Fund Manager

This fund manager would invest $10,000 in these three "superior quality" stocks

Mon 24 Jul 23, 9:50am (AEST)
Untitled design - 2023-07-19T102925.750
Source: Livewire Markets

Key Points

  • Global equity markets are currently at a fair valuation, but there are still promising investment opportunities for those willing to take a long-term perspective
  • Swell Asset Management prioritised three crucial considerations when selecting the three assets for this experiment: superior quality, intrinsic demand, and comprehension of the businesses
  • CIO Lachlan Hughes selected Intercontinental Exchange, GE Healthcare and Microsoft as his three $10,000 ideas

How many times have you heard the words "artificial intelligence" in the last six months? Probably too many to admit (or in some cases, care). But the reality is that AI hopes have fuelled the US stock market in a first half that was meant to be dour. And depending on what you read, that first half outperformance from American big tech stocks is here to stay.

"We believe overall the tech sector will be up another 12%-15% in the second half of this year led by software and the chip sector with Big Tech remaining the "torch bearer" for this tech rally continuing to heat up," writes Dan Ives from Wedbush Securities. 

And in contrast:

"While individual stocks will undoubtedly deliver accelerating growth from spending on AI this year, we do not think it will be enough to change the trajectory of the overall cyclical earnings trend in a meaningful way," writes Mike Wilson from Morgan Stanley. 

One investor who knows all about what it's like to ride the highs and lows of the US technology cycle is Lachlan Hughes, CIO at Swell Asset Management. Swell's flagship Global Fund returned a lazy 42% in the last financial year (with almost all of it occurring in the second half). Four of its top five holdings are from the mega-cap tech stocks. 

But with valuations this high, does Hughes still want to get in?

Expert Insights EDM (42)
Lachlan Hughes, CIO at Swell Asset Management

To find out, Hughes is stepping up to become our latest entrant in Livewire's new mini-series The $10,000 Idea. The series aims to find out how Australia's leading fund managers would invest $10,000 in fresh capital if they had it right now.

Hughes will be faced with the same two thematic questions around valuations and the investment process. And as with the first example, he can nominate up to three assets. Finally, any cash that doesn't get used goes into a term deposit fetching a 4% yield. 

What's your read on market valuations currently?

Global equity markets typically maintain a range of reasonableness around their valuations, with companies fluctuating slightly above or below their worth. However, during extraordinary times, such as a financial crisis or a pandemic, these markets can significantly deviate from their typical value bounds. 

Currently, we perceive the market to be at a fair valuation, yet there exist promising investment opportunities for those willing to take a long-term perspective. A timeless investment adage asserts that time proves to be a trusted ally to well-managed businesses while posing a threat to subpar ones. 

How did you pick the assets you did for this experiment?

When tasked with the selection of these companies, we prioritised three crucial considerations. 

  1. We sought businesses of superior quality, characterised by a distinct and defendable competitive edge, or 'moat', that can endure the passage of time. 

  2. We ensured these companies exhibited intrinsic demand, regardless of the macroeconomic climate, thereby sustaining revenue growth amidst challenging economic conditions. 

  3. Lastly, we placed importance on our comprehension of the businesses, strongly advocating that investors should invest in ventures they fully understand, rather than getting swept up in investment hype.

Swell's $10,000 Ideas

Asset

Stock Code

Allocation (%)

Intercontinental Exchange

NYSE: ICE 

35%

GE Healthcare

NASDAQ: GEHC

25%

Microsoft

NASDAQ: MSFT 

40%

The case for Intercontinental Exchange

Intercontinental Exchange (ICE) is a global operator of exchanges and clearinghouses that facilitates trading in a wide range of financial and commodity markets. Founded in 2000, ICE has emerged as a leading player in the financial industry, offering a diverse portfolio of products and services to market participants worldwide.

It’s not dissimilar to a bustling farmer's market, but instead of cabbages and apples, we're dealing with futures contracts and equities. 

Now, why should you care? Because much like our hypothetical farmer's market, the demand for these services tends to hold steady, even when the world around us is unpredictable. It's like being the owner of the marketplace instead of worrying about whether your tomatoes will sell. And it’s why its CEO Jeff Sprecher calls it an “all-weather company”.

In addition, Intercontinental Exchange is currently working to revolutionise the mortgage ecosystem through a series of strategic acquisitions. One such acquisition is of Black Knight, a key player in the mortgage space. Although a decision from the FTC is still pending, we are of the opinion that the acquisition will proceed following the divestiture of Optimal Blue (a subsidiary of Black Knight).

We view the resolution of any remaining concerns related to the Black Knight acquisition as a favourable development for Intercontinental Exchange, regardless of the deal's eventual outcome.

The case for GE Healthcare

GE Healthcare, a former subsidiary of General Electric (GE), is a 130-year-old startup that recently completed its spinoff from its parent company and began trading on the NASDAQ this year. GE Healthcare focuses on medical imaging, diagnostics, and bio-manufacturing.

There's a saying in investment circles - "The world will always need healthcare" and it's absolutely true. As much as we all love superfoods and the latest fitness trends, sickness and disease are an unfortunate reality. And GE Healthcare stands at the forefront of fighting these challenges with technology.

GE Healthcare has a worldwide presence, functioning in over 160 nations, supported by a robust team that comprises more than 10,000 sales experts, 8,500 field engineers, and has its manufacturing base spread across 43 locations in 17 different countries. The surge in the adoption of precision healthcare is driving the demand for innovative health services, and an aging population further propels the potential for revenue growth.

GE Healthcare is also a spinoff, and one of super-investor Joel Greenblatt’s favourite types of investments. In fact, we wrote about the man and his investment strategy in 2018: A first-rate business, led by a dedicated management team and shedding the constraints of the industrial behemoth GE, the company presents an attractive prospect for investors with a long-term perspective.

The case for Microsoft

Finally, market stalwart Microsoft is a company that we have owned for 8 years, and whilst the stock has increased more than 7x since this time, we continue to be sanguine about its prospects.

Satya Nadella, CEO of Microsoft, emphasised the role of digital technology in driving economic growth. He believes that every industry and every organisation will have to transform itself with digital technology. Microsoft's mission is to empower every person and every organisation on the planet to achieve more, highlighting the role of their technology in productivity and economic growth.

Microsoft provides the fundamental structure upon which other systems, applications, and technologies are built and operated. This is best exemplified by its operating systems, Windows and its cloud platform Azure. These platforms create an ecosystem where each piece benefits from the other and create a network effect that enhances Microsoft’s overall value proposition. 

Their expansive partner network comprises over 400,000 global organisations and generates eight dollars for every dollar Microsoft earns. This partner network creates a defensible moat and is under-appreciated by the market. Lastly, we are of the view that Microsoft is strategically positioned to reap significant benefits from the ongoing digital transformation across all sectors in the next decade.

This article was first published for Livewire Markets on Sunday, 23 July 2023.

Written By

Hans Lee

Senior Editor

Hans is one of the Senior Editors at Livewire Markets and Market Index. He created Signal or Noise and leads the team's coverage of the global economy and fixed income markets.

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