The 3 key factors for this successful stock picker (and 2 ASX stocks he likes)

Note: This interview was recorded on Friday 15 November 2024

Glemore Asset Management founder and Chief Investment Officer, Robert Gregory, likes to keep things simple. 

At the core of his investment philosophy, he's looking for quality, established, and cash-generative businesses with a product or service that resonates with customers and strong management. 

Beyond that, he's looking for businesses that, once he's analysed them, have the ability to generate earnings in excess of what's priced in. 

For a lot of companies, over say the next 12-15 months, what the company is going to earn is relatively well agreed on by the market.

But often in those outer years, that's where it can differ. So if you can build a conviction on a stock that it can do a lot better than what's priced in that medium-term timeframe, that's where you can add a lot of value as a fund manager.

In the following episode of The Pitch, Gregory shares a little more about the process that has made the Glenmore Australian Equities Fund one of the best performers in its class over the past seven years, as well as a couple of stocks that he has liked over the journey.   

Edited Transcript

Chris: The strategy has delivered strong performance over the journey and in all market conditions, and oftentimes when small and mid-caps haven't been in favour, how have you managed to achieve it?

Rob: Firstly, there's a strong focus on quality companies, established businesses, cash generative businesses.

There was a period a few years ago when equity markets were going through a really challenging period, and some of the small to mid-caps that weren't cash-generative to support their business model really struggled. So that’s always been a big focus, on established businesses.

Having said that, being really disciplined on valuations - so trimming or exiting stocks that have become quite fully valued - is important. Particularly in that small to mid-cap part of the ASX, the companies can become quite fully priced quite quickly. You have to be quite disciplined at continuing to rotate funds out of the more expensive stocks, into more attractively priced stocks.

Also, the Fund’s mandate allows it to invest in small, mid, and large-cap stocks, so that's probably been helpful at various points along the journey.

Rob, a question without notice, it would be remiss of me not to ask. You're talking about having the discipline to exit or take profits when things are fully valued. We've got a stock market that's at all-time highs. Are you finding in the current market environment that some positions are becoming fully valued and you have to treat them that way?

Yeah, there are.

In what I would call the quality growth part of the ASX, there are a number of companies that, yes, they've performed really well over the last 12 to 15 months. 

So I think it's a case-by-case situation, but there are certain instances of some of the stocks that are quite fully valued at this point.

Talk to me a little bit about your process. How do you go about finding opportunities and what are maybe two or three key criteria that every company must have to get into your portfolio?

The initial point is that I’m constantly scouring the market for new ideas. Having worked for 20 years in the markets, you start to have, even subconsciously, the type of company you're looking for in terms of quality of company management, and earnings growth potential.

So within that, there's just this constant scouring of the market, listening to conference calls, investor days, and reporting season. You listen to a lot of conference calls, reading as much as you can about all the companies that are out there. There's a lot of initial screening of companies and you have to love the job to be doing that. That's something I enjoy.

• A product or service that resonates: With the three factors, I guess the first point would be having a unique product or service that really adds value for the customer base. At the heart of every grade investment, it's going to have a product or service that really resonates with its customer base. That’s the first point.
• Do the analysis: Point two would be, after doing a lot of analysis into the divisions of the business, the earnings outlook, and the industry that it operates in, having the ability to generate earnings above what's priced in. Ultimately, for a lot of, companies say the next 12-15 months, what the company's going to earn is relatively well agreed on by the market. But often in those outer years, that's where it can differ. So if you can build a conviction on a stock that it can do a lot better than what's priced in that medium-term timeframe, that's where you can add a lot of value as a fund manager.
• Good management: The last point would be management. It goes without saying that a company has to have good management. Stable management is a huge positive for me, not just at the top level of the CEO, but even a lot of the really high-performing companies on the ASX over the last five to 10 years, that senior management team below the CEO is quite stable, and it just indicates that the company is performing well and that the people are happy working there.

