Fund managers offer strategy options

18/11/2019 - 13:36


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With uncertainty surrounding global share markets, Business News has taken a close look at the strategies of six Perth-based fund managers.

Fund managers offer strategy options
Romano Sala Tenna (left) and Giuliano Sala Tenna maintained their investment strategy despite poor returns last financial year. Photo: Gabriel Oliveira

With uncertainty surrounding global share markets, Business News has taken a close look at the strategies of six Perth-based fund managers.

The 2019 financial year was a challenging time for fund managers like Romano Sala Tenna.

His company Katana Asset Management has a history of outperforming the overall share market but the year to June 2019 was an exception – a big one.

Its flagship fund, listed investment company Katana Capital, had a negative gross return of -0.53 per cent for the year.

(click to see a PDF version of this special report)

With the All Ordinaries index increasing by 6.51 per cent over the same period, it was the worst period of underperformance since the fund was established in 2006.

Since then, it has outperformed the market in 10 of 14 years.

Mr Sala Tenna is feeling a lot more comfortable now, with Katana Capital achieving a gross investment return in excess of 7 per cent for the financial year to date compared with 1.1 per cent for the All Ords.

“It’s nice to see what we laid out come to fruition,” he told Business News.

“We haven’t changed our strategy, we aren’t chasing the latest fad.”

Mr Sala Tenna said the overall market had been inflated by irrational demand for technology stocks, with Australia having the highest-priced tech sector in the world.

Katana has kept clear of the tech stocks and retained about a quarter of its money in cash, with Mr Sala Tenna saying its conservative approach yields the best risk-adjusted returns over time.

“As a manager, we will always put preservation before performance,” he said.

Katana is one among a small group of Perth-based fund mangers with equity investment funds.

The following table illustrates the very diverse strategies adopted by each of these fund managers.

Katana invests across all market sectors; hence its top stocks range from mining services company Mineral Resources to health tech company CSL, Woodside Petroleum, gold miner Evolution Mining and Ramsay Health Care.

Another fund manager with similar products is Euroz subsidiary Westoz Funds Management.

Euroz has total funds under management of $1.58 billion.

Most of that money is in its Entrust Wealth Management business, which operates individually managed accounts for its clients.

In contrast, Westoz manages two listed investment companies that offer an easy way for investors to gain access to a broad portfolio of shares.

Both Westoz Investment Company and Ozgrowth reported negative returns in FY19, reflecting the general decline in smaller WA-based companies they typically invest in.

Westoz, for instance, has major holdings in Cedar Woods Properties and Finbar Group and mining services companies Macmahon Holdings and Perenti Global, along with global miner BHP.

Ozgrowth has a leaning toward smaller companies, including Zenith Energy, Emerald Resources and Orecorp.

Like Katana, the two Westoz funds enjoyed a bounce in the September quarter before dipping slightly in October.

Chairman Jay Hughes draws investors’ attention to the long-term performance of both funds.

Westoz Investment Company has generated an average return of 13 per cent since inception in 2005 while Ozgrowth has returned 8 per cent per annum since it was established in 2008.

“As ever, our strategy is focused on utilising our experience to identify attractive investment prospects from our base in Western Australia,” Mr Hughes told investors in a recent update.

Other fund managers include Merchant Funds Management and Precision Funds Management, which both service high net worth investors. 

Merchant manages both the Merchant Opportunities Fund, established in 2012, and the Merchant Leaders Fund, established in July last year.

Managing director Andrew Chapman told Business News his group had raised money into both funds recently.

He said the Opportunities Fund now had close to $100 million in assets under management – up from $65 million it reported at June 30, and the Leaders Fund close to $50 million.

That growth may have been helped by some impressive performance numbers. The Opportunities Fund has returned 10.7 per cent over the past year and 25.1 per cent over the past five years.

It has a strong bias toward smaller tech companies, with one notable example being Bard1 Life Sciences, which is commercialising a breast cancer diagnostic.

The fund paid about two cents per share to buy into Bard1, which jumped as high as 5.2 cents last month before easing to 3.5 cents currently.

The Leaders Fund has a very different focus, investing in ASX100 stocks. Its major holdings include Fortescue Metals Group, Beach Energy and Rio Tinto.

A relatively new player in the market is Precision Funds Management, established three years ago by experienced stockbrokers Tony Kenny and Tim Weir.

“The motivation behind establishing Precision Funds Management was to wrap some rigour and process around how clients manage the ‘high-growth/high-risk’ portion of their portfolio,” Mr Kenny said.

The two founders have put their money where their mouth is, having collectively invested $4.25 million in Precision at the same entry level as other investors.

Precision has a broad mandate with the flexibility to invest in early-stage opportunities, including seed capital, private companies and pre-IPO capital raisings.

It has a bias toward resources and associated service companies but also invests in other sectors.

For instance, it recently invested in life science company Phylogica, which has gained heavyweight backing from former Ikea franchise owner Alan Tribe.

Mr Kenny said Precision had also been able to offer its shareholders co-investment opportunities.

