Research Postcard: Alphinity IM

Alphinity IM portfolio manager Bruce Smith


By Bruce Smith

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Alphinity Investment Management principal and portfolio manager Bruce Smith tells theinstoreport about his recent trip to Asia, where he found some risks lurking for Australian retailers.

Where and when did you go on your trip?

I visited Hong Kong, Shanghai and Tokyo for one week in May 2014: Hong Kong, Shanghai and Tokyo in a working week. I’ve been to each these cities a number of times before.

What was the purpose of the trip?

The key purpose of the trip was research to help inform us about trends around Australia’s retail sector which are likely to develop in the future. It has alerted me to a number of risks Australian investors may not yet realise.

We spent the week visiting retailers, companies who source goods for retailers and others who participate in the vast retail supply chains.

What stood out the most about the countries and industries visited?

One thing that struck me was although Australian apparel retailers have been a massive beneficiary of the Asian sourcing and supply chain over the past decade or so, achieving further benefits would be a challenge in the future.

Retail and consumer goods companies in Australia are increasingly moving away from China, as wages for primary industries like manufacturing are rising rapidly there, and looking towards lower-cost countries in the region, such as Bangladesh, Myanmar and Cambodia.

This increases the logistics challenge and also the risk of worker exploitation.

Another cultural observation was the stark contrast between the chaos, brashness and pollution of Shanghai and the calm order, politeness and cleanliness of similarly-sized Tokyo, only a short plane trip away.

How is this market performing at present?

There is always a lot of debate about China in the markets: it is the second-largest economy in the world and has been the major growth engine of the global economy since 2008.

The last couple of years has seen a slowing in its growth: is this something fundamental or just the consequence of it now being so big that large percentage growth numbers just aren’t reasonable?

Do you have any holdings in this sector?

Alphinity invests in listed companies in Australia. While some of these companies also have operations in Asia, they are mostly focused domestically.

I met with managers of the Japanese operations of one of our holdings, Goodman Group, a developer and owner of logistics property with significant and impressive operations in the booming Japanese logistics market.

What are the risks to this sector?

A key risk to the Australian retail and consumer goods sector is local companies’ abilities to adjust to higher costs.

Sourcing of cheap goods from China in particular has been very good to Australian retailers in the past decade and it appears the gains have now mostly been made and costs are at risk of increasing from here.

What implications do these findings have for your portfolios?

We have become very cautious about prospects for all apparel retailers – including discount department stores – as the benefits from sourcing and low costs dissipate.

Our holdings of retail stocks are now focused towards those who only compete domestically or have smaller flexible models of operation.

Most unusual dish you ate while away?

I met with Australian-listed Domino’s Pizza Enterprises, who own Domino’s Pizza in Japan, and watched a highly-skilled worker stretching the dough to assemble a pizza.

To my shock, I found that the pizza was being prepared for me. There were completely good intentions behind the gesture, however, it felt like a shame to spend one of only two precious lunchtimes in Japan eating pizza, when I could be enjoying authentic Japanese food like sushi or sashimi.

The pizza itself was bizarrely western, although the broccoli on top was quite novel.

What’s your next planned trip?

No trips planned at present – perhaps after reporting season.

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