The challenge to find low multiple companies

It is rare to see “all parts of the market firing on all cylinders”, according to Airlie, but high multiples make it challenging to find companies.

Portfolio manager of the Airlie Australian Share fund, Emma Fisher, said valuations were higher than historically as bond yields were low. However, this was making it difficult to find quality companies.

“It is rare to see all parts of the market firing on all cylinders; miners, banks and industrials are all up and it is pretty broad based.

“We look for balance sheet strength, solid management team, good return on capital and a valuation which is not excessive and not many companies we see are passing these four filters. It is quite challenging.

“The only area I could highlight would be retail where multiples are undemanding and people have low expectations, stocks like Nick Scali and Premier.”

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Given the fund was high conviction and only tended to hold 25 to 30 companies at a time, the lack of new opportunities meant it was retaining its existing holdings for longer.

Meanwhile, she said firms were being punished if they were reluctant to hand cash back to shareholders in the form of dividends and share buybacks.

“There is a wall of cash on company balance sheets and firms are getting the message shareholders want the cash returned to them. There were record dividends from iron ore miners, banks are doing buybacks and Wesfarmers announced a capital return,” she said.

“The businesses which don’t pay out are being punished and seeing their share price fall as the perception is they are hoarding cash.”

She said shareholders had been understanding of the economic uncertainty in the first-half results but were now expecting it was being returned as the vaccine rate was high.

The Airlie Australian Share fund had returned 37% over one year to 31 August, 2021, versus returns of 30.7% by the Australian equity sector within the Australian Core Strategies universe.