Australian Financial Review
7 June 2023
Investment manager Washington H Soul Pattinson is braced for the possibility that Australia will fall into a recession, and is hoping to capitalise on a slowdown.
The company, which owns stakes in assets from coal mines to ASX-listed banks, said yesterday that it was taking a more defensive stance, including stockpiling more cash in the current economic environment.
The economic situation was complex, with inflation ‘‘not under control’’, Soul Patts chief investment officer Brendan O’Dea told a shareholder briefing at Brisbane’s Calile Hotel.
‘‘Rates are higher. We think they will probably continue to go higher.
‘‘A recession is definitely possible – probably probable in other parts of the world – but certainly possible here in Australia. So we see plenty of risks to the downside.’’
Soul Patts managing director Todd Barlow told The Australian Financial Review the company was not relying on any specific economic trigger to buy: ‘‘We just think that over time increasingly the opportunities start coming to us. They become more attractive.’’
An analysis showed the average period between the peak and trough in the last 10 US recessions was 10 months, but earnings per share in that time fell 19 per cent. ‘‘It’s short and sharp, and so you do need to get set . . . to ride that recovery,’’ he said.
The company had, since merging with fund manager Milton Corporation in October 2021, reduced its equity holdings in large companies from almost $4 billion to $2.8 billion as of April.
‘‘We’ve used the strength in the markets that we’ve seen . . . which we find a bit surprising over the last 12 to 18 months, to make those sales. Those sales have gone into cash balances, but they’ve also gone into structured credit and private equity,’’ Mr O’Dea said.
The balance of equities was less weighted to materials and banks, which it sees as facing falling margins, and into healthcare and consumer staple stocks. Mr O’Dea said Soul Patts was still generally selling equities, although the pace of that had slowed.
The company has also reduced some property exposure.
Soul Patts increased its funding of credit instruments, which it said were made of mostly senior secured debt, with some unsecured bonds, anticipating returns of 12 per cent to 15 per cent.
While conceding many would question the safety of assets offering such desirable returns, Mr Barlow maintained Soul Patts was taking a prudent approach.
He said it would only invest in a business with debt if it was happy to invest in its equity as well, but that debt had higher levels of security attached and protected it from risks.
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