Marcus Bogdan, Portfolio Manager of the Switzer Dividend Growth Fund (Quoted Managed Fund) recently spoke to Peter Switzer on Switzer TV to discuss reporting season, and stocks that he is keeping a close eye on.
Watch the full interview here:
Peter Switzer (PS): Well, we’re catching up with Marcus Bogdan the Fund Manager of the Switzer Dividend Growth Fund and of Blackmore Capital. Marcus, great to see you.
Marcus Bogdan (MB): Thrilled to be here, Peter.
PS: This is an exciting time for you, isn’t it? Reporting season, someone like you it’s like grand final time for an AFL supporter.
MB: It’s the time of the year where we relish, and the reporting season so far has been better than expected. When we were sitting in early January in the midst of Omicron, I was concerned around just the trajectory of earnings. But earnings broadly have been better than expected. And that’s been primarily driven by commodities and financials.
PS: But what’s really interesting, Marcus is that this is the sixth month going from July 1 to December 31. And there was a whole lot of lockdowns in there as well. Then we got an escape probably over October, November, then December Omicron comes. So, for companies to report well, that’s a very good sign, isn’t it?
MB: Extraordinary, and we’ve had a lot of false downs and a lot of false starts and they have reported, I mean, companies like Endeavor where 40% of their hotels were in lockdown over a three month period in time but they’ve generated higher sales revenue. And the mixes there have been better than anticipated across the board.
PS: Okay, this is a little fact that I bet you didn’t come across. I know you pour over financial facts like I do, but this one quite shocked me. Israel is apparently a very good forward indicator for the US economy, didn’t know that. And, December quarter in Israel was a 16% spike in economic growth. Well, I read that, I thought, well, I’ve been saying that in the second half of this year when we get over Omicron, we’re going see a really big economic rebound. Are you feeling that, provided we don’t get another Omicron-type challenge to economies, there is going to be a massive economic rebound?
MB: Yeah, there’s certainly those challenges that we know that are out there. Obviously, there’s always that persistence there that another variant can come along. But we are looking at the numbers, the facts that are companies reporting, GDP is stronger than anticipated. Employment is stronger. And we’ve also seen that when we’ve come out of these lockdowns, there has been a sharp rebound and there’s evidence of that coming. There’s also evidence that the supply constraints that we’ve had in the economy are certainly not getting any worse. We’re seeing fewer issues around Omicron, around absenteeism as well.
PS: Okay, because you’re a fun kind of money guy, let me share another really interesting observation I had picked up this morning. This US analyst was saying, because of the virus we’re buying a greater proportion of products compared to services than we do when it’s normal. And the classic example is we can’t fly overseas, so what do we do? JB Hi-Fi and Harvey Norman and bought stuff.
But once we can fly again, once we can move around our country even again, we’ll start buying more services and we’ll buy less products and there could be a whole lot of inventory and what do stores do when they have too much inventory, they cut prices. So that could be another reason why inflation could come down over the course of this year and next.
MB: Yes, economic forecasting has been incredibly problematic. We talked about this before, six months ago in the US, there was no prospect of an interest rate rise in the US in 2022. Today, companies like Goldman Sachs are suggesting there could be between five and seven. So, we really just look at the underlying earnings of the companies and what the companies are saying to give us an indication of what’s occurring.
PS: All right, so that’s the interesting stuff that money-type people like you and me like to talk. People watching this want to know, as a consequence of this reporting season, what new companies have you added to the fund and what companies have you added to because you are really impressed with what you saw?
MB: Okay, so we’re getting to the back end of reporting season now. There are a number of companies that we’ve got on our watch list of potential new companies to come into the portfolio and those companies that we are looking to add to. So far, we haven’t made any additions or deletions in the portfolio. We did put NAV in before their result. That was quite good because that was a result that was better than expected so–
PS: Are you expecting the banks to keep on doing well?
MB: Well, you’ve got to look at the individual names. I think CBA, which we’ve got in the portfolio and NAB are growing above system. And that’s another reason why we’re confident around the economy because we are seeing very strong lending growth, very strong deposit growth and a very benign environment for credit. Companies like Macquarie we’re keeping a very close eye on which moves up and down with the market. I think longer term as they’re pivoting that business toward green infrastructure, I think that there is a long pathway there for them to benefit from that.
PS: They’re also pushing themselves into lending to normal people, aren’t they? Or their ads are sort of trying to go into it and they were there many years ago and they kind of got out of it. So, it’s just another little string they’re adding to their bow. All right, so what about companies that have impressed you that you might be considering adding to the portfolio?
MB: There’s companies that in particularly in insurance or insurance brokers, companies like Steadfast. SEEK is another example where it’s far more employment, but they’re more growth-orientated companies. Growth has protracted at a very significant premium to the market, but what we’re watching now is a compression of those valuations. once we believe that those valuations have compressed enough and the underlying business model–
PS: You will seize upon them?
MB: We might then look to move into those. So, SEEK is a good example.
PS: Because your fund primarily likes to get great dividend imposed. But if you see opportunities for growth because there’s good value at the moment, you will at least get into it for a time and benefit from the growth.
MB: Yes, absolutely and remembering investors return–
PS: And see, it’s still the case in point, isn’t it?
MB: Investors’ returns are in two parts. It’s both capital growth and dividend growth. And why earnings are so important is they are a reflection of the dividends. If our earnings are growing, then ultimately, you’ll see growth in dividends. We’re seeing growth in dividends, which is higher than the inflation rate, which is terrific.
PS: Okay, one last question. I read something on Monday, which I actually wrote in “The Switch Report”. I made the point that in October or so last year from my reading of a lot of analysts and talking to people like you, it seemed apparent that three areas were going to do well. That was financials, miners, and energy, and they’ve done really well. We’ve seen BHP go from about 35 up to 45 or whatever. So, there’s been a nice rebound there. My argument in “The Switch Report” on Monday was they will probably still keep doing well but the gains are going to get smaller and smaller because the big ones have been had. But if you want to get big long-term gains or big gains, you might have to wait. Some tech stocks that have been beaten up eventually, I suspect will make a comeback.
Is there a tech stock that you, I guess you mentioned SEEK which is a tech stock, is there a tech stock that you’ve considered one day you might add to the fund to get some growth?
MB: Yeah, there are a couple. One is Xero, which is the digital accounting group. We’ve previously had them in the fund and we sold them because the valuation was excessive. And so they got to $1.50 – earlier this week they were back at 98. So that is one that we like because it’s a subscription business. Small businesses are regulated to put their tax returns in digitally. They’re a global business as well. So that is one also. But I’d also point to the fact that there have been big sectors in the economy which have been laggards in the benchmark.
PS: And now you’re going to say healthcare, aren’t you?
MB: Yeah, well healthcare is one and aren’t going to repeat that one. But consumer staples has been one which has really struggled and obviously coals and more worse we’ve got in the portfolio, they’ve delivered results which were better than expected. And they are now starting to see some of the cost pressures ease and then they’re also a beneficiary of higher inflation as well.
PS: Okay, thanks, Marcus.
MB: Terrific, thanks, Peter.
PS: That’s Marcus Bogdan, a guy who looks at stocks 24/7. He’s got nothing else in his life, the poor guy. But still, it’s worth talking to him.
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