Last week I had the opportunity to have a discussion with Paul Moore from PM Capital and the advisers within our network. In my opinion, Paul is one of the finest fund managers in Australia and I have had client money invested with him since 2001.
Paul discussed that central to their investment philosophy is being able to identify companies that have reasonable valuations but will also experience growth in earnings, over the long term this has provided superior returns on their capital that has been invested relative to alternatives.
Paul gave us an overview of how he sees of valuation of equities at the moment.
The first point to note was that the valuation of tech companies being driven by Artificial Intelligence was at very high levels. This has reduced over the last month as the darling of the share market Nvidia has lost approximately 30% from its highs.
Paul also discussed the fact that his current portfolio had holdings that were at considerably lower valuations than the overall market (refer to table below). There are always individual opportunities to be found within the large group. So whilst the market as a whole might be expensive there are opportunities available for those who can do the work and identify them.
The S&P500 is trading at a multiple of approximately 22 times and as can be seen by the table below the companies within their portfolio are around half the multiple of expected earnings for 2025.
“The best way to protect yourself against market volatility is to buy well-valued Businesses that have a good earnings growth profile” – Paul Moore
Paul also discussed the influence of Passive investing and the impact he believes it has on markets. According to Morningstar as of the end of 2023, the amount of active assets had been surpassed by passive. Passive is where the funds are usually low cost, highly diversified and usually invest according to the market capitalisation of the market not taking any bets based on macro, valuations or any other inputs and thus getting the return of the market.
Source: Morningstar Direct Asset Flows. Data as of Dec. 31, 2023.
Paul also discussed his analysis of CBA – Commonwealth Bank of Australia which is the largest company on the Australian Stock Exchange valued at around AUD $217 Billion. Therefore it represents around 9% of the ASX 300 meaning that from passive funds invested into Australian shares, 9% ends up in CBA.
Paul compared the valuation of CBA to a similar-sized bank in the UK named Lloyds Bank. This shows that the valuation of CBA is 3x that of its peer.
Given the above from a valuation perspective, it seems in the first instance, buying CBA rather than Lloyds you would need a very good reason to justify it. Secondly, for those that are passively investing in the Australian market nearly 10% of their money is invested in a business that is expensive from a valuation perspective and has had very low levels of growth being only 1-2% over the last 10 years. Note Google parent Alphabet has a current PE of 23 times and its earnings have grown 20% per annum over the last 10 years.
Paul made the point that this is not uncommon for Australian-based companies on the ASX to have a “full” valuation which is why he loves to be able to invest globally into a much broader market that presents many opportunities.
Article by: Robert Coyte, CEO, Shartru Wealth