This hall of famer returned 15% over the past year without tech and lithium. This is how he did it

Fri 21 Jul 23, 2:13pm (AEST)
Chris Kourtis
Source: Livewire Markets

Key Points

  • Markets have weathered the storm, but not for much longer
  • Ellerston Australian Share Fund has generated 15.18% over the past year (keeping pace) and 16.38% over three years (putting it in the top decile)
  • Kourtis is bullish on Santos and bearish on the banks

If you look at today's market in aggregate, things are looking pretty rosy. The ASX 200 has returned 14.8% over the past year, while the S&P 500 has generated 13.40% over the past year and 18.11% year to date! All this comes despite the dark macro picture of sticky inflation and rates that are yet to see a reliable pause. 

But peel back the onion and it's a two speed highway. Tech stocks have gone on a charge, while the rest of the market has struggled. 

Enter Ellerston Capital. Its Australian Shares Fund has generated 15.18% over the past year (keeping pace) and 16.38% over three years (putting it in the top decile). And it's done it without the big tech names that have carried the market.  

In this interview, I sit down with Hall of Fame fund manager Chris Kourtis, Director and Portfolio Manager at Ellerston, to find out how the team have generated that kind of return ex-tech. 

While he's not speculative, he is a contrarian. As a case in point, one of his highest conviction plays is an energy "dog" that the market has largely discounted. Chris also details three out-performers. On some, he's taken profits and on some he hasn't.

He also outlines why he's still bearish on the banks, and why he avoids the ASX's "crowded longs". 

Note: This interview was recorded on July 18 2023. You can watch the video or read an edited transcript below. 

Edited Transcript

Markets have weathered the storm, but not for much longer

Markets have managed to largely buck the dark macro picture they occupy. 

"Contrary to conventional wisdom, and confounding all the pessimists, markets have actually performed pretty well," says Kourtis.

"If you'd asked me nine months ago, I would've expected a worse outcome for equity markets. We've had unprecedented rate rises by all the central banks, and in many ways the real economy has been totally out of sync with global equity markets."

Markets can only weather the pain in the real economy for so long, however. Kourtis expects to see stocks sell off right across the market cap spectrum in the back half of 2023.

"Monetary policy will have an effect with a lag, and it's no secret out there to your listeners that the RBA has aggressively tightened. Yeah, we've had a pause for the time being, but there will be more rate rises globally by central banks, and global growth has slowed."

"And the second half is going to be a really tough half economically, which then sort of flows into earnings expectations."

Consumer discretionary, in Kourtis' view, will lead the sell-off.  "A lot of the retail stocks that have reported recently, they've hit a brick wall."

16% over 12 months

Generating 16% in any market is impressive. Doing it in today's market without tech is all the more so. 

It's a level of volatility and, dare it be said, speculation that Kourtis (a self proclaimed "bricks and mortar guy") is happy to avoid. 

"The WiseTech (ASX: WTC)'s of the world, stocks that really ripped... I mean, that stock was up over 100% last financial year."

"It's just not me, and it's not what my investors expect of me. I've always been a bricks and mortar sort of guy."

So what stocks drove the result? Kourtis offers three out-performers. And he's already taken profits from some of them.

Northern Star Resources (ASX: NST), for one. 

Screen Shot 2023-07-20 at 3.34.19 pm
Source: Market Index

"The stock was 7.50 [last year], it rallied to $14, it's now come back closer to $12."

James Hardie (ASX: JHX) was another. 

Screen Shot 2023-07-20 at 3.35.27 pm
Source: Market Index

"At the start of this calendar year we piled into James Hardie, it had been absolutely smoked. It fell back to sort of 26.50, we've piled into it, it's $40 or thereabouts. Now we're out of the name, see you next cycle, we're gone. We've locked in the alpha, move on. You can't just buy and hold things forever, those days are gone. I can talk about that later if you want me to.