Another follow-up question, if I may. Just on that second point where you're talking about looking beyond the next 18 to 24 months, which like you say, it's relatively well known or agreed to by the market. Going beyond that, how much of that is science and how much of that is art? You've been doing this for a while now and you've got plenty of experience. Have you built a robust quantitative process and then how much of it is just your knowledge and intuition?

It's a great question. It's probably a combination of quantitative and qualitative. I mean, the further you go out in terms of trying to forecast it for a company, the harder it is. However, that is where you can add quite a lot of value.

So often it's more about understanding the product, the product fit, the addressable market, and what scope it is for the company to deliver better-than-expected earnings in years 2, 3, 4, and five. So I would say it's a combination, but that's certainly something that's a big focus.

A lot of people were saying that 2024 was the year for small and mid-caps. Has that come to fruition, in your view, and what are you hunting at the moment?

Yeah, well, I think mid-caps have done very well. I think perhaps the small caps are still struggling a bit. They probably need interest rate cuts to really get going for their earnings base. A lot of the small to mid-cap quality growth companies have rerated quite significantly.

The beauty of the ASX is that there are often pockets within the pockets of the ASX where companies have just performed particularly well. 

They might've had a period of investing in a product that they've released to market or they might've had a period of management instability, and that's just coming to an end. So whilst there are hundreds and thousands of companies out there, to generate really good returns for the portfolio, you really only need probably 10-15 key ideas within that. And so often it can be quite idiosyncratic that even within a relatively fully valued market, you can still find high-conviction ideas.

Just very quickly before we get to a couple of stock ideas, how many stocks are typically held in your portfolio?

It's typically around 25 to 35.

Let's get into some companies now over the journey. Which stock has contributed most to your exceptional performance over the life of the fund? It doesn't have to be one that you're still holding now.

The biggest contributor would be Pinnacle Investment Management (ASX: PNI) - it would be well-known to a lot of the viewers I'm sure.

Essentially the business model of Pinnacle is they take an equity stake in a boutique fund manager and in return, they essentially do everything except the investment function.

So they'll do the general business operations, the unit pricing, dealing with investors and that’s the really big value add.

That allows a fund manager to purely focus on their investment research. So it's a really positive, beneficial relationship for both parties. From Pinnacle's point of view, they're a specialist fund marketer, so they've got very high levels of expertise in helping fund managers grow their funds under management.

That might get them on platforms, get them rated by research houses, and get them in front of the key decision-makers to win flows. It's a business model that's fairly simple, but it just makes sense. It solves a problem for the customer. It's a "one plus one equals three" situation. And I would also add that Pinnacle has very good management. So other companies in Australia do a similar business model to Pinnacle, but no one's been as successful. I think Ian Macoun, the CEO, has to take a lot of credit for building a really strong culture of helping these boutiques grow and grow their thumb in a stable environment.

We have had Ian on Livewire a couple of times. He's an exceptional operator. Do you still hold that one now?

I do.

Let's talk about another stock. Your current longest-held position in the portfolio. What's that one?

The longest-held one would be Hub 24 (ASX: HUB). That’s a financial platform business. Essentially it's a piece of software used by financial advisors and their clients to present the client's financial investments in a very easily viewed and informative way.

It also helps the advisor create financial reports and tax reports for each financial year. So it's a critical piece of software for their financial planner.

The key attraction back in 2017 was the product was getting a lot of traction from the financial advisor community. As part of the research I did into the company, I met with a lot of financial planners and they were very positive about the product, and how it was making their job easier, and more scalable to be able to service more clients.

Hub, and to that matter Netwealth, have benefited from a lot of their competitors being larger incumbents, which in a lot of cases the platform business is one part of a much bigger business. Whereas Hub and Netwealth benefit from being their specialist platform providers, very much focused on the business.

The other thing I'd call out for Hub is just a very well-run, very good culture of listening to the customer base and addressing needs and just constantly improving the platform in terms of valuation. Funnily enough, even back in 2017, the stock - optically at least - was quite expensive, trading on a P/E of around 25-30x. But, as we know, sometimes the multiple can be a bit of a blunt tool for these high-quality growth businesses. So it's certainly one that it's a very scalable business and management's just done a fantastic job.

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