Editors Choice

MT DATABASE
Tuesday, 19 September 2017
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A big stock picker

One of the things that doesn’t waste an investor's time is finding out what fund managers have bought and are selling (as soon as possible after they’ve bought them or started selling them). 

Fund Managers have more focused investment brains, they have the time and hopefully the skill to find stocks and you have to assume they have more insight and have done more work. We may be fulfilling their purpose by listening to fund managers sell their stories to us, but that has been the game for centuries, since the word “market” was first uttered. In the funds management game, especially in the mid-cap arena, it is all about buying something and telling the world to help get the share price up.  

So when a fund manager talks, you listen, because the likelihood is they know more about it than you. Also thanks to the pitiful liquidity in the Australian market, no even small fund manager can afford to be short term because they can't get the money in or out quickly so their stories tend to be medium to long-term and because looking to the horizon rather than their screen, is about the only way they will generate the lowest risk long-term returns.

One fund manager worth watching is Greencape Capital run by Matt Ryland and David Pace.

Greencape is particularly interesting because they are a huge fund that also picks small and mid-cap stocks. They dwarf Wilson Asset Management with their fire power. They run $7.5bn, Wilson runs $2bn. If Greencape decide to target a mid-cap stock it is going to move

Greencape says "we are an active, 'bottom-up' stock picker. Whilst Greencape does not target any specific investment style and will invest in stocks displaying 'value' and 'growth' characteristics, its focus on a company's qualitative attributes will generally lead to 'growth' oriented portfolios. This is an outcome of its bottom-up process. As such, Greencape's investment style may be classified as 'growth at a reasonable price'.

  • They have a Broadcap Fund and the Greencape Wholesale High Conviction fund. 
  • The High Conviction Fund is described as “Active portfolio management of fewer stocks with higher conviction means there is potential for higher returns.
  • The Braodcap fund “offers the potential for capital growth above the S&P/ASX 300 Accumulation Index over the medium to long term. The Fund is diversified, and provides access to Australian companies of all sizes.”
  • They have $7.4 billion under management.
  • They started in 2006.
  • They have outperformed every year. 
  • They say they spend 100% of their time on the investment process.
  • Analysts are given an unlimited travel budget - they call travel an investment in performance.
  • They have beaten their benchmarks (ASX 200 and 300 Accumulation Index) by over 3.4% each year after fees since inception - that may not seem like a lot but when you run $7.4 billion you do not get “rocket under rock” returns and to beat a compounding costless index at all is fairly impressive.
  • Ryland talks about the focus being on what is “observable and verifiable rather than making predictions and having theories. When we lock on, we have high conviction because we have done the verification work”. He says they make mistakes but with their philosophy “tend to have more money in the stocks you get right and lessen the stocks you get wrong”.
  • He makes the valid point that if you achieved 1% of alpha (outperformance) with a $7.5 billion fund it is as good as raising $750 million in new capital. He says “we would rather knuckle down and focus on the alpha than run around rattling the can”.
  • He emphasises the importance of “shareholder stewardship of management and the board”. In other words “aren’t they good stewards of capital”.

His stock picks in an article in the AFR on 19/9/17 include:

  • CSL, because it is investing to generate long-term returns.
  • Speedcast (SDA) which he says has been a shrewd capital allocator.
  • He says they were smart enough to avoid Healthscope and Mayne Pharma, stories that were out of date.

The Greencape top holdings – This is an interesting list because I have broken out their recent trades in each stock and at the bottom it also includes the stocks they have sold. Note they are selling A2 Milk in NZ and have recently been buying VOC and IRE:

Top Holdings and movements as of 18/9/2017:

From their website:

Investment process

  • Idea generation: All companies within the S&P/ASX 100 are automatically researched and assessed as part of this process. To research the companies in the S&P/ASX 100 properly, Greencape Capital believes that you need to conduct in-depth analysis on their competitors, customers and suppliers. This process can reveal opportunities outside of the S&P/ASX 100 for investment. Greencape Capital consider these companies to be part of the Fund’s ‘investment universe’.

Company selection criteria

  • Shareholder stewardship: examines whether a company’s management team acts in the best interest of shareholders and will continue to do so in the future. This can include an analysis of historical decision making, management and board effectiveness, remuneration structures, corporate governance and financial controls.
  • Business evaluation: involves the investigation of the sustainability of financial metrics such as return on investment, profit margins and free cashflow generation, and the potential for these factors to change over time.
  • Valuation: is considered primarily on the basis of cashflow generation and the capitalisations of earnings and yield. Franking credits are valued as part of this process.
  • Market milestones: are assessed as to whether they represent a meaningful catalyst of a company’s share price performance. Milestones may include earnings certainty, outlook statements, valuation risk and strategic business milestones.
  • Company rating: Following this in-depth company analysis Greencape assigns a ‘Stock Rating’ to each company. This rating identifies Greencape’s view of the likely relative performance of the company.

Portfolio construction

  • When constructing the portfolio for the Fund, Greencape uses the company ratings to determine which companies are included in the portfolio and what percentage is invested. These company ratings also form a key part of the buy/sell discipline, as a change in rating will form the basis of these decisions.
 

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