22, August 2017
Q&A with Jason Teh

INDUSTRY MOVES | Jason Teh was a curious child who grew into a curious adult. Drawn to the stockmarket, and a search for ‘universal truths’, he carved out a successful career as a portfolio manager before partnering with Copia Investment Partners to launch Australian equity income boutique Vertium Asset Management. Jason tells Industry Moves about Vertium’s offering for retirees, the Vertium Equity Income Fund, and its unique place in the market. He also shares a little about the evolution of his investment philosophy and the benefits of being, metaphorically-speaking, a ‘mixed martial artist’.

What do you think is the biggest investment challenge facing retirees?

The biggest challenge, I believe, is that retirees outlive their savings. There are several ways this could happen:

1. As a society, we are living longer.
2. Retirees’ savings could shrink in value from:
a. drawing down too much
b. their underlying investments performing poorly.

Rather than living on less, I think it’s important retirees focus instead on ensuring their savings last as long as possible. I believe they may be able to do this if they can achieve the following three objectives from their investments:

1. More income: to minimise their drawdowns
2. Less risk: drawing down on low-risk investments relative to high-risk investments may help preserve their capital
3. Greater return: to grow their capital base over time which can help keep pace with rising living costs

What is your investment philosophy and has it evolved over time?

My investment philosophy is based on three principles:

1. Markets are rational most of the time
2. Mispricing occurs with emotions
3. Margin of safety is critical

When I first started, I thought working hard was the secret to stock picking. But I realised over time, no matter how hard you work, you can still be wrong. The market is not easy to beat otherwise every second stock I look at would be a bargain.

Over time, I learned I was better at defence (identifying mistakes made by the market), rather than offence (finding the next big theme). Hence, my investment specialty has been to focus on areas in the market where emotions are heightened and where mistakes are more likely to happen. Specifically, I try to identify bathwater babies (market overreaction to negative fundamentals) and neglected orphans (market underreaction to positive fundamentals) and avoid value traps (market underreaction to negative fundamentals) and expensive stocks (market overreaction to positive fundamentals). It’s the combination of what you own and don’t own that determines performance outcomes.

Further, to help minimise my own mistakes, I approach investing with a margin-of-safety framework when I capitalise on mispriced stocks. Capitalising on mispriced stocks with a margin-of-safety framework is the best way I know to preserve capital and still deliver a reasonable return over the long term.

What has been your most memorable investment to date (for either negative or positive reasons)?

I enjoy spotting anomalies in the stock market – it’s like picking up $20 notes on the footpath. The most memorable for me was Westfield spanning five years from 2007.

In early 2007, Westfield Group, which at the time combined its global and domestic assets, was extremely expensive. The thesis was simple: the share price was trading at 67% premium to net tangible assets (NTA). The logic of such a premium to NTA didn’t make sense. Either the NTA was extremely undervalued or the development assets were worth about two-thirds of the NTA. The NTA was about right, but the market chatter at the time focused on Westfield’s development pipeline. Yet, to have that much value ascribed to the development assets defied logic because the underlying NTA took the Lowy family about 50 years to build. Further, for the development assets to be realised, it was going to need a lot of capital, something that was going to be difficult with an elevated gearing level of 40%. The share price was primed to collapse given the extreme pricing. Unfortunately, I didn’t short the stock but at the very least I avoided it.

In 2010, Westfield split up its global and domestic assets and its Australian assets were held by Westfield Retail Trust. Again, the thesis was simple: in 2011, Westfield Retail was extremely cheap with the stock trading at a 15% discount to NTA and the market forgetting it took 50 years for the Lowy family to build its property empire. In comparison, the rest of the REIT sector was trading at a premium to NTA. To trade at such a discount, the market was implying the development book was free and the existing NTA was under stress, which was unlikely given its very low gearing level of 11%. This time it was easier to take advantage of the situation by buying the stock with an extreme margin of safety.

This anomaly shows how the market can sometimes forget about valuations and fall in love with the prevailing story at the time. Interestingly for this example, it went from one extreme to another all within a five-year period. My job has always been to search for the truth and weed out false narratives.

Who has had the greatest influence on your career?

It has to be Charlie Munger. Munger’s lessons are not only applicable to investments but to life in general. He promotes the idea that people should be learning machines and become multi-disciplinary. He is a voracious reader, like me, and credits Warren Buffet and his investing success to their multi-disciplinary approach.

I often compare Munger’s multi-disciplinary thinking to a mixed martial artist versus a karate expert. The highly skilled specialist is good, but he will have blind spots. Munger would refer to this specialist as a man with a hammer because everything looks to him like a nail. The mixed martial artist will work on every aspect of their fighting style to ensure there are no blind spots. With a wider variety of skills, the mixed martial artist will often take advantage of the specialist’s weaknesses.

What was your first job?

My first job was as a waiter at Burswood Casino in Perth.

Where did you grow up and what was it like?

I had a pretty normal childhood growing up in sunny Perth. Growing up, I never had an entrepreneurial spirit like selling lemonade, but I was very curious and wanted to know how the world worked. Over time, this curiosity has been extended to the stock market and it provides the perfect scenario to keep a scorecard of my wins and losses. I believe my journey to find universal truths that began in my childhood will never cease.

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