Garry Laurence Perpetual’s head of global equities has read every single one of Warren Buffet’s famous newsletters dating back to the 1970s. Photo: Peter RaeA lot of kids would have been happy to pick up the pocket money and think of something else to do with their life – but not Perpetual Investments portfolio manager for global equities Garry Laurence.
So intrigued was he with the way his family’s printing business was run, that the young Garry looked beyond his after-school and weekend work putting pages together to the nuts and bolts of balance sheets, suppliers, customers and market trends.
When his father, sensing the ramifications of the digital revolution, sold the company and bought a software venture, Laurence ran his slide ruler over that one, too. His love of the minutiae of cash flow, interest coverage, leverage and profit margins was born – as was his suspicion of cyclical industries.
And both have endured. Today, Perpetual’s 34-year-old strategist travels the world, talking to senior executives from some of the best-known companies on the planet while weighing up geopolitical concerns, market trends and capital flows. At home, he also helped set up his wife’s online fitness business, and never tires of getting to know the DNA of companies.
With about $670 million under management in the firm’s Global Share Fund, Laurence and his team have a portfolio crammed with some of the biggest corporate names in the United States, along with stocks from China, Japan and Europe. The fund was relaunched last year to broaden the horizons of the traditionally domestic-focused fund manager.
Current holdings include NASDAQ OMX Group, Bank of America, Verizon Communications, General Electric, eBay, Oracle Corporation, China’s Zhaopin and Qihoo and Deutsche Börse and BBVA from Europe.
The line-up is US heavy but the stock-picking criteria transcend geographical boundaries. The team looks for strong cash-flow, cash-heavy balance sheets, low price-earnings ratios with growth potential and favourable situations such as monopolies and oligopolies.
“The great thing about Perpetual is that it has this very strong focus on strong balance sheets and we have strict metrics on what a good balance sheet means,” says Laurence.
“For us, we look at interest cover.
“I look at the free cash flow and make sure that free cash flow can pay down the net debt very quickly, and can meet the interest costs,” he says
“What that means is that during periods of weakness and fear, the companies that will fall the most are the ones that are highly indebted. By steering clear of that, you tend to outperform in a falling market.”
And so the statistics attests. According to Perpetual’s own calculations, the net debt-to-equity ratio across the fund’s holdings is an average 12.7 per cent, compared with the benchmark index’s 51.2 per cent. Interest cover is 26.5 per cent, compared with 10.4 per cent for the index.
Laurence likes sharemarket companies such as NASDAQ OMX and Deutsche Börse because there are high barriers to competition and the technology is already in place, making it easier to grow earnings.
Legendary stock-picker Warren Buffett has always advocated buying into this sort of market dominance.
Laurence is a fan, having read every single one of Buffett’s famous newsletters dating back to the 1970s.
“Basically, I like to buy businesses,rather than stocks,” he says, “and I’ve been doing that from a very young age.”
At university, where he completed bachelors degrees in law and commerce, he still had time to build his own, successful equity portfolio. His first job in the business was an internship at Morgan Stanley, before he moved on to PM Capital as an analyst and then Perpetual.
There, this back-to-basics approach to share selection, supported with forensic financial assessment of the companies, appears to be working.
Since its creation in January 2011, the Perpetual Global Share Fund has outperformed the MSCI World Net Total Return benchmark every year, by an average of 2.8 percentage points after fees.
Absolute return after fees has averaged just over 19 per cent.
“Our approach is basically to buy these high-quality businesses that, through the cycle, grow their earnings consistently, and buy them at attractive prices,” says Laurence.
“And we’ve got a concentrated portfolio, so with all these movements in markets, what you’re seeing are valuations going up and down but the core businesses and high-quality ones should continue to grow their earnings.”
Nor does this bottom-up focus preclude continuous study of the big global trends that can spark routs and corrections, or alter a company’s outlook over the mid-to-long term.
On his latest visit to Europe, in June, Laurence attended a round of macroeconomic and investment conferences to hear the views of European Central Bank board members, politicians and the like. This was on top of the always-crucial meetings with the chief executives and chief investment officers of the companies that Perpetual holds.
And how much detail is he trying to extract from senior executives when he sits down with them?
“Because we are long-term investors, we are not really trying to find out how the next quarter’s going,” says Laurence.
“It’s more of just getting a sense for strategically what they are doing with the business, insuring that they are staying competitive, that the actual industry is still growing and that there aren’t any structural issues.
“Also, we try to really understand the management team and insure that they’re managing the business for the best interests of shareholders.”
Perpetual’s global equity fund is underweight in Europe, having sold down a lot of “expensive industrials” when their prices started to look frothy.
However, it still holds pharmaceuticals giant Sanofi Aventis, Spanish bank BBVA and Ebro Foods, also of Spain. In the first case, Laurence likes the range of products, earnings growth rates and the company’s successful push into emerging markets.
The Spanish selections, meanwhile, reflect the country’s recent recovery from the ravages of the global financial crisis.
“We are slightly overweight in Spain, because we think the economy is improving,” says Laurence.
He also likes financial stocks in the US because the economy is ticking along nicely and interest rates are about to rise for the first time in almost a decade.
Laurence is also happy to hold China Life, the US-listed insurance group, because of the extremely low rates of insurance product penetration in the world’s most populous nation, and hence the company’s growth potential. Online job search company Zhaopin and mobile security group Qihoo 360 Technology are trading on low price-earnings ratios and will grow along with China’s middle class.
He is unperturbed by recent market gyrations in the country, and its move to devalue the currency.
“The companies that we own that are exposed to China are companies that are in the services or consumer-related spaces, which are continuing to grow their earnings quite strongly, and in sectors where the penetration rate of their products are very low,” he says.
“We don’t think any of these movements in currency or gyrations in the markets are really going to have an effect on those trends.”