Anton Tagliaffero Part 2

Here is a short interview with Anton Tagliaffero that I was emailed by IML. Hope some of you get something out of it.

Never mind the volatility, feel the value
Australian Financial Review Article
Round Table Interview
9 June 2006

Anton Tagliaferro, IML investment director, participated in a round table discussion on the current share market environment for the Australian Financial Review. The article appeared in today's edition of the Australian Financial Review. For your convenience, we have published on the IML website the full interview.

Q: The market's risen x per cent over the last 3 years, favouring growth style investors. It has risen in line with annual earnings growth of about 20 per cent. Will this continue? Or will slower growth reveal operational cost pressures leading to further share market declines?

AT: The ASX 300 has recorded 26 % per annum returns compounded over the last three years. In our view returns going forward will be significantly lower. It is inevitable that higher interest rates and petrol prices will slow the global economy in future and as a result we expect commodity prices to ease significantly at some point. We thus remain particularly cautious of areas such as the Resource sector and cyclical companies like Rinker, which have been amongst the biggest gainers in the last couple of years.

Q: In the environment we're in right now with the volatility we're seeing, why should I give you my money?

AT: Our portfolios are heavily skewed towards companies with recurring, lower risk earnings streams and which we believe represent good long term value. Many of these companies have underperformed the market significantly in the last 18 months - we are talking about the likes of Transurban, Tabcorp and IAG. Many of these companies also have high, sustainable dividend yields. This should help underpin our returns going forward and also offer us substantial downside protection in the event that the correction gets a lot worse.

Q: Does the recent volatility in the market present buying opportunities or are you nervous that it is a sign that the market will go lower? Are we at a turning point? If so, why?

AT: We have been amazed that in the light of the uncertainties caused by higher interest rates and petrol prices that global sharemarkets have continued to advance at the pace that they have over the last 6 months. The current correction thus comes as no surprise. Some sectors which have run hard over the last 12 months, such as the banks, are getting back to more reasonable levels and we have started selectively rebuilding our holdings. At some stage, cyclical stocks will have to come off substantially in recognition of the fact that economic growth will slow - we believe we are close to that turning point in sentiment.

Q: What sort of returns are you telling your clients you will achieve over the next year?

AT: We never offer clients forecasts as markets are unpredictable and a lot can happen in 12 months. Having said this, we believe that our current portfolio should be able to generate a 10 to 12 % return in the next 12 months. The high dividend yields from many of the stocks held in our portfolio should underpin this return.

Q: What are the stocks in your portfolio that will drive these returns?

AT: As we believe economic growth will slow substantially in the next 12 months, earnings growth will be harder to come by. Going forward, we believe that investors will seek stocks offering earnings certainty going forward rather than strong earnings momentum. Our view is that stocks that offer this will to do well and be rerated in the next 12 months - thus gaming, telco and some of the less complex infrastructure stocks should do a lot better in our view.

Q: Do you believe that certain styles favour different points in the cycle or do you believe that one style will generate returns consistently for investors?

AT: Well being a value manager we clearly have a biased view on which style delivers the more consistent returns over time! I don't think it's a secret that true value managers such as ourselves are under immense pressure from clients at the moment because of our underperformance. This always seems to happen after markets have had huge runs. Many clients are now wondering why they have a value bias in their portfolios - only three years ago and when markets where heading south clients all wanted more of a value bias. I would have thought that now is a better time to seek value managers than three years ago for clients wanting to protect some of the large gains they have made.