Lessons from the GOATs of Australian funds management

To be considered one of the Greatest of All Time (GOAT), whatever your industry may be, several boxes need to be ticked: 

1. Sustained excellence: You can't just be good, or even very good. You need to be consistently excellent. 

2. Longevity:You need to be excellent for a long period of time. One-hit wonders need not apply. 

3. You need the respect of your peer group: Game recognises game, so the people operating at the same level need to recognise you as a contemporary.

4. And finally - and this element is often overlooked - you must be humble and willing to learn from your mistakes. As Micheal Jordan famously said: 

I’ve missed more than 9,000 shots in my career. I’ve lost almost 300 games. 26 times I’ve been trusted to take the game-winning shot and missed. I’ve failed over and over and over again in my life. And that is why I succeed.

To share lessons from their careers, we're joined by two of the Australian funds management industry's all-time greats, Catherine Allfrey from WaveStone Capital and Anthony Aboud from Perpetual Asset Management. 

In this episode, they cut through the market noise, highlight some management teams that they particularly like, and share which investment decision really put them on the map. 

They also share some of the biggest mistakes they've made in their 25+ years in the market and, more importantly, the key lessons they learned over that time. 

Note: This episode was filmed on Tuesday 17 October 2023. You can watch the video, listen to a podcast, or read an edited transcript. 

Edited transcript

Ally Selby: Hello and welcome to Livewire's Buy Hold Sell. I'm Ally Selby and today we'll be drawing on the expertise of two of the GOATs of Australian investment management. They'll be helping us cut through all the market noise we're hearing, by providing some of the lessons they've learned from more than two decades in investment management. They'll also be naming some of the leadership teams they're really liking today. To do that, we're joined by the wonderful Catherine Allfrey from WaveStone Capital, as well as Anthony Aboud from Perpetual Asset Management. Like all good stories, we're going to be starting at the very beginning. Catherine, I want to know, what was the stock that really put you on the map at the start of your career?

The stock that put you on the map

Catherine Allfrey: I had to look after, as a young analyst, the telco media space. Similar to today when you went through this speculative period, there was a lot of pressure at that time to invest in these speculative startups. It was Afterpay more recently, but if you go back 20 years ago, it was a company like One-Tel. I travelled around the world, and I looked at the company, and I came back said – I was working at Colonial First State at the time - I didn't think that we should invest in it. The only actual small telco that we invested in at that time was Macquarie Telecom, which is still alive today and kicking. I think, over a period of time, you learn what makes a company tick, and in that case it really did put me on the map, and they gave me the opportunity eventually to become a portfolio manager.

Ally Selby: Over to you, Anthony. What was your greatest call early on?

Anthony Aboud: I was an analyst at what is now UBS. It used to be called SBC Warburg and I was covering the gaming sector. One of the companies I covered was Aristocrat (ASX: ALL) and in about 2000-2003, it was going through a really tough time. The Stock had fallen about 85%, down to 90 cents, on the back of bad acquisition. They were going through growing pains, had a bit of turnover at CEO, and had some uncollectible debts in South America. Things had got pretty bad. Then it turned.

It got professional management; Paul Oneile and Simon Kelly became CEO and CFO of the company. What didn't change the whole time was that this is a good industry to be in. There were only four players in the world. They had good games, there were barriers to entry, and they just needed to get some professional management in, which kept the entrepreneurship of the business but actually managed to add more professionalism. They turned it around. Whilst I didn't pick the bottom at 90 cents, I wasn't too far off that, and the stock was $7 maybe 18 months later.

What about your biggest mistakes?

Ally Selby: You've worked in the industry for 25 years. What was the biggest mistake from that time? When was it, and what did you learn from that?

Anthony Aboud: Plenty of mistakes. Too many to count. Probably the biggest one was McGrath Holdings (ASX: MEA). This is a company which I read the prospectus before meeting the management, and after reading the prospectus I thought, "There's no way I'm going to invest in this. I'm just not even interested." Anyway. Went into a meeting with John McGrath, who was the founder of the business, and walked out bidding for stock and buying, exchanging on an apartment. No, I didn't exchange any apartment (laughing), but we bid for the stock, it was $2.10. It's never seen $2.10 since. We've obviously sold out long ago, but it's now currently trading at 39 cents.

What I learned from that? A few things. First of all, be wary when you've got good salespeople selling you stuff. You've just got to walk out of the room, respect the fact that someone's a good salesperson, and just make sure you just take a cold shower and have a really good think about things. Secondly is, whilst we love founder-led businesses, not all of them work. Finally, understand with business models. Some business models, they might be sustainable businesses, but where do the economics end? Think about stockbroking, real-estate agents or even, I'd say, radio or TV media today. The economics is going to end with the talent. So, that's something that I've learned, understanding that whilst an industry might be profitable, where are the economics in it?

Ally Selby: Catherine, you've got four years on Anthony, what was the biggest mistake you've made during that time? When was it, and what did you learn from it?

