Magic Markets Ep189: Portfolio Construction with AnBro

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This podcast is for informational purposes only and is not financial or investment advice. Please speak to your personal financial advisor.

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The Finance Ghost: Welcome to episode 189 of Magic Markets. Thank you for joining us, it’s great to have you here. I think we’ve had a couple of really interesting shows in the past couple of weeks. We’ve covered stuff like how to research stocks and how to prepare for a big sell-off in the market. And today we’re going to be talking about how to construct a portfolio and what some of those strategies look like. You’ll have an extra voice on the call today, but not someone who is new to Magic Markets by any means. Craig Antonie of AnBro, you’ve joined us several times on this podcast. It’s always really lovely to have you, and of course, Moe doing this with me every week as you do. Craig, thank you so much for joining us on the show. And I know that Moe and I are really excited to chat to you today and just get some insights around how you guys build the portfolios that you have at AnBro.

Craig Antonie: Well, hi there, guys. Good to be here again, and thanks for having me. Always enjoy these conversations and looking forward to getting stuck in.

Mohammed Nalla: Yeah, Craig, I think that it’s always really great to have you on the show and specifically at around a time like this, because markets have been remarkably volatile. Just a couple of weeks ago, Ghost and I were talking about how you prepare for market correction. We had that market correction, and now we’ve got the market pushing on again, close towards record highs again. And the reason why this is such a timely conversation is, in and amongst all of that volatility, it’s really important to get your psychology right in the markets as well, because sometimes you’ve got FOMO and you feel as though you’ve got to jump into the market – that leads to poor decision making. At other times, when the market’s selling off, you’re terrified by the fear and you arguably don’t deploy your capital in an optimal manner.

Craig, that’s what we want to try and unpack on this particular show – some of the strategies you use at AnBro when constructing those portfolios. I’m going to jump in with maybe the first question of the day, which is to say, we know that AnBro has a whole bunch of different portfolios, different strategies out there. We’ve covered your BRNDZ portfolio, for example, that focuses on some of the world’s most valuable brands. You’ve got Dynamic Compound, and that’s a portfolio that’s very income focused. And then you’ve also got the AnBro Unicorn portfolio, which is really also quite interesting. But a lot of these strategies also talk to different investors. Maybe the first question for me for the day is, is this really around personality, or how do you craft the fit between your various portfolios and the investors when you have that initial conversation with them? I think that’s maybe the starting point. And then from there on, we can move on to how you go about building that portfolio and deploying the capital.

Craig Antonie: Sure, Moe, it’s a very good question, and I think I’ll answer it by saying that it really is a personality thing for one, and also a wealth creation tool for another. And it really starts with what an individual investor is looking for. The other thing is, what is that individual investor’s risk appetite or risk tolerance? And I think that’s important for people individually to understand. Now, some people are naturally more or less tolerable of risk or volatility than others. If you look at my wife, for example, she’s a total adrenaline junkie. She’d just as easily jumped out of an airplane as she would walk down the aisle at the grocery store and buy groceries. I, on the other hand, am not like that. I’m terrified of heights. Horses couldn’t drag me up to my own rooftop, never mind jumping out of a plane. And in investing terms, one’s got to think about it like that, the higher the volatility or perceived risk, the higher the potential return.

Obviously, one individual is very different from another when it comes to the ability to withstand that sort of volatility. And hence, you’ve got to construct your portfolio or investment or have an investment plan in such a way that not only mitigates the overall risks, but also appeals to your investment style and your own risk tolerance.

Mohammed Nalla: Craig, I want to jump in here because with me, for example, I look at this almost in terms of my own personality being a little bit schizophrenic when it comes to that. I’m an adrenaline junkie. I like jumping out of planes. I like climbing up high, high spaces. And when I come to my money, however, I’m a lot more conservative. I think that’s also part of the discussion, when it comes to a person’s personality versus the actual financial objectives. And again, maybe a question here to kind of just leverage off that first question: surely this is also linked to a person’s disposable income, where they are in their life cycle, for example? If you’re early in your career, you’ve got lots of disposable income. You can add that into the portfolio versus someone that’s looking to start building a portfolio that gives them a little bit more passive income. And maybe just talk to us about reconciling those differences in terms of lifecycle, where someone is mentally in their space versus their personality construct.

