lot cheaper than other fund managers. It also actually pays a pretty good income level so we find it still attractive.
Macquarie will also benefit by about 3% to 4% from the US tax cut which is a nice little bonus.
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