Tim Weir (left) and Tony Kenny have invested $4.2 million of their own money into their fund. Photo: Gabriel Oliveira

An example was Precision participating in a consortium to purchase HiSeis, an unlisted company that is commercialising 3D seismic technology for the hard rock mining industry that was developed at Curtin University.

Its co-investors included listed mining services company Perenti Global, senior executives and investors represented by Azure Capital and Sternship Advisors.

The involvement of Sternship was no coincidence, as it is one of several businesses that leases space in the same building as Precision.

The building at 1202 Hay St, West Perth was formerly the head office of law firm Blakiston & Crabb (now Gilbert + Tobin) and is still owned by lawyer Michael Blakiston, who is also Precision’s chairman.

Mr Kenny said the aim was to create a resources hub with a diverse range of ASX-listed companies, corporate advisors, private equity investors, lawyers and technical experts that can leverage off each other.

Mr Kenny said the Precision Opportunities Fund achieved a return of 20 per cent in FY18 – its second year of operation – but, like others, had a tougher time in FY19.

It had a small positive return, against the backdrop of the Small Resources Index being down 14 per cent.

“In light of a difficult small cap market, our primary objective has been to protect capital while we wait for the right opportunities and the broader markets appetite for risk assets returns,” he said.

That is reflected in the group keeping more than one third of its funds in cash.

High net worth investors looking for international exposure have backed one of the success stories in the local funds management scene, Cottesloe-based Packer & Co.

Established by former stockbroker Willy Packer in 1993, its Investigator Trust currently manages more than $2.2 billion of funds, invested across global stock markets.

It returned 13.5 per cent for the year to June 2019. Most of that gain reflected the movement in global markets, as reflected in the 12.6 per cent gain in the MSCI World Accumulation Index.

WA Super

An even larger funds manager is superannuation fund WA Super, which has $3.9 billion in assets under management.

WA Super offers two specialist equity options, focused on Australian and international shares.

Like many big institutions, WA Super is moving towards passive investing, which aims to match the returns achieved by the overall market, and therefore focuses on large-cap stocks.

That’s the opposite of the active investment managers discussed above.

Most of WA Super’s members have their money in diversified funds, such as MyWASuper, which is its default fund.

MyWASuper has its money spread across shares (38 per cent), fixed income, such as government bonds (27 per cent), real assets, such as property (18 per cent) and various other investments.

Chief investment officer Chris West said this diversification was an effective way to manage risk.

“We don’t know what the future will hold and it’s important that the returns we generate on our members' retirement savings are robust to a range of potential scenarios,” he said. 

Mr West said there is not one right way to invest.  

“The selection of a portfolio should be based on an investor’s own investment philosophy, risk tolerance, objectives and constraints.”

He said many investors have not needed to worry greatly about diversification because of the good returns over the past decade.

“The period from 2009 to 2019 has been the best period of returns for a 70 per cent equities/30 per cent fixed income index portfolio in modern history and, by many measures, the best returns period ever,” he said.

“The other two notable periods are immediately after the Second World War and during the tech bubble.”   

Mr West said investing in the future would be more challenging.

“The expected returns of cash and fixed income are low,” he said.

“And the expected future premium for holding risky assets, like shares, relative to lower risk assets, is also low. 

“That means we expect less ‘bang for your buck’ when taking risks in the future but also so-called safe haven assets will also struggle to perform their role. 

“Now is as important as ever to focus on building diversified portfolios with appropriate risk levels; especially true for people in the ‘retirement risk zone’ which represents those nearing retirement age or recently retired.”  

Another major investor with a cautious view of the market is HBF managing director John Van Der Wielen, who has shifted to a more conservative investment strategy in response to the risks facing global share markets.

“We’ve opted for less volatility,” said.

“We want more certainty around our ability to maintain competitive premiums.”

HBF has reduced its weighting to ‘growth’ assets, notably Australian and international shares, from 30 per cent of financial assets to 15 per cent.

The funds have been reallocated to ‘defensive’ assets such as interest-bearing securities and term deposits.

“We are concerned with the level of risk and volatility in world markets,” Mr Van Der Wielen said, adding that the US stock market was trading near all-time highs.

The changes in the group’s investment strategy follow the appointment of Reserve Bank of Australia board member Mark Barnaba as chair of a new investment committee.

The recent changes partially  reverse a shift in HBF’s investment strategy over the previous year.

Its 2019 annual report shows it had $1.63 billion invested in financial assets as at June 30, with 32 per cent invested in shares, infrastructure and other growth assets.

One year earlier, that proportion was lower at 22 per cent.

The annual report shows the group had net investment income of $65.9 million in the year to June 2019, an increase of 16.4 per cent on the prior year.

It attributed this to higher returns from equity markets (shares) while noting that low interest rates continued to affect term deposit returns.

The overall investment return for the year was 4.3 per cent, up from 3.9 per cent.

Mr Van Der Wielen said the group would continue to invest via managed funds, rather than by buying shares directly.

Its shares portfolio is split evenly between Australian and international markets.

He said infrastructure continued to be a viable and attractive asset class.


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