New look Soul Patts has Perpetual right where it wants
A subtle move by Soul Patts boss Todd Barlow speaks volumes about his intentions for the under-pressure wealth manager.
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A subtle move by Todd Barlow at $11.5bn investment house Soul Patts to put his sizeable stake in under-pressure funds house Perpetual into his collection of “strategic” investments. This sends a message to Perpetual: Barlow is not going anywhere.
From Brickworks, TPG Telecom and New Hope, companies that find their way into Soul Patts’ $5.9bn strategic portfolio rarely leave. Many of the seven have been there for decades.
It’s a new year and new look for Soul Patts that has decided to drop the “Washington H Soul Pattinson” from the 122-year-old company’s name. It was getting a bit of a mouthful, Barlow says.
“We found nobody was really calling us that and what people were calling us instead was a variety things from WHSP and Soul Patts and various other names. So we decided that we wanted to simplify things with one name,” Barlow says.
Last December Barlow lobbed a cheeky $3.5bn non-binding offer for Perpetual that relied on the simultaneous carve-up of the wealth manager, with the wealth and corporate trust business spinning off from the funds management arm. Under the plan, Perpetual’s funds business would be de-merged and remain listed, with the higher returning wealth and trust business being folded into Soul Patts.
Soul Patts’ put a value of $27.00 a share on the offer, but was immediately knocked back by Perpetual’s board, which said the deal represented a low-ball price and was too complicated. Since the approach Perpetual shares have pulled back around 6 per cent, to be trading at $24.32, while Soul Patts have added another 5 per cent.
On Thursday, as Soul Patts was delivering its first half results, Barlow revealed the Perpetual stake he has bought on-market has been moved from his large cap funds portfolio and now sit in collection of “Strategic Investments” alongside ultra-long term plays including TPG Telecom, Brickworks and coal miner New Hope.
Barlow says the complexity of Perpetual and recent market backdrop had weighed on the share price and that’s why he took opportunity to double his stake through November and December to now be sitting on just under 15 per cent of the wealth player. There are some shares in his large cap fund, but most is held in the strategic portfolio.
“We are attracted to Perpetual’s business and the increased exposure it provides to the financial services segment,” Barlow says. Even so, he will closely watching the outcome of Perpetual’s own strategic review. The outcome, expected next month, could also recommend a split of Perpetual and this would be a potential trigger for further corporate activity coming its way. Soul Patts already has a sizable seat at the table if this happens.
Soul Patts is a diversified investment house although it is in need of more diversification. More than half of $11.6bn portfolio are tied up in the companies sitting in its strategic portfolio.
And just three stocks — Brickworks, New Hope and TPG — make up 43 per cent of its total portfolio. Brickworks is the biggest single holding, representing a near $2bn stake. That investment goes back 55 years, while large holdings in TPG and New Hope are counted in decades. Perpetual’s well regarded wealth and corporate trust businesses offer more diversification.
The recent acquisition of listed investment house Milton Corp helped Barlow take a step in this direction and he now has an active fund management arm with $3.4bn across large and small cap shares. Soul Patts also oversees a $1.4bn private equity and private credit portfolio. But it is financial services where he wants to get bigger.
Barlow had been deploying Soul Patts’ cash pile in the past six months, spending more than $1.1bn snapping up equities, including the Perpetual stake. After the spree Soul Patts still has another $400m in cash on hand.
Another of Barlow’s big bets in recent months was on uranium, picking up convertible bonds and direct equity in Canadian producer NexGen Energy. Barlow says uranium has attractive growth tailwinds backed by global energy transition. All up Soul Patts has a $345m exposure to uranium and this represents an increasing long-term hedge against exposure to coal through New Hope. Elsewhere it is building up a more active exposure to real agriculture assets with investments running to $500m including 12 farms across the nation.
