Why Macquarie Group is a high conviction position in The Montgomery Fund

Both Australian Eagle and Montgomery have had a position in Macquarie Group (ASX:MQG) for some time. The positive view on the company would seem obvious given the heavy emphasis on first identifying quality businesses in both Australian Eagle’s and Montgomery’s investment process.

However, while a holding of two different investors may be the same, the rationale behind holding a stock is almost always viewed from differing perspectives. In terms of the Australian Eagle process, we try to determine, not just the quality of the company, but the changes that are evidently taking place that may drive an improvement in earnings growth and/or quality of those earnings.

In common with a number of stocks that have been in our portfolio, this is the second time we have taken a position in Macquarie Group, with the first position exited prior to the GFC. This time around, our conviction levels and the portfolio weight have both increased significantly due to the successful deployment of capital into its “Green Bank”. A deeper analysis of Macquarie Group’s history provides some helpful information for Australian Eagle’s thesis. After exiting our initial holding in 2007, our second entry occurred in 2013 when Macquarie spun out its holding in Sydney Airport to recycle this investment into less capital-intensive but higher-returning assets. This redeployment of capital confirmed management’s willingness and ability to meaningfully adjust the company’s portfolio into higher returning exposures. The change in corporate focus and subsequent improving Return on Equity (RoE) metrics provided us with the improvement in quality that we needed to see for the stock to command a position in our portfolio.

In recent years, Macquarie has become the market leader in infrastructure projects for both financial advice and as a fund manager. The company’s growing infrastructure expertise coupled with an increasing global focus on energy transition investments meant that the acquisition of Green Bank in 2017 was likely to support an acceleration in earnings growth.

The trigger, that confirms the positive change, to increase the stocks portfolio weight came from numerous pieces of evidence. In 2020, the company raised $1.7 billion in equity to partly fund 250 green infrastructure pipeline deals. By year-end, an additional $20 billion was raised in new infrastructure Funds Under Management (FUM) and the group CEO was one of the few global banking CEOs handpicked to speak to world governments at an international conference about financing the energy transition. These data points confirmed Macquarie’s strategic pivot towards energy infrastructure investments could potentially generate an additional and growing earnings stream.

After the recent first half results announcement in October 2022, the company now has over $30 billion in committed funds management equity awaiting deployment. This means Macquarie’s Real Asset FUM has the potential to grow by 20 per cent as deals are consummated. This is further evidence that the structural nature of energy transition infrastructure spending supported by international government policy is expected to support a stronger medium term earnings growth profile. Such tailwinds, we believe, should underpin medium term share price outperformance.

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