Marcus Bogdan, Portfolio Manager of the Switzer Dividend Growth Fund (Quoted Managed Fund) recently spoke to Peter Switzer on Switzer TV to discuss what’s going on in the US, recent changes made to the portfolio and his thoughts on some stocks he has been keeping an eye on.

Watch the full interview here:

Video Transcript

Peter Switzer (PS): Joining us now is Marcus Bogdan of Blackmore Capital, who manages the Switzer Dividend Growth Fund. I’m keen to hear what he’s thinking about the selloff we’ve seen today on the market. Marcus, good to see you.

Marcus Bogdan (MB): Good morning, Peter, good to be here.

PS: The markets just opened while I’m talking to you, and we’ve seen what’s going on in the US. My reaction this morning was it looks like a bit of an over-reaction. Okay, Walmart’s had an ordinary report, but Home Depot had a good report. Now Target comes out with a bad report, and sure, I think it tells us that in the March quarter, inflation was bad in the US, but we don’t know what it’s going to be like in this quarter and going forward. What’s your feeling? Do you think this is a sign that there’s now going to be another big leg down for US stocks?

MB: Well, I think it highlights just the nervousness that the market has got at the moment in term, and that’s been exhibited by the volatility, the nervousness around the extent of how much the Federal Reserve and central banks will have to push interest rates up higher to stem this persistent inflation, and whether that will be effective or not. And I think the secondary issue is just on the trajectory of earnings, both in the US and in Australia. Our universe is Australia and the earnings trajectory in Australia and the underlying economy is still very sound. We have had a significant de-rating in the valuation of both the US market and the Australian market. Australia’s valuation price earnings ratio has fallen from a peak of just over 18 times to today, to around 14 times, which is around the 30-year average. So, I think a lot of it is now starting to be priced into the market, but I do see that we could be still skewed towards further downside risk, but I do now start to see as long as the economy remains sound, that there’s a level of attractiveness coming in into some of these valuations.

PS: The interesting thing is Target and Walmart and other consumer staple and discretionary businesses have had inflation imposed upon them because of oil price rises that have been related to the Ukraine war, and we also know that China’s lockdown hasn’t helped them as well. In three months time, for example, if China’s out of lockdown, one part of that inflation pressure will be, you know, coming down, and hopefully the Ukraine war might be over inside at least six months, and that’s another one, which means it’s not unreasonable to believe that the inflation that was serious in the March quarter becomes increasingly less serious over the course of this year. You think that’s an unreasonable expectation without me saying it’s going to be accurate, but it’s not unreasonable, is it, surely?

MB: I think what is being reflected now is just the reality on the ground. I mean there are higher costs and then companies are trying to pass that through to the end consumer. What you are seeing with Target in the US and Walmart is that they are trying to protect the consumer to some point. In terms of the inflation outlook, I think there is a level of persistence and I think it would be very ambitious that by the end of the year that they would get back to their target range of around two percent. I think that is too low and I think you are seeing the persistence of higher energy prices. The concern there are just around supply, and I think a longer tail issue, what we’re seeing now is the persistence of higher food inflation. And that could be offset more broadly by a reduction in spending by consumers, but I do think the risk is that we continue to see high, high inflation, maybe not at the levels that we’re seeing today. So that is really important in terms of how we’re positioning the portfolio in terms of the types of companies that we want to own in this type of environment.

PS: Let’s hope that I’m more right than you. Not because I want to be right, go higher. I think the argument you put forward has a lot of merit. My argument wrestle on no more… Lockdowns disappearing in China and the Ukraine war ending, and they maybe will be very big calls, it might take a lot longer. Let’s go to some of–

MB: And I hope you’re right as well, Peter, rather than mine.

PS: All right let’s go to some of your changes to portfolio. I’ve got here that you’ve reduced your exposure to Healius and you’ve added Atlas Arteria, ALX. Tell us why.

MB: So, Healius was a terrific stock that we held through the pandemic. It was one of the few healthcare stocks because they’re a pathology company that benefited from PCR testing. Throughout the pandemic, you saw over 100% uplift in profits in that period of time. We think that those levels of elevated testings will diminish over time. The company is reaching sort of peak earnings, so we’re taking advantage of the higher price that we’ve enjoyed. We’re allocating capital to Atlas Arteria, which is a toll road operator in both Europe and the US. It provides a very attractive dividend yield for our investors. Obviously, it’s an income fund, we want to make sure that we have really attractive levels of dividend levels for our investors. By taking some profits out of Helius and putting it into Atlas, we’re actually increasing the overall dividend yield of the portfolio.

PS: Okay, now, a company that I really like, you have a view on Goodman Group, which provide a recent trading update. What’s the story there with Goodman?

MB: Yeah, we like Goodman. They recently presented at the Macquarie Conference and like the broad spectrum of property stocks that are listed, there’s been a significant selloff, a selloff of between 20% and 25%. And now we’re starting to see some value, particularly in Goodman, because of the ongoing outlook and the demand there for logistics and distribution centres globally. And that’s been reflected in an upgrade in their earnings. They were previously… Well, at the beginning of this financial year, they thought that earnings were going to, or they forecast earnings were going to grow to 10%, they upgraded that to 20%, and then earlier this week, they’ve increased that again to earnings per share growth of 23%. And that is an outstanding result, and it also just reflects the strength in the underlying franchise of Goodman.

PS: Yeah. Goodman has a whole lot of industrial parks and anyone who hasn’t seen a Goodman name outside of industrial park obviously never goes for a drive, but they had been advantaged by the Coronavirus’ ability in the lockdown, the ability to make people buy online who would never have bought online before. I remember interviewing that famous Melbourne demographer, Bernard Salt at the beginning of the pandemic and Bernard confessed he never bought anything online in his life, but now he was because he was locked down, because everyone remembers the length of the Melbourne lockdown. In a sense, a company like Goodman has been helped by the fact that there are a lot more people buying online and the warehouses and the logistics services that go with that, they’re beneficiary.

MB: Certainly, and look, the whole thing with the pandemic is that it’s accelerated all of these trends in terms of online. Whilst we’re starting to see a recovery in sales and physical stores, there has been a persistence there still online. I think it is important that Goodman is well positioned in terms of each of the jurisdictions that they operate in and they have significantly important customers such as Amazon.

PS: Okay. You also made points around the M and A activities out there, including Ramsey, RHC and BXB’s talk with CVC. Why don’t you just talk through those two?

MB: Sure, both Ramsey and Brambles have been long term shareholdings in the portfolio. I think Ramsey’s bid is far more developed in terms of their engagement with Ramsey, their ability to get into the data room and also the consortium, including Australia’s largest healthcare fund, Hester as well. I think we’re getting to see, they’ve been in the data room for several weeks now and I expect to see a conclusion of that in the next little while, but certainly positive in terms of those assets, in terms of owning hospitals. And then the second one has been Brambles, which has been… It has struggled in terms of its share price performance, despite the underlying business being very strong and profits well up through the pandemic, both in terms of sales and earnings.

PS: All right. So, what’s the likelihood of both those acquisitions actually happening? What’s your best guess?

MB: Well, I think for Ramsey, I think there’s a much higher probability that a bid will be formalized there. They have initiated a cash bid of $88 a share, and I think that there is a very strong possibility that that will continue to go through. It does require foreign direct investment approval, and I think having Hester there in the consortium is important and for Brambles, it is just far too early. So I think there’s a long way to go before that could actually get up at this point in time.

PS: Marcus, thanks for joining us.

MB: Thank you, Peter, cheers.