Seven questions with Stuart Welch

Stuart Welch is a portfolio manager at Alphinity Investment Management.

Cochlear has significantly underperformed the health sector benchmark during the crisis. Is now a good entry point?

Cochlear is a great business. It is the undisputed world leader in cochlear implants.

However, unfortunately for Cochlear, it has been disproportionately impacted by COVID-19. The cancellation of elective surgeries has materially reduced sales volumes in most markets. Most Cochlear units are sold to adults.

Going forward, more urgent surgeries will likely be prioritised ahead of adult implantations, meaning it may be a little while yet before Cochlear gets back to its otherwise solid footing.

Sydney Airport or Transurban, which do you prefer?

What were seemingly defensive infrastructure assets with stable and growing distributions have been upended by COVID-19. Thankfully both companies significantly strengthened their balance sheets post the financial crisis, so these events certainly aren’t terminal.

However, the path to recovery, as in most industries, will not be uniform. As restrictions lift, people are much more likely to jump in their car before they head to the airport.

China’s post-COVID-19 recovery shows car traffic has increased relative to pre-COVID-19 levels as people have avoided public transport.

The key driver for Sydney Airport is international air traffic. While the path to domestic air travel is clearing, international looks more challenging for now.

We prefer Transurban today, although both are great businesses.

What has been your approach to investing in the current environment?

The main thing is to stay in regular communication with the companies that you invest in. The economic ramifications of COVID-19 have continued to evolve as regulators have acted to firstly contain the virus and subsequently loosen restrictions. It has been fast moving.

Throughout this time we have stayed close to companies to understand the ever-changing world.

Our initial focus was ensuring the balance sheets of the companies we owned could withstand the impact. The focus has now shifted to understanding the path to recovery and what life looks like in a post-COVID-19 world.

How has the use of quantitative analytics changed with the uncertainty in consensus figures?

Our investment process combines both fundamental and quantitative research techniques. However, we lean much more heavily on our fundamental research at times like these.

At sudden turning points, quantitative data points are rapidly out of date. Consensus earnings estimates still have not fully accounted for COVID-19 impacts and we will not see the balance-sheet implications until August.

Markets are moving well ahead of these data points, hence we focus on our fundamental research inputs.

Have you been pursuing any information on the outlook for a vaccine from primary sources?

Yes. We have spent many hours speaking to experts from around the world to better understand the healthcare crisis we are all facing.

Vaccines is just one of many topics we have needed to understand. Equally as important are aspects such as transmissibility and which cohorts are most adversely affected.

Aspects such as these will shape people’s fears and actions, together with regulatory responses, both during the onset and the subsequent easing of restrictions.

Treatments are also important. While they won’t stop you getting COVID-19, they could dramatically improve the outcome if you do. Anything that reduces your time in hospital being ventilated increases effective hospital capacity, further improving healthcare outcomes.

Industry experts help us answer these and other important questions. Epidemiologists would have never had so many incoming phone calls (and may never again – we hope).

Any podcasts, reads or shows that have caught your attention?

I always enjoy reading Howard Marks from Oaktree Capital. I recently watched an interview with Stanley Druckenmiller, formerly of Duquesne Capital. It was interesting, although a little depressing.

Any isolation story worth sharing?

Thus far I’ve managed to avoid anything too embarrassing, mostly because call co-ordinators can typically mute your phone line remotely if you haven’t already. I have had my line muted a few times, mostly around bath time.

Things have been more challenging, however, if you are a more active participant in a call. In one instance a stockbroker, acknowledging my daughter screaming in the background, simply said he was going to speak up and carry on until I said to stop. It didn’t appear to be his first such incident.