Craig Antonie: Sure. Well, I think one simple way to look at it is to look at, say, risk profile. And you touched on that Moe with regards to stage of life or life cycle and investing cycle. Obviously the most important thing to consider is the amount of risk you’re able to take depending on where you are at your stage of life. Now, simply put, cash in the bank is often considered the least risky investment you can get. And if you look at, say, the average money market fund in South Africa, that has returned about 7% per annum on average, over the last 20 years. The JSE Top 40, on the other hand, has averaged about 13% per annum over the last 20 years. If you take that into the US context, investing in things like short term treasury bills in the States would have returned roughly 1% per annum over the last 20 years, investing in the S&P500, average of about 10, 10.5% per annum.

What I’m really trying to illustrate here is, irrespective of your level of risk tolerance, in order to generate returns which do grow your capital over time, whether it be inflation as a target or ultimate retirement as a target, you do have to take some level of risk on board. In other words, sitting in a money market account for your entire investment career is not going to get you the returns and ultimately the retirement comfort you would like. On the other hand, sitting in a highly volatile, high beta portfolio a couple of years just prior to retirement is going to give you far more anxiety than it should for someone at that stage of life.

The way we like to look at it is to say, well, we have three portfolios at AnBro. You touched on them Moe when you talk about things like, say, BRNDZ. BRNDZ is what we consider the quintessential quality portfolio that sits in the middle of the risk spectrum. That is a portfolio made up of stocks which have pretty much survived what the market and what the world has thrown at it from time to time, whether it be Covid, the.com crash, emerging market crisis, whatever market fall you want to look at. And these sorts of companies have come out better for it. Then on the other side, you have the AnComp portfolio, which is more focused around stocks that pay dividends. And these dividends are concentrated not just simply around high paying dividend stocks, but also stocks that grow their dividend payouts quickly.

In the context of the two, we would consider the AnComp portfolio to be more conservative. These are the sorts of companies that, again, due to their sheer strength and moat and strong balance sheets, have been able to stand the test of time and pay cash flow to shareholders for a long time. Unicorn on the other side, as you said, is the sort of blue sky, I would say more volatile portfolio to the others, it has the potential for life-changing returns. But along those lines, rather, you can have some gut-wrenching volatility.

What we try and do is try and suss out where individual investors are in their life stage, where they are in their headspace, and try and then recommend a portfolio which constructs it on the say, those three aspects in perhaps differing weights and exposure.

The Finance Ghost: Yeah, I think that’s something I’ve always really enjoyed in the discussions we’ve had, and obviously in many of the prior podcasts we’ve had with you and with Justine as well, we’ve talked to some of the specific stocks in these portfolios. I guess that comes down to once you’ve got your top-down, overarching mandate of the portfolio, this is what we’re looking for. It’s either quality or it’s yield focused, or it’s growth focused. And Craig, I love the comment on how risk-averse you are, because I also know some of the growth stocks that you invest in. You might not get your adrenaline fix by doing all these crazy things with your Mrs., but I have seen you take some pretty interesting positions in the market that often work out really well. There’s some adrenaline there for sure.

But I guess that brings me to the question, which is how do you really pick what’s going into these portfolios? Do you use stock screening tools? Portfolio construction is kind of a top-down, bottoms-up analysis. Moe, we talked about something similar, literally last week on how to research stocks. Is it quite similar in how to build a portfolio? You start with a top-down mandate and then you start screening for the stocks you’re looking for?

