The investing great once said: “Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well.”
Mr Fraser agrees. He is led by the philosophy that being contrarian in nature is key to investing successfully.
“We seek to invest in those companies when the markets become overly pessimistic,” said Mr Fraser on an upcoming episode of the Relative Return podcast.
“So, one of the ways that we tried to identify that is actually understanding the range of valuation outcomes.”
He highlighted that one of the challenges with investing is the belief that “we can precisely value a company or forecast its earnings”.
“For us, actually understanding a range of valuation outcomes is more instructive to try and work out whether the markets become overly pessimistic or indeed overly optimistic about a company’s fortune,” Mr Fraser said.
“We express that through a low and a high case, or a bull and a bear case, valuation. And typically, our best investments are the ones that are trading at or around the bear case with good upside to a base case valuation.”
At an aggregate level, Mr Fraser believes that the ASX 200 is overvalued by some 10 to 15 per cent, but for him, the spread within the ASX 200 companies is actually more interesting.
“It’s the spread between what we believe our portfolio is, or the upside in our portfolio, relative to the market. And from that spread, which has historically sat between sort of 30 and 40 per cent, albeit in the COVID period the portfolio looked like it had north of 100 per cent upside on the lows, is that we expect to be able to deliver an access return above the ASX 200 returns,” said Mr Fraser.
An example of a company Mr Fraser is currently taking an interest in is a2 Milk.
“Market became overly pessimistic about the increase in the structural decline in Chinese births, which is their biggest target market, and COVID accelerated that decline, and because they were in lockdown for longer, that rebound hasn’t occurred as rapidly as what say the market would have expected,” he explained.
“But what the market has been overly focused on, which is an issue for the company, what they can address is how they perform within that market. So, the company has been investing in the brand and has actually been gaining market share, and we’re starting to see signs of that playing out.
“We think a2 Milk is a great brand that’s doing a lot of good work in increasing its relevance within the Chinese market.”
Really playing into the idea of unpopular companies, Mr Fraser revealed his firm has made some initial investments into Star Entertainment Group and Tabcorp Holdings.
“In the case of Star, the concerns around anti-money laundering and governance and so forth, have created an opportunity there,” he said.
“Our philosophy is centred on behavioural bias, and we sum that up in a statement that we believe people are motivated by short-term outcomes, overemphasise recent information, and are uncomfortable having unpopular views,” the portfolio manager told InvestorDaily.
“These are not unique to Merlon per se. They are well researched, well-documented behavioural biases, but we believe they exist even in the advent of AI and so forth.”
To hear more from Mr Fraser, tune in to the podcast next week.
Maja Garaca Djurdjevic
Maja's career in journalism spans well over a decade across finance, business and politics. Now an experienced editor and reporter across all elements of the financial services sector, prior to joining Momentum Media, Maja reported for several established news outlets in Southeast Europe, scrutinising key processes in post-conflict societies.