Catherine Allfrey: Well, I made plenty of mistakes like all investors do, and like you say, you really do have to learn your lessons. For me, I'd go back to September 11, Australia was the first stock market to open. We were under a lot of pressure. Macquarie was doing a placement at the time at $35. Now, we took that placement at $35 and watched the stock fall to $22 over the ensuing period. What did I learn through that time? Never take capital-raising from an investment banker without doing a lot of due diligence. And Macquarie in particular are very good at timing the cycle. So, when they're raising equity, take a deep breath before you jump back in. They would be my two big lessons from that time. Yes, it was a painful trade.

The most significant change over your career?

Ally Selby: Markets have obviously changed a lot over your career. What's the biggest change for you, and have you adapted your strategy because of that?

Catherine Allfrey: I've been giving some deep thought to this because there are a number of changes. Obviously, interest rates have collapsed, and so that's the big one through my time in the last 25 years plus. The other big change is the rise of the unlisted market and private equity, and their ability to take small companies and grow them. Companies are tending to come to the stock exchange later in their lifecycle, and when they do, unfortunately they're perfectly priced. So, another lesson out there is when an IPO comes in now versus the old days. It used to be there was always a stag of about 10% that would occur, whereas now you get this fully priced IPO with usually one or two bombs in it. They're going to blow up in the next one to two years. So, I’m actually quite highly sceptical of any private-equity listing coming to market.

Ally Selby: Okay, that's a good lesson for investors. Over to you, Anthony. What's the biggest change you've seen in your career in markets?

Anthony Aboud: The biggest change I've seen is definitely the shift to passive. We've seen this really accelerate in the last five years. What we're seeing is, especially pension funds, who are more motivated to get market returns rather than much more above or below, and so not as interested in that high-tracking area. They really want to get just the lowest fees and the market return. That results in a lot of strategies just buying what's already gone up and selling what's already gone down, which doesn't sound like the smartest thing, but it seems to work in momentum-style markets.

Have we adjusted the way we do things? Not really. It's maybe a bit more nuanced, that we respect momentum a little bit more. That might mean dragging your feet a little bit on selling something which has gone up, to make sure you're not going too early and too big a size when we are looking to buy a position. So, it hasn't changed, but it's nuanced exactly how we get in and out of a position.

The best leadership teams on the ASX

Ally Selby: What makes an awesome leadership today? Can you point to an awesome founder-led company and an awesome agency CEO that you really respect today?

Anthony Aboud: Even though he's not the CEO, he's an Executive Chairman, on founder-led we think Solomon Lew at Premier Investments (ASX: PMV) does a fantastic job. It's a founder-led company. It's got Smiggle, Peter Alexander. We feel that what he's bred within the company are at least two, maybe three individuals who could be CEOs of ASX-listed companies. We think it's a business which has kept its entrepreneurship, but has also allowed people within the company to grow. We feel that over time, they'll be CEOs of individual companies within the premier network. We always find that these founder-led companies, like Premier, go into a downturn with a lot of cash, and they'll deploy that cash and lean into the market when things are getting tough.

On agency-style business, you'd have to say Matthew Comyn from Commonwealth Bank (ASX: CBA) has done a fantastic job. He got into the job at quite a tough time. This was right on the back of the Royal Commission into the financial planning industry, and he got into it when they were all out of favour, everyone was throwing rotten tomatoes at all these banks. He's done a good job of balancing shareholders and all other stakeholders at the same time. That's not easy. It's easier said than done. He's balanced the political side, the employee side, and as well as doing a good job for shareholders. It's rare that you get an industry where there are very, very similar businesses, but one business has four or five turns PE higher than the other three. I'm not putting it all down to the CEO currently, but it's a good indication of what the market thinks about him.

Ally Selby: Okay. Over to you, Catherine. What's an agency CEO and a founder CEO that you really like right now?

Catherine Allfrey: From an agency point of view, I would say Rob Scott from Wesfarmers (ASX: WES). I think the Wesfarmers way, in terms of particularly focusing on entrepreneurship at the divisional level, also very strong capital allocation over a long period of time, that business has been particularly successful. But what Rob has recently done is, he's invested in healthcare and spent about a billion dollars of capital in the healthcare part. Plus, he's stepped out into lithium as well with the Mount Holland mine. Those two businesses really are two growth industries, healthcare and lithium, over the next five to ten years in Australia. So, if you have a very solid, amazing business in Bunnings and Kmart, and then you combine it with these niche opportunities, Rob's setting Wesfarmers up for a really good growth trajectory over the next 10 years.

On the founder side, equally amazing is Greg Goodman (of Goodman Group (ASX: GMG). He started that business in a similar timeframe to us in going into markets, 28 years ago. He's taken it from one shed in South Sydney all the way through now to 81 properties globally, and managing extensive partnership agreements. What is exciting about Goodman's, coming out of results, was their data-centre opportunities. So, not only will they be in industrial sheds globally or logistics, they will also be in data centres. What was fantastic was on the result call... you should listen to it... he was equally as enthusiastic as he would've been 5, 10, 20 years ago about the opportunity and growth ahead for Goodman.

Ally Selby: Goodman is truly an Australian success story. Well, I hope you enjoyed that episode of Buy hold Sell as much as I did. If you did, why not give it a like? Remember to subscribe to our YouTube channel. We're adding so much great content just like this every single week.