Small fundies punch above their weight with mighty returns
Jul 20, 2019 — 12.00am
Long positions in Fortescue Metals Group, Jumbo Interactive and LVMH were some of the winning bets successful Australian fund managers made, enabling above-market returns in 2018-19.
A handful of small strategies have produced strong numbers that beat the index and elevated them to the company of well-known names such as Magellan and Regal.
According to Mercer, the S&P/ASX 300 Index’s comparable 1-year return was 11.4 per cent, and the MSCI World ex-Australia Index was 11.9 per cent. But the median Australian shares fund delivered only 9 per cent before fees, and the median overseas strategy returned 11.4 per cent before fees.
Over the past 20 financial-year periods, the S&P/ASX 300 has exceeded the median manager just four times with the highest underperformance coming in 2018-19, Mercer’s data shows.
Trigger for change
Australian Eagle Asset Management’s Sean Sequeira recorded a 16.27 per cent return for his long-short fund, after fees, and 19.23 per cent before fees.
Fortescue was a winner: the stock has more than doubled this year.
“The improvement of their cashflows was still not recognised by the market,” he recalled.
“We were definitely confident in the sustainability of those cashflows, and that was confirmed by Fortescue. It allowed us to benefit from an external shock to the iron ore market that’s happened because of the Vale disaster,” Sequeira said.
The iron ore price has risen to a five-year high. Positions in Altium, the $4.7 billion design software company, and QBE Insurance Group were also big contributors on the long side.
“While we are a growth manager, two of those three positions are not necessarily considered growth stocks,” Sequeira said.
“What we saw was the change in what they were doing relative to what they were doing in the past,” meaning a substantial change that moves the stock up the quality spectrum and translates to earnings growth. Such theses also require a trigger.
In Fortescue’s case, the company is improving the grade of their product and adding more tonnes that amount to a more attractive growth profile than the larger diversified miners.
“We’ll have some volatility around the iron ore price,” the fund manager expects, but the transformation in cashflows should still be able to support a share price “not too far from where we are at the moment”.
On the short side, positions against AMP, Caltex Australia and Challenger worked in Australian Eagle’s favour.
While Sequeira could never have predicted that the Reserve Bank of New Zealand would block a key platform of AMP’s strategy reset – the sale of its life business to Resolution Life for $3.3 billion – he continued to hold the already profitable short because a turnaround of that scale would take longer, and require more patience.
“We don’t target particular companies,” he said, “we will look at the quality of the business and the trajectory of that, and our view of AMP was it was going to be a long-term process.”
Even though a deep value stock can stay a deep value stock longer than the market might hope, he is watching AMP closely. It can’t be much longer, he speculates, before the risk-reward looks attractive. But he will take his time.
“We’re not here to pick the absolute top or absolute bottom of the market.”
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