Katie Hudson: It has never been a better time to be a female investor

While the finance industry has long been considered a "boys club", things are finally changing. In fact, according to Yarra Capital Management's Katie Hudson, it has never been a better time to be a woman in investing. 

She believes the finance industry has finally woken up to the benefits of "differentiated thinking", particularly as the "insights from having women as part of an investment team are now better understood." In addition, clients are increasingly demanding greater diversity in teams, and women are in demand - as they should be. 

Describing her career path from chartered accountant to analyst, and her current role as head of Australian equities research, Hudson notes her journey has been anything but traditional.

“It has not been linear, with the birth of two children, career breaks and part-time work all part of the journey," she says.

Those non-linear aspects of Hudson’s career journey are all too often overlooked. Giving birth to, and raising, children make high-powered finance careers all the more challenging. But they also improve the rich tapestry of any company culture – which is something increasingly recognised by many of the world’s leading organisations today.

Hudson counts herself as fortunate to have worked with “terrific teams” that understood the need for flexibility, and that there are numerous ways to deliver strong outcomes. And she believes the finance industry is moving in the right direction to further improve its diversity.

In the following interview, Hudson discusses the challenges she has faced and overcome, delivers some advice for women starting out in finance, and also offers some investment ideas.

This is part of Livewire’s ongoing commitment to feature more female chief investment officers, portfolio managers and analysts in our articles, podcasts and videos. As part of our International Women's Day coverage, we are running a dozen profile interviews with some of the country's established and up-and-coming female investment leaders.

Katie's profile

• Name: Katie Hudson
• Firm: Yarra Capital Management
• Years in the industry: 20-plus
• Speciality: Australian equities
• Biggest personal portfolio holding: UBS Yarra Australian Small Companies Fund
• One thing very few people know about you: As a member of the Hawthorn FC board, I am a hugely passionate advocate for the AFLW
• Your guilty secret: Haigh's chocolate on a Thursday afternoon at Yarra

Can you take us through your journey to where you are today?

I started my career in chartered accounting before becoming an analyst. With the benefit of hindsight, it was a great foundation for investing given the importance of understanding financial statements and all the tricks to watch out for.

From there I moved to the buy side as an equities analyst at a broking firm covering small companies (back when CSL and Cochlear were small caps!) and then a number of other sectors in the large-cap space.

After a number of years on the sell side I moved to the buy side and have been part of the same team, first at Goldman Sachs Asset Management and then at Yarra Capital Management (following a management buyout) for nearly 15 years. I have been the portfolio manager for our Small Cap strategies for seven years, and am a director and Head of Equities Research.

While that sounds like a traditional career path it has not been linear, with the birth of two children, career breaks and part-time work all part of the journey.

What challenges have you faced, if any, in this journey? And what’s your advice to emerging female talent starting out?

Most importantly, this is a fantastic industry for women and it has never been a better time to be a female investor. The benefits of differentiated thinking and insights from having women as part of an investment team are now better understood. Clients are increasingly demanding diversity, and women are in demand as investors.

Like most jobs, this is an outcomes-driven business, although unlike most it is very easy to measure your impact given portfolio performance is measured daily. However, there are many ways to deliver these outcomes and I would encourage anyone to find the way that works for them, their families, and their team, without feeling the pressure to follow historical models of success.

I have been fortunate to work with a terrific team who have understood that, at various times with a young family, flexibility was important and there are many ways to deliver strong outcomes. The rest of the industry appears to have made that connection during COVID, and I am confident that will support improving diversity across the industry.

For any emerging fund manager, the most important thing is to work with talented investors. Learn from their experience, draw on the parts of their approach that makes sense to you, observe others, read widely and develop your own style.

What is the core of your investment philosophy? Did you have any mentors who have shaped your strategy along the way (and what did they teach you)?

I was extremely fortunate early in my career to work in the research department of JBWere (later acquired by Goldman Sachs) which was the number-one-rated research team in Australia over many years. The research disciplines of thinking and acting long-term, understanding true free cash flow generation and the importance of understanding capital have been important influences on my investment philosophy.

A deep knowledge of boards and management, understanding the governance environment and doing the right thing were at the heart of how the team operated back then and were the foundations of what we now call ESG. As a young analyst, I will never forget being asked by the chairman whether I knew who was on the board of a particular company. I didn’t know, but that was the last time in my career I didn’t know the answer to that question.

While markets today are more short-term and momentum driven than ever, it means the inefficiency for long-term investors to exploit is greater and the opportunity to use those early lessons learned is even more relevant today.

What’s your outlook on markets over the year ahead? What risks do you feel have not yet been priced in?

Our team undertakes more than 2,500 company meetings per year and the data points we are observing suggest that inflation headwinds are moderating – hard and soft commodity prices have fallen, transport costs have declined to near pre-COVID levels, supply chains are normalising and companies are de-stocking (which will also be deflationary).

The one area which is harder to predict, and may prove to be sticky, is labour rates. Recent conversations with company management teams through reporting season suggest that 5% wage growth is the new normal and will be the key challenge to inflation targets being achieved.

Following the sharp rally which kicked off 2023, it is a time to be more selective. The focus through February has been on the reporting season and the acceleration in the earnings downgrade cycle. Given this is the most anticipated economic downturn, with the longest lead time, it begs the question of why investors are not getting earnings expectations right.

Earnings forecasts are typically a lag indicator (which is why you don’t wait until the earnings cycle bottoms before buying). Amongst the earnings downgrades are businesses that will prove to be resilient, and demand impacts which will prove to be temporary (such as in pathology and radiology). 

The volatility and multiple turning points in market sentiment can be difficult to navigate, but there are opportunities for investors prepared to stay focused on the long-term horizon.

Where are you finding the most opportunity right now?

The opportunity in small-cap stocks looks really compelling after the risk-off selldown in 2022. Small Cap Industrials are trading at more than a 23% discount to Large Cap Industrials, which is a 20-year low. Against this backdrop, we think the macro environment is also supportive with the Australian economy a relative winner compared to offshore (US, UK, Europe) and the $A likely to head up. Both these factors are supportive for small caps which typically have more domestic exposure and are more likely to be net importers.

We have been adding risk over the last few months, buying growth stocks (technology, financials and other sectors) which sold off hard in 2022. Post the period of the economic transition underway (whether that is a hard/soft landing or recession) we expect to be operating in a lower growth environment. Companies with the ability to take market share and compound earnings growth will be important parts of our portfolios.

There are some good businesses with cyclical volume characteristics where there is still downgrade risk, where we have been buying into weakness or post-downgrades during reporting season.

In contrast, there is a surprising (even alarming!) number of sectors we believe are still over-earning, which require caution. These include:

• banks (a combination of high net interest margins and zero bad debts is unlikely to be a sustainable combination),
• retailers (sales are still above the long-term trend, and margins are elevated from less discounting),
• agriculture (following three years of near-perfect weather conditions and strong commodity prices),
• housing construction (government fuelled housing schemes during COVID drove a sector that didn’t need more stimulation), 
• energy (elevated coal, and gas prices courtesy of underinvestment, transition delays and the war in Ukraine) and
• health insurance (surgeries and claims still well below pre-COVID levels, benefiting margins). 

We would prefer to see earnings normalise before stepping into these parts of the market.