Soul Patts’ preferred measure, net asset value, saw its portfolio increase 7 per cent to $11.5bn during the six months to end-January. First half profit fell by a third to $302m given lower returns in Brickworks and New Hope. Even so, Soul Patts’ unbroken run of increasing dividends helps it command a premium to its net asset value. This is in contrast to most listed investment companies, that are currently struggling in the up-market share cycle and are trading at a discount.
The Magnificent Seven member worth shorting
Ask hedge fund boss Phil King if markets have run too hard and he’ll give you plenty of reasons to stay the course. But he will also give you one big reason why it’s good idea to be short selling EV maker Tesla.
King, who oversees Regal Funds’ $11bn portfolio including shorts and long-only investments, says although market gains won’t be a straight line, he believes Australian and US stocks will be higher by the end of the year. This is helped by falling interest rates, reasonable opportunity in valuations, and the prospect of corporate earnings growth.
“The most common mistake in investing is selling and buying too early. And that is why momentum is such a powerful factor in markets. People usually sell too quickly. And we think there’s a danger of that happening at the moment,” King says.
Even with huge returns already locked in by Wall Street’s tech-focused “Magnificent Seven” King reckons there’s value opportunities across them, as well as the broader market.
And on the constant criticism the seven represents excessive concentration risk given they represent a third of the US benchmark the S&P 500, King quips Australia is more concentrated. The top seven stocks here representing 40 per cent of the market cap of the S&P/ASX 200.
Still, the members of the Magnificent Seven – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla have had an extraordinarily strong run more than doubling in the past 15 months. By contrast, the ASX seven – BHP, CSL, Commonwealth Bank, National Australia Bank, Westpac and ANZ and Fortescue haven’t seen gains anywhere near. In fact miners have come off.
King says even though the Magnificent Seven has performed well over the last few years, as a group, they’ve not been getting more expensive, because they have been delivering earnings growth has been more than matching the share price growth.
As a result, the Magnificent Seven have collectively de-rated, where the broader market has been fairly flat for an extended period, but has got more expensive just in the last few months.
Still, Elon Musk’s Tesla represents a good opportunity to short – or bet on further share price falls. Even with a falling share price King reckons the EV maker has become more expensive over time as earnings have disappointed and fallen faster than the share price.
“In fact, earnings have stopped rising. Competition is increasing and we’re very happy to be short”.
He is also fast cooling on $US2.2 trillion ($3 trillion) white-hot chip maker Nvidia that unveiled its latest superchip this week. The tech darling has had a tremendous run, more than doubling in just six months.
“Investors have made a lot of money chasing the AI thematic. But Nvidia is a very tough stock at the moment for bottom-up investors until we get some more clarity around what its earnings are going to do in the next few years”.
But he likes others in the Seven, and has moved to a long position on three: Amazon, Meta and Google-owner Alphabet. They are “great businesses with great balance sheets and great valuations”.
Alphabet trades on a forward price-to-earnings of about 18 times next year. Amazon’s on 33 times and Facebook owner Meta on 21-times. All three have around $US100bn in cash on their balance sheets. And they’re currently spending a lot in loss-making areas that will eventually turn positive.
For the Australian market King reckons there’s plenty of options for stock picking with his preferred exposure on resources with a switch out of banks that have run hard.
Not only are resources trading on a very low multiples compared to historical levels, the thematic around resource supply constraints are only getting stronger, he says.
“The most common mistake in investing is selling and buying too early. And that is why momentum is such a powerful factor in markets. People usually sell too quickly. And we think there’s a danger of that happening at the moment,” King says.
King, who also made an audacious bid for Perpetual 16 months ago as part of a move to spoil the pressured wealth manager’s own merger with Pendal, says it’s going to be another big year for mergers in Australia, following a flurry of deals at the end of last year. Most of the interest coming will come corporate buyers looking to consolidate the sector and also take advantage of a relatively low Australian dollar. Regal’s Australian Long Short Fund has held a top three position over one, three and five years, according to latest figures from funds tracker Mercer.
johnstone@theaustralian.com.au
Originally published as New look Soul Patts has Perpetual right where it wants
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