Finally, there's United Malt (ASX: UMG)

"It was bid for by the French, as it turned out the souffle did rise twice, so we're out of that name as well. I'm not going to wait for the 11th hour and 59th minute for the $5 cash to hit my bank account, I've come and gone."

Screenshot 2023-07-21 at 10.15.27 am
Source: Market Index

Avoiding retail and crowded longs

Kourtis has steered clear of the supermarkets (with the notable exception of Metcash (ASX: MTS), the banks, crowded longs and expensive defensives."

 "I'm not in ResMed (ASX: RMD), I'm not in Aristocrat (ASX: ALL), I'm not in CSL Limited (ASX: CSL). Well, that was supposedly a safe bet six months ago. And again, we had sell-side analysts ramming it down my throat with a 300 handle in front of it."

The dog days are over for this energy company

Ever the contrarian, Kourtis likes Santos (ASX: STO), partly because the bulls don't. 

"Last year, under Kevin Gallagher's leadership, delivered record production of 103 million barrels of oil equivalent, a record revenue, record free cash flow of three and a half billion," says Kourtis.

"They returned one and a half billion to shareholders in the form of buybacks and dividends, and not that long ago they announced a new policy, where 40% of all free cash flow will be returned to shareholders in the form of dividends or buybacks."

Importantly, Santos' fundamentals mirror those of its competitors. 

"It's on sort of four times EV/EBITDA. And a lot of global energy companies are on the same sort of metrics, but it's dramatically underperformed its peer group. In calendar 22, Santos underperformed Woodside by over 60%."

And finally, it's built an asset base that's under-appreciated by the market.

"People now forget Santos own Oil Search, so they've got world-class assets. In PNG their share of LNG productions about three and a half, 3.6 million tonnes of LNG. They've got G-LNG on Curtis Island in Queensland. They've got the long in the tooth Cooper Basin, they've got Bayu-Undan. So they've got a very diversified domestic asset base coupled with an export LNG business, that I think the market under appreciates."

Still bearish on the banks

Earlier this year, Kourtis made waves on this website arguing that the Big Four are the "last place you want to be." He argued at the time that consensus forecasts assumed that NIMs would stay high and that the fixed rate rolloff would be more benign than expected. In his view, that simply didn't stack up.

Is he still bearish?

"Yeah, I am. That said, banks have performed broadly in line with the market last financial year, with a return of around 14% or whatever the number was," Kourtis told me. 

But he now adds they're not walking in lockstep. 

"Bank of Queensland (ASX: BOQgot smoked, that was the clear under performer, National Australia Bank's (ASX: NAB) underperformed, BOQ underperformed the market by nearly 30%, that's a big margin. NAB was the majors the worst performer and underperformed. And then you had Westpac (ASX: WBC) , ANZ Group (ASX: ANZ), and Commonwealth Bank (ASX: CBApretty much performing sort of 15-odd percent for the year, in line with the market. Now what has surprised me is just how resilient they've been. And I think I said earlier, monetary policy will have an impact but with a lag. And we're going into that period now where I think there's something... And I think I talked about it last time, there's $230 to $240 billion of loans that are moving from fixed to variable in the current half we're in. The supposed mortgage cliff."

Kourtis also points out that the share prices of the banks haven't done much in a decade or two. 

"ANZ's share price is the same it was 15 years ago. The only one that's added value, real shareholder wealth, has been CommBank, which has delivered over the longer term." 

Crunch time for the banks will be when rates bite and bad and doubtful debts come to the fore, if they even do. 

"The cycle's just starting to play out now. And I suspect what you'll see is BDD charges, write-offs will kick up to about probably 25 basis points.

This article was first published for Livewire Markets on Friday, 21 July 2023.

Written By

David Thornton

Content Editor

David is a Content Editor at Livewire Markets and Market Index. He currently hosts The Rules of Investing, a half hour podcast where he sits down with leading experts across equities, fixed income and macro.

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