Ballasted with cash, Argo sails for ?choppy water?

Rob Patterson has been running the listed Argo Investments since 1982, only the second managing director the Adelaide-based company has ever had. His first two years in the job were spent under the chairmanship of Donald Bradman.

With $4 billion in funds under management, Patterson has just finished a $440 million rights issue. In today’s interview, Patterson tells Glenda Korporaal that he is raising the money to build up a war chest to top up the company’s favourite stocks during the market volatility ahead.

A committed value investor, Patterson says there is still strategic buying in the Australian banks as well as companies, such as its long-standing commitment to Macquarie Bank, which are expanding offshore, particularly in what he sees will be “choppy water” ahead.

The interview

Glenda Korporaal: What was the aim of the rights issue?

Rob Patterson: Just to keep growing. We went ahead with the rights issue with a view to having a war chest at in a period that might be more volatile.

What is your investment philosophy?

It is basically value investing. We try to get an income stream from our investments. That will protect us in volatile markets. If you keep getting a regular and growing income stream from your investment, it will see you through the bad times.

But we are also looking for capital growth. We invest for the long term. Our idea is to find good companies and build our holdings in them at the right prices and hold them forever. We don’t ever invest in anything with a view to selling it.

What do you like at the moment?

When the market was down recently we spent about $8 million across about 20 different stocks. BHP Billiton and Rio Tinto were among them.

We just build on our favourite stocks at a given time, particularly on days when the market is down. Particularly the banks and the mining houses. But we don’t want to advertise too many [of our purchases.

Our portfolio is pretty widely spread across 180 different stocks. It covers the whole market. It is just a matter of picking price points on your favoured stocks at a point in time and buying them on these bad days. That’s how we work.

What do you think of the outlook for the market?

It’s quite likely there will be further choppy water ahead. A number of experienced people believe that a 10% correction might still be in focus in the next few months. We will just wait and see.

There have been lots of arguments saying the sheer weight of money coming into the Australian stockmarket will keep on pushing prices up, or at least that was what a lot of people were saying before the recent market dip. What’s your view on that?

We have seen recently that money can get nervous pretty quickly. You never know what’s going to come along and cause that. No one would have picked a 9% fall in the Chinese stockmarket as the tripwire for a global equity correction, particularly given that it was a market that has risen 130% in the previous 12 months. Why was anyone surprised to see a 9% correction?

It’s the first time we have seen that response to the Chinese stockmarket. It shows you how important China is becoming to the global setting that the movement could have had the effect that it has had. It also shows the unfortunate short-termism that abounds in some of the fund management groups.

Is that one of the advantages of being in Adelaide? It is a bit like Warren Buffett being based in Omaha?

You are removed, somewhat, from the daily noise. Although these days, with communications, you are still affected by it. We have a team of three analysts in Sydney [in addition to two in Adelaide] who are constantly sourcing information. They are regularly at brokers’ offices, seeing either their economists or companies that come in regularly to brokers and tell all about their business.

Would you compare yourself with Soul Pattinson group’s listed investment companies?

Not entirely. We are somewhere between them and a regular fund manager. We are not quite as conservative as they are. We own 180 companies, many are blue-chips but historically we have also done well from getting in on the ground with some interesting smaller companies that either grow into big companies or get taken over.

We were one of the initial shareholders in Computershare when it was just a small Melbourne-based share register company. Now it has become one of the largest global share register businesses. We have been there right through. If it is not in the top 20, it is close to it.

That’s the sort of thing we like to do: identify smaller companies that are going to grow into the big companies, or the alternative is they get taken over. Either way you can do very well.

One of your worst investments was Christopher Skase’s Qintex.

It was. We were a very early investor with Christopher Skase. Hardy Brothers, the jewellers, was his first listed company. We invested in that and he actually did some good things. But it was a case, I believe, of ego taking over. He started thinking he could take on the world and just became too ambitious. By the time we had identified that, we were caught.

It would have to rank as one of our worst experiences.

How much did you lose?

About $5 million. At the time it was a serious loss. These days, given our size, it wouldn’t be an issue but it was then. I took it badly. He definitely changed.

I remember flying to Brisbane to meet him. He had an office in what was called the Blue Tower. It was a palatial sort of office, which was what Christopher was taken with. I flew up there and begged him not to get involved in the MGM takeover. The fellow who own MGM – Kirk Kerkorian – had already sold it a couple of times and bought it back, like Packer did with Channel Nine. That sort of thing had already happening but there was Christopher trying to do it again.

I went there, partly to try and talk some sense into him. I could see I wasn’t getting anywhere. We started selling but it was too late. We got a little bit out. As we all know, it all ended in disaster.

Which companies are you talking to these days?

Our biggest investment is Macquarie Bank. We talk to them a lot.

So you wouldn’t be critical of them clipping the ticket on every part of a deal?

We are an investor in Qantas. On the other side, Macquarie Bank is going to get a relatively large fee when the deal goes through so we benefit both ways.

Some people are saying “the Macquarie model” has been stretched to the point where it may have difficulty in raising new funds.

You could concede that it is reasonably mature in Australia with the model they have. But they believe – and we would agree – that there is still plenty of scope out there in the big wide world.

There are numerous toll road opportunities coming up in the US where it is only in its early days. They just missed a deal in the US. Someone overbid them. But that’s not a bad thing. At least they just didn’t keep paying to get it.