Craig Antonie: Yes, it’s pretty much starts like that. What we do at AnBro is we said, well, how we sort of built the business initially, we said, well, let’s look at what we would consider to be some of the biggest global trends, if you like, whether they be of our lives, of the century, of the future, where do we think the world is going? Where’s it been? What is the next sort of leg up and where do we think most of the action is going to be? If we’ve looked at that over the years, we’ve looked at things or we’ve pretty much identified the trends we would like to be investing in and we’d like to be involved in were some things like technology, for example. That’s fairly obvious, right? Energy, consumption and healthcare, so we start with that and we say, well, these are the trends that we’d like exposure to.

Ultimately, the portfolios we build are what we consider to be our best perception of where we would like the world to be, a sort of world we would like to live in, to put it another way. Because ultimately, as a shareholder, you’re giving your capital to these companies and you are backing what it is that they do.

Within the context of technology and energy and consumption and healthcare, we are then looking for the sorts of companies that strive to meet the sort of goals we have as investors, but also at the same time doing good, by the world and also by the various cohorts that they interact with on a daily basis, whether it be their customers, their staff members, shareholders, etcetera. Now, you can imagine each trend has a plethora of opportunity, and depending on the strategy, whether we’re looking at something like AnComp or Unicorn, for example, the filtering processes then begin. And some of the things we look for, obviously are things like track record of performance.

One thing which you might find interesting, which intuitively might make sense, but a lot of people don’t often think about it this way, is that winners win. Companies that are successful, that have been successful, generally continue to be successful. The reason is that these companies have gone through and survived variety of different market and economic cycles and always managed to come out of this better than they went into it. And this is a testament to things like management, the quality of management, the adaptability of management or the business model and that kind of thing. And that provides, I think, another basis or overlay of shares that we look at or companies that we look at. Track record is an important thing and you can’t underestimate the potential of it. I could have a chat with you about companies which probably sound as boring as anything on the surface, but have annihilated even some of the best performing stocks of our time. And they just seem to be underrated and underappreciated. After that we obviously look at things like balance sheet strengths, payout ratios, dividend consistency, dividend growth, the moat, the ability of a business to compound over time. These are things, again, which are vitally important to the longevity of any position you want to take.

Perhaps for something which is more specific to the likes of Unicorn, we look at things like debt levels, cash flows,  and SG&A expenses which are basically all non-productive expenses in the business. We look at things like the rule of 40, in things like SaaS companies. Now, the rule of 40 is really, it’s the gold standard of companies where revenue growth and margin needs to be equal to or greater than 40. It’s a benchmark that some of the best growth companies in the world strive for. All these things really form an overlay into which stocks we then add into our sort of portfolios and selection process. Then break it down into sort of factors, if you like, things like quality, growth, safety, valuation, momentum, beta and then after that, we break it down into whether we consider them to be cautious, moderate or aggressive type investments. And depending on where the company is fitting in all these baskets, they then get allocated to the individual portfolios. That’s really the very short way of saying how we select the stocks to invest in.

Mohammed Nalla: Yeah, Craig, thanks. You’ve unpacked quite a bit to chew on there and I think something that’s still kind of a gap for me in terms of just understanding this a little bit, is that to your point on winners keep winning, right. Quite often – and you’ve indicated, for example, you look at valuation – quite often, if a stock’s one of those winners that keep on winning, the market tends to price that in, and those are the stocks that tend to trade at these extended valuations for extended periods of time. My question comes down to how do you then decide on what price do you pay for some of these companies?

From the sounds of it, a lot of the stuff you’re looking at tends to look at the growth, it tends to look at the momentum. Your rule of 40, for example, that’s a classic growth metric and construct. But at the same time, you’ve got to be sensitive to valuation, the price that you’re paying for something.

Does AnBro kind of come up with a watch list? When do you decide to pull that trigger?

And then very importantly, in terms of deploying the capital. This is something Ghost and I discussed just last week. My approach personally is that if you find something that’s pretty decent and if you’re uncertain around the valuation, if you think it maybe could go lower, sure, you maybe stagger that input and you maybe take a bit now, if it goes down a little bit lower, you consider if everything’s still in line, you kind of take an additional position. What is AnBro’s approach to those things? How do you determine valuation when you’re comfortable to actually pull the trigger on something? And then how do you actually go about deploying capital, assuming this is cash that’s now sitting on the sidelines?

