Nathan Parkin is responsible for managing $5 billion. Michele Mossop
Nathan Parkin, who learnt first hand the principles of business when his parents used a redundancy payment to set up a company operating out of their home in the last recession, thinks Australian investors have lost sight of one of the key fundamentals of risk in the sharemarket right now – leverage.
The deputy head of equities at Perpetual is responsible for managing $5 billion but wouldn’t expose his clients’ money to some of the best-performing stocks of the past few years.
“Investors are buying stocks that look very stable, things like infrastructure and property, Transurban, Sydney Airport, any of the Macquarie vehicles. Things that don’t get past our investment process, they have too much debt,” he explains.
“The way the market is handling these stocks, it’s as if they are the most stable equities around, which to me, is where the risk is. They are the most geared. They are paying dividends out of debt, the equity component looks stable, the business looks stable but the capital structure is very geared and in fact unstable.” he warns.
When the sharemarket was in freefall during February, Parkin found it interesting that 170 stocks in the major S&P/ASX 200 index were moving in a range of 10 per cent or more, while there were 30 stocks that didn’t move much at all.
“I looked at that and it showed up they were the very stocks we couldn’t invest in. The most stable stocks with all this volatility were the very ones we couldn’t invest in. Which is odd. Our investment philosophy and process is concentrated on quality businesses and it just shows that balance sheet isn’t being appreciated at the moment,” said Parkin.
The message is simple, investors might think they’re in the safe or defensive part of the market but they’re not. One day it will all turn.
As a patient investor there are four filters that Parkin looks at when assessing if he’s willing to invest the money he and his team are responsible for. There’s the balance sheet, the management, the quality of the business and then how profitable it all is.
“If it doesn’t meet all four we can’t invest,” he explains.
Those same rules would also apply to his parents’ business if he was running the Perpetual ruler over it. As a teenager he saw how hard they had to work, taking and making phone calls all day long from the lounge room, doing whatever it took to grow the business each year, which they did.
“It was a distribution business, there was a lot of hard work for it to survive , but they grew it every year, just a little and I saw all of that and you probably don’t realise at the time just how formative it is,” said Parkin.
His parents also played a role in igniting Parkin’s passion for investing by taking him to a seminar held by BT Funds Management when he was still at school.
That seminar then prompted a trip to the local Hornsby library to find out all he could about investing, while Parkin also set about getting some work experience in the funds management industry.
“That was a challenge, not knowing anyone, writing all these letters to people and all the rejections, about 50 of them, going to the letter box and every letter started with the word … Unfortunately,” said Parkin.
In the end he got a job at the ASX in the statistics department that led to a job in the funds management industry at Perpetual. But not investing on the equity desk – his real passion.
Instead, he joined as an account manager and four years later became head of the institutional business in 2001.
But Parkin wanted to be like the people he saw at the BT seminar so he joined 452 Capital, which was established by former Perpetual manager Peter Morgan, in 2003 as an equities dealer.
Five years later he was back at Perpetual doing what he always wanted to do: running money.
Parkin looks after the $1 billion Wholesale Ethical SRI Fund and over the past five years it has returned 15.4 per cent per annum compared to the 5.5 per cent per annum return from the S&P ASX 300 Accumulation index. A year ago he also took over the $4 billion Australian Share Fund.
Parkin’s top 10 stocks in the SRI fund include Freedom Foods, Qube Holdings, DuluxGroup, Boral, Aveo, Harvey Norman, and the four major banks despite being underweight that sector.
The fund has been a long-term investor in Freedom Foods and was impressed with how the company had plans to grow its business.
Telstra and CSL are not in the fund, while an underweight position in Macquarie Group has also helped the fund outperform although stakes in Reckon and Bega Cheese have not.
Parkin, along with his team of analysts and dealers that are all part of the investment process at Perpetual, is using the the recent volatility to build positions in really good businesses.
Woolworths, Caltex, IAG, and AGL are all companies that have a common theme of a stable asset base and a stable core business.
“I’m focused on these stable businesses that aren’t overly expensive as opposed to risky businesses where the equity has been stable. There is going to be some sort of resolution of that when rates rise and I don’t want to be standing on the cliff edge when it does,” he said.
Woolworths, in particular, is a stock Parkin thinks is showing signs of value.
“Woolies has the best asset base of any business we can find, yes there is pressure on margins, yes the old management team made a lot of mistakes, but the expectations for it have been culled a lot and now you’re not paying as much for it,” said Parkin.
“The management team are now focusing on what they should be, which is the part of the business that makes all the money. Obviously Aldi is in there, and we’ve seen the effect of that already, Coles is very fit. But this is a business that is on the largest scale in the industry and it’s a stable industry structure. It’s a very defensive business, in terms of sales, it’s very predictable, they are 30 per cent bigger than their nearest competitor and going forward people are assuming there is no scale advantage in food distribution and we think that is wrong,” Parkin added.
While the market might be saying Woolworths will have structurally lower margins in the food business than Aldi and Coles, Parkin and his team can’t see that.