Soul Patts is axing equities for alternatives amid a worsening economic climate

Late last week, Washington H. Soul Pattinson (ASX: SOL) announced it had axed $1.4 billion in equities during the full year ending 31 July 2023, and warned the market of worsening economic conditions to come.  

The conglomerate - which celebrated its 120th anniversary as a listed company this year - noted it had redistributed much of this capital towards alternatives such as private equity and "structured yield investments" like private credit - both of which are typically uncorrelated to equity markets. 

It comes as the Reserve Bank of Australia keeps interest rates on hold at 4.1% in October, while this week, the yield on 10- and 30-year US Treasuries hit 16-year highs. The last time the yield on Australian 10-year Government Bonds was this high was in 2011. 

Meanwhile, the ASX 200 has erased the gains it has made in the first seven months of the year and is now approximately 1% in the red year-to-date. In comparison, the S&P 500 and the NASDAQ are still up around 11% and 26% since the beginning of the year.  

"We are starting to see rising risk in both equity markets and debt markets," Soul Patts' CEO Todd Barlow told Livewire Markets. 

"I don't know if there is going to be a recession or not, but there is a reasonable chance that there will be - whether it's here or overseas - and that will have an impact on how businesses perform." 

With this in mind, Barlow and his team have cashed up (they are holding more than $900 million in cash) and are looking to take advantage of mispriced businesses that can continue to thrive in any type of downturn. 

Soul Patts has sold off around 4% since the result. However, despite the cloudy economic climate, Barlow believes the conglomerate - which has its hands in businesses such as New Hope (ASX: NHC), Brickworks (ASX: BKW) and TPG Telecom (ASX: TPG) can continue to outperform in dislocated markets. 

"In the last 20 years, the market has been negative about a third of the months. And when the market is negative, it's down 3.5% on average. In each of those down months, Soul's is nearly 2.1% better per month. So we have a really long history of outperformance when the market is negative," he said. 

"Our portfolio today is actually better able to withstand market disturbances than it was historically. We are more diversified across asset classes, and we've got a lot more cash. So I think the next time around we will actually do even better." 

In this interview, Barlow talks dividend sustainability, the investment team's approach to private assets, as well as the risks Soul Patts foresees on the horizon. 

Plus, he also shares why the team is "very bullish on uranium", as well as three future-facing themes Soul Patts has identified as areas of long-term opportunity. 

Note: This interview was recorded on Tuesday 3 October 2023. 

Timecodes: 

• 0:00 - Intro 
• 0:44 - Highlights from Soul Patts FY23 report 
• 1:26 - The board is confident that cash generation and dividend increases can continue 
• 2:05 - Where Soul Patts is seeing opportunity within listed investments 
• 3:24 - How Soul Patts is allocating to small and large-cap equities 
• 3:55 - A better understanding of Soul Patts' investment team
• 4:45 - A deep dive into private equity and structured yield investments
• 6:46 - For investment bankers: What it takes for a business to make the grade 
• 8:25 - What it will take for Soul Patts to put its $911m war chest to work 
• 9:20 - The risks Soul Patts sees on the horizon and the chance of a recession
• 11:04 - How Soul Patts performs during dislocations 
• 12:03 - Three future-facing themes (and how Soul Patts is allocating to these)

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