Craig Antonie: Sure. I think what I would say is the strategy is very dynamic based on the portfolio we’re talking about. If we talk briefly about the AnComp portfolio, which is obviously the more conservative portfolio and the one that’s focusing on dividend growth and dividend payouts and dividend longevity, that’s a very different animal to say, a Unicorn type stock. Valuation matters in all sorts of aspects, but they matter in different ways, if I can put it that way. If one looks at a portfolio like AnComp and stocks that fall into that sort of portfolio, the valuation  metrics we consider there are also pretty vast and pretty diverse. But importantly, what we look for also is the company’s relative valuation to its own history, say, over the last 5, 10, 15 years, and also relevant to its peer group or to those companies that it tends to compete against.

Obviously, these things are dynamic. When interest rates are significantly lower than they are today, the inputs into various valuation models obviously change and fluctuate and companies tend to get, or you get more, I think, disparate views in terms of what the right or fair price for a stock is or company is. But in the context of AnComp type stocks, these portfolios don’t trade at the sort of multiples that we would look at when comparing them to Unicorn stocks. Again it’s long term valuations based on long term, average multiple versus themselves, versus peers versus the market, that sort of thing. When it comes to investing in the portfolios, to your point, Moe, we will always take an initial investment into the portfolio, and that will be our starting position. That will serve us as a way to not only keep an eye on the stock, but to monitor the stock in the position for further additions. We’ll have generally a target allocation that we’d like to get to over time, and we’ll use market ebb and flows to build up that portfolio or that weighting to where we consider it to be optimal.

If we then consider something like, say, the Unicorn portfolio, which is a vastly different animal, the valuation metrics are different. These sorts of stocks tend to trade at higher valuations than normal or average sort of companies, but we look for other things there to try and justify that valuation. And top line growth is particularly important. Are these companies able to grow at significantly faster rates than not only inflation, but GDP and inflation, the overall market that they’re competing in, and also the peers that they’re competing against?

At the end of the day then that needs to be backed up by a really solid balance sheet. No debt on the balance sheet, cash flows which must be positive, and also a very long runway for growth, where we can see companies growing into the valuation. It’s very different if one looks at a company like Costco today, which is trading at a PE in the sort of stratosphere, relative not only to its growth rates, but to its historic long term average. And you compare that to, say, a company that’s growing at 40% or 50% per annum, that’s showing at the same multiple, is much smaller and has a much bigger runway to grow. So that’s a long way of answering the question, but really, it just depends on the portfolio we’re talking about and the stock that fits into that investment profile.

Mohammed Nalla: Maybe just one more on that, Craig. In terms of an optimal allocation in the portfolio, what kind of position sizing do you tend to consider? Is it a 1%, 2% to start off with and slowly building that up over time. How do you frame that decision?

Craig Antonie: Sure. How we initially started with the Unicorn portfolio, for example, is each stock in the portfolio came into the portfolio initially at an equal weight, so it was equally weighted from inception. That would, for example, be relatively lightweight, let’s say, 1% per stock or per name that we put into the portfolio. Unicorn always tends to carry a pretty considerable cash balance in the portfolio due to the high nature, the high beta nature of that portfolio. And that cash balance allows us to deploy capital opportunistically as and when we see market fluctuations, market volatility, which tends to be higher for those sorts of stocks than it is, say, for AnComp stocks. Once the portfolio is then equally weighted, that allows us to keep an eye on the positions, watch out for volatility, and then to build those positions up over time. We would generally tend to top out in a position weight through natural buying. A maximum position of a high conviction call would be probably about 5%.

From there, the stock tends to outgrow its position over time. And that really is subject then to company specific performance and stock performance.