I think they are fairly disciplined. They have very strong risk controls in their businesses. There are also large opportunities in Asia where they are building their strengths all the time. They have been quite active in Europe and they will continue to do things over there.

While it is fair to say that the Australian operations are probably becoming mature there is plenty of growth available offshore. They have very bright people and their model has worked extremely well.

In the recent results, more than half of the profit now is coming from offshore and that will be a growing thing for them.

We quite like Macquarie because our logo is “investing in Australia”. We want to invest into Australian companies where we can keep regular contact with the people but we like to identify those companies that are broadening their businesses offshore. The Australian economy is reasonably mature. To get real growth, companies need to take their business models offshore

The sorts of things we like are Aristocrat, Computershare, and Billabong – those sort of businesses that have been successful overseas.

Aristocrat has had a bit of a rocky time lately'¦

There have been a few issues in Japan with the regulatory approvals of some of the games. They are transitioning from the old-style games to the new ones and there are obviously some regulatory hurdles to get through. But those approvals are coming through slowly and they should have a pretty good business there.

They are getting a decent share now of the US market and of course Macau is growing rapidly. They should be able to capture a good share of that market.

We think it is still good growth stock. They need to be. They are priced around 18 to 20 times, depending on whose numbers you read, but we think they will continue to deliver growth.

You don’t invest in any companies offshore?

No. It’s a mandate thing but we do like getting offshore exposure through our Aussie companies.

Most of the top 20 would have international operations. Macquarie has more than half its earnings coming from offshore. Some of the banks have offshore businesses. NAB has. ANZ has some Asian exposure. The Commonwealth is trying to do some. Westpac has stayed pretty well at home.

So you still like the banks, despite their current high prices?

You would have thought the Australian banking landscape was pretty competitive and mature, but they still seem to grind out profit growth.

The huge growth in residential lending has now tailed off. But what has been the surprise is the pick up in business lending, which is running at about 15–16% growth. It seems to have picked up enough to fill the gap caused by the slowdown in the residential market. So the banks continue to do very well.

The other thing that has been fantastic for them has been the fund management business. Westpac has got BT, which is ticking along quite well. NAB has MLC. The Commonwealth has Colonial.

The ANZ is probably the weaker link there but it is very well managed. It will be interesting to watch. We have this transition of both David Morgan at Westpac and John McFarlane at ANZ. It will be interesting to see the outcome and whether either of those banks change their strategy under their new CEOs.

What about St George?

We have got a good position in St George, which has been terrific. We started when it was the old Advance Bank and it has been a terrific investment.

What other sectors are you looking at?

We are still looking at the resources sector. We subscribe to the China “stronger for longer” theory, so the support for commodities should remain.

We quite like the health care industry with the ageing demographic. The only issue there is that it is fairly regulated; you need to watch for interference from government. But that’s an industry we like going forward.

Do you have any view on the latest trend by private equity players to bid for major companies such as Qantas and Coles?

We worry about it a bit in terms of how many companies might get removed from the market, which will make the Australian market even narrower than it already is. It is very much a financial stock/resources market. It is dominated by those sectors. It is not a very deep market now and if we lose the likes of Coles Myer and Rinker – and Qantas to private equity – the market just gets narrower and that’s disappointing.

I suppose we will also be looking towards new float opportunities which undoubtedly will come along.

What about property? And property trusts?

Property has been pretty expensive sector of the market. We are bit cautious in that area. Given that we have had had this long period of economic growth and low interest rates and low inflation, property is, like most things, fairly fully priced.

There have been placements recently from Stockland and Centro but we have not participated.

What about Telstra?

We continue to have about a market-weight position. We just want to see how Sol’s [managing director Sol Trujillo) plans develop.

What about your own share price? Is it overvalued?

It probably did get overvalued ahead of the issue. But I think the combination of the issue and the setback in the market generally has bought us back to earth. We are trading around our asset backing, which is what you would argue is about the right price. You can justify a small premium for our historical performance and for our very low management expense ratio. It is probably about right. It’s certainly a bit cheaper than we were about a month ago.

Has your investment philosophy changed over the years you have been running Argo?

It has never changed. And it won’t.

What about your own personal situation? How much longer do you intend to remain in the job?

I will be 60 this year. That will be another issue for us – succession. Who knows?

We’ve got a good team of people. We would hope to deal with that accordingly. I don’t want to get too much into that.

You sound like you already have your successor in mind?

I wouldn’t say that. You’ve got to keep an open mind.

One last thing, I can’t help asking. What was it like working with Don Bradman?

He became a director of Argo in the mid-fifties and he was chairman from 1982 to 1984, which were the first two years when I was CEO. The company has been going for 61 years. The founder, Alf Adamson, ran the company until 1982 and I took over from him.

Adamson was really my mentor. I had started working there in 1969 as the company secretary.

Bradman was absolutely terrific. He had been a stockbroker in Adelaide. When he came on to the board he had retired as a stockbroker and was a company director.

My first two years of being chief executive with him being chairman were very enjoyable. He was very helpful. When he was forced to retire from the board in 1984 when he was 75 – because we had a retirement agreement – we continued him on as a consultant for a number of years. He used to come in and have a chat with me and go through research and discuss some ideas.

He was a pretty tough guy? Not so much liked as admired?

He was a bit of an individual. I think that came through in his cricket. He didn’t take any nonsense.