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Ask A Fund Manager
The Motley Fool chats with fund managers so that you can get an insight into how the professionals think. In this edition, Atlas Funds Management chief investment officer Hugh Dive humbly names his biggest mistake in investing and how it changed him forever.
The ASX share for a comfortable night's sleep
The Motley Fool: If the market closed tomorrow for four years, which stock would you want to hold?
Hugh Dive: We don't own it in the property fund, but we own it in the equity fund: CSL Limited (ASX: CSL).
Absolutely, totally inelastic demand for their products. No real alternatives. Very hard to pirate… they don't face the issues that, say, Cochlear Limited (ASX: COH) or ResMed CDI (ASX: RMD) face, with China trying to pirate your devices.
It's based on blood, clean blood — high tech but lowest cost producer in the industry. Biggest collection of centres around the United States, and they have a product that demand's totally inelastic. Their customers need to take that product on a daily basis just to live.
It's hard to be pirated, hard to run out of business when you're selling a life-saving product, with a high-quality management that has had an exceptional acquisition record over the years.
I'd be happy, if the market was shut for four years, to turn the screens off. I would be very certain that CSL would be around in four years' time. Doesn't work with every company.
Looking back
MF: Is there a move that you regret from the past? For example, a missed opportunity or buying a stock at the wrong timing or price.
HD: Every single fund manager would have one to five of these, and any fund manager who's been in the market for more than 10 years would be lying to you if they didn't have a couple where they were just, even now, years later you think about, sort of head in hands, going, "What was I thinking?"
For me, it's a company that hasn't been around for a while, but caused me an enormous amount of pain, and it's also changed the way I've invested money [since].
The company in question was Gunns Limited (ASX: GNS). They owned a range of land, about 250,000 hectares of timberland, mainly in Tasmania.
I bought this based on companies that had NTA [net tangible assets] — potential assets per share that were much greater than their market value. So effectively using that strategy of buying a dollar in cash for 80 cents. And this particular strategy is very seductive for value investors, because it leads you to try to buy some of these asset-rich companies.
So I invest in Gunns, attracted by this sort of big land bank, owning $500 million dollars worth of land and trees. And that was at quite a premium to the prevailing share price.
Ultimately… when we had the combination of the GFC in 2008 and '09 and a rising Aussie dollar, dramatically reduced wood sales to China, and the company had insufficient cash flows to service their debt.
So Gunns became this asset-rich, cash flow poor company that ultimately couldn't control its destiny. They couldn't sell their assets off quickly enough to pay their current liabilities in an extremely stressed market in 2008 and subsequently went into administration.
I only think about that every three or four days now, but it changed the way [I invest]. It made me focus much more on the cash flow statement and much less on a company's profit and loss and balance sheet statements.
Because you need that — cash flow is the lifeblood of a company.
MF: When a company descends into administration, it's going to zero for the investors, isn't it?
HD: Yeah. We were sold out at 70 cents, so it was a big loss. It didn't hold its debt. It was a very poor outcome. When a company goes into administration there, if you don't sell out just before the debt, often a company will go into a share trading freeze.
Sometimes you end up with a couple of cents in a dollar, but as an equity holder, you're the last in the queue. The bond holders, the hybrid holders, their hands are out first, and then you're left… Rarely [do] you get anything. So you're left holding worthless pieces of paper in that situation.
MF: Creditors always come above shareholders, don't they?
HD: Yeah. There's a long line of hands with their hands out. That's the risk you take as an equity investor, and that's why you get compensated when things go right, above the bond holders, who often get their interest coupon and their money back.
