Elston's McKie names a handful of ASX global winners (and 2 high-conviction stock picks)

Note: This interview was taped on Wednesday 18 September 2024.

Despite the rise of passive investing and the concentration of performance in a handful of stocks, there remains significant opportunity for active managers according to Elston Asset Management co-founder and portfolio manager, Andrew McKie.

“I still think that you've got plenty of opportunities as an active manager”, says McKie, before going on to highlight two salient reasons why. 

Firstly, the performance of the top 10 companies changes significantly from year to year, notes McKie, adding “If you look at last year, the banks do well, resources do poorly. If you look further back, you'd say CSL was a hero of the index at 14% of the index and then has de-weighted from there.

"Even within the larger companies, you can get quite a difference in relative performance year to year", says McKie.

The second reason for optimism from an active manager’s perspective is that outside of the top 10, there are some high-quality businesses that, at the moment, are perhaps getting overlooked.

"There are some fantastic businesses and it's quite a big active position in the portfolio when you get outside of that top 10. 

"I think there's a fundamental opportunity when you look a little bit broader from that concentrated index, the passive equation", says McKie. 

The Elston way

Elston runs both multi-asset and Australian equity strategies, with their flagship Australian Large Companies portfolio focusing only on the ASX 100 and maintaining a 75% allocation to the ASX 50. 

They adopt a style-neutral approach, which allows them to balance the characteristics of both growth and value investing, which they believe provides investors a smoother ride over the long term. 

Hunting for opportunity on the ASX

Whilst it seems like eons ago, McKie’s take on reporting season was that the consumer remains resilient, and cost inflation is being driven by wages.

That all leads to the third theme, “which is cost out and productivity - particularly investment in technology to drive technology-based productivity gains", says McKie. 

When asked about the sustainability of cost-cutting measures in companies, McKie expressed that while cost reduction is finite, the integration of automation and AI is ushering in a new era of productivity gains.

This transition is particularly relevant for large companies with a significant white-collar workforce engaged in low-value tasks. McKie cited the Commonwealth Bank's (ASX: CBA) move towards AI to replace certain operations as a reflection of this trend.

Banks and miners

Focusing on the two dominant sectors in the ASX, McKie conveyed a cautious outlook on banks, saying “It’s pretty clear for us; we don’t want to be overweight the banks at the moment”.

Concerning the miners, particularly iron ore producers, McKie talked about the need for higher-cost suppliers to withdraw from the market to stabilise prices.

“Commodity companies boom on demand and they bust on supply”.

“We really need supply to come out of the iron ore market. The higher-cost producers are starting to withdraw supply. 

"We think it [weakness] has got a little bit further to play out in resources, but that's our general view at the moment”, says McKie

How are you investing?

In terms of risk allocation within portfolios, McKie noted a significant shift in Elston’s stance on healthcare, moving from underweight to overweight for the first time in over a decade.

This decision has been driven by relative valuation opportunities and favourable demographic trends toward aging populations that necessitate increased healthcare spending.

The other key areas of focus is on what McKie calls “global winners” – that is, ASX companies that are winning not just in Australia, but all around the world.

And while Australian corporate history is littered with international expansion failures, some of them quite spectacular, McKie points out that we now have “a lot of great Aussie businesses that are doing exceptionally well overseas”.

McKie adds that in some jurisdictions, rates and inflation are coming down, and they’re at a different point in the cycle, which is providing benefits to Australian companies and investors.

“You're also gaining low currency [benefit], so US dollar earnings. There are some great Aussie winners in large companies, and that's where we want to be at the moment as well”.

When pressed for examples, McKie cited Aristocrat (ASX: ALL), Amcor (ASX: AMC), Brambles (ASX: BXB), Macquarie (ASX: MQG), and Car Group (ASX: CAR).

Stock picks

McKie presented two high-conviction stock picks: Challenger Financial (ASX: CGF) and The Lottery Corporation (ASX: TLC).

Challenger stands out for its growth in annuities, particularly as interest rates rise and more individuals transition into retirement. 

Conversely, Lottery Corporation, with its dominant market position and increasing digital engagement, showcases strong potential for operational efficiency and revenue growth.

Looking ahead

McKie identified the main risk as the Reserve Bank potentially over-tightening interest rates, which could stall economic growth. However, he also sees significant opportunities in companies that invest in automation and AI, leveraging their existing customer bases and data to enhance productivity. All of these insights and much more can be found in this video Q&A. 

Learn more

Elston Asset Management's investment solutions range from a core Australian Equities Large Cap model through to full risk based multi-asset class models. To find out more, visit their website. 

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