What is different to the Unicorn portfolio in particular is we let the winners run, so we don’t rebalance on a quarterly basis or biannual annual basis, just purely based on company performance or share price performance. If you’ve picked up Amazon at $10 a share and it’s now $50 a share, and it’s still looking like the business has got an enormous runway ahead of it, we’re not going to just simply reduce the position size just because it’s grown. Of course, one rule of thumb we do have is if the size of any position gets too large, that it keeps us up at night, we will naturally look at ways of reducing that risk. But historically, in stocks in particular, in general, and in Unicorn stocks in particular, the real money made over time is finding these real winners and just actually keeping them. And you can take them into any context.

In the SA context, if one just imagines investing in something like Bidvest, 20 or 25 years ago, and just keeping that position – over time, you would have done incredibly well. You wouldn’t have had to reweight. You would just find that one in a lifetime stock and just let it deliver.

And I think that’s how we like to look at it from a Unicorn perspective. The AnComp portfolio obviously is different. That’s a different beast, that’s more conservative. There position sizes would generally top out at perhaps 3%, 3.5%. That would be much more dynamic in terms of how we manage those positions, how we recycle capital, and ensure that the overall risk profile of that portfolio, or risk profile, is kept to a place where we’re not too high beta and not too far off, I think just general risk considerations for the investors that that portfolio appeals to.

The Finance Ghost: Craig, I think you’ve shared a lot of really great stuff with us today on how you guys think about these portfolios. Moe took the words out of my mouth on the last question. I wanted to also understand how you think about the weightings and all that kind of thing. So thank you. Obviously, this really just literally scratches the surface of portfolio construction. There are textbooks on this stuff, never mind 25 minute podcasts. But the point is that you’ve touched on a lot of the really important concepts, which is brilliant. And it really does give our listeners a way to go and do some more reading. Go online, check out these different concepts, and look at your own portfolio and consider what’s happening there and what you want to change and how you want to do it going forward. I think a good place to finish off, Craig, is just how people find out about these different AnBro portfolios, because you do have a few, as you’ve mentioned. What is the best way to go and learn about the different options?

Craig Antonie: Well, I would suggest guys go and have a look at our website. It’s anbro.co. There are links there to the different portfolios that we offer, and you have a bit more information about each one, and how they might fit into your own specific sort of risk profile. And what I would say, to all investors out there that are trying to consider what their own individual appetite to risk is, is to think about the times that you’ve been invested in the markets and when markets have fallen considerably. Think about how you felt in that moment when markets fell 8.5% two weeks ago. How were you feeling when you watch the news and you saw the big red numbers everywhere? Were you feeling okay with that? Were you feeling nervous? Were you feeling anxious? That in itself will tell you whether your portfolio is too risky for your own risk profile without you necessarily realizing it.

If you went through that and thought, this is great, I’ve been waiting to buy this dip, and I’ve had money on the side, and now I’m so excited, I want to deploy that – you probably have a different risk profile to someone who’s thinking, I’ve got too much invested right now, I prefer to have a higher cash balance. And there’s no right answer. I think it’s individual. Everyone knows what their own risk tolerances are, but normally it’s during the high stress times when you actually realize what your actual risk tolerance is versus when you just talk about it with friends or your financial advisor.

Mohammed Nalla: Craig, I think that’s fantastic insight. And unfortunately, that’s where we’re going to leave it this week, because we’re out of time. Again, really grateful to you and the AnBro team for always coming on the show, sharing your insights, and again, just contextualizing how people should think about their wealth creation journey over time. It’s not something that’s static – like your portfolio, like markets, it’s dynamic. It can change over time. Go and check out the website, guys. It’s www.anbro.co. Reach out to the team at AnBro. They are very approachable. If you have further questions, engage with Craig, engage with Justine. They’re both very approachable, and we hope to have you back on the show at some point in time in the future. For our listeners, hit us up on social media. It’s @magicmarketspod, one word, @financeghost and @mohammednalla, all on X. Or go and find us on LinkedIn and pop us a note on there. Until next week, same time, same place. Thanks and cheers.

Craig Antonie: Thanks, guys.

The Finance Ghost: Ciao. Thanks, Craig.

This podcast is for informational purposes only and is not financial or investment advice. Please speak to your personal financial advisor.