Westoz, LinQ rare bright spots in a difficult year

This time last year, fund managers in Perth were talking bullishly about continued strong investment returns and plans to rapidly expand funds under management.

Twelve months on, most of those who expected strong growth are licking their wounds, with only two of their number claiming to have achieved positive returns.

Listed investment companies LinQ Resources Fund and Westoz Investment Company achieved very creditable returns in the year to June 30 2008, in stark contrast to most of their peers.

Argonaut Funds Management's AFM Perseus Fund went from being one of the best performers in 2007 to one of the worst in 2008, while Oceanic Asset Management was forced to scrap plans for a uranium fund and failed to achieve targeted growth in its established funds.

The fund managers who have done it tough in 2008 are mostly sticking to their guns, maintaining their investment strategy in the expectation this will serve them well in the long-term.

Perth has a relatively small funds management industry. WA Business News has surveyed the performance of 12 fund managers and listed investment companies with about $1 billion under management.

Boutique investment house The LinQ Group is the responsible entity for Australian Securities Exchange-listed LinQ Resources Fund, which was the top Western Australian fund last year.

It achieved a 42 per cent return in the year to June 2008, following its 37 per cent gain in the previous year.

The LinQ Resources Fund invests in small to medium-sized resource companies through both equity and debt instruments.

LinQ management believes several factors create the opportunity to achieve high levels of return on investments in this niche, including the difficulty often experienced by smaller resources companies obtaining debt and equity capital, as well as low analyst coverage of the sector.

Despite being focused on the resources sector, LinQ managing director Clive Donner describes his $407 million fund as having masses of diversification.

"We're sector-specific. We know our stuff and don't pretend we're experts in everything," Mr Donner said.

"We are stock pickers and we don't rush to buy the next fad; we buy stocks that have the proper fundamentals, as they are the ones that usually stand the test of time when you have market sell-downs."

As the number of fund managers in Perth grows and they increase the amount of money they control, the fledgling industry is gaining greater exposure.

Mr Donner said there was a tendency to assume that all fund managers in WA only invested in small-cap stocks.

"Sixty six per cent of our portfolio as of June 30 was invested in companies with market caps over $500 million," he said.

"About 40 per cent had values greater than a billion, and that's quite extraordinary.

"That's really saying these guys are not penny dreadful micro cap managers, they are actually people seeking stocks with strong underlying values."

Westoz Investment Company, which is managed by stockbroking firm Euroz, focuses on WA-based companies outside the top 100 stocks on the ASX.

Due to the relatively low levels of research coverage by the market, Westoz believes the sector offers good opportunities.

Westoz performed strongly last year with an increase in net tangible assets (NTA) of 32 per cent.

Looking ahead to the 2009 financial year, Westoz acknowledge its investment portfolio is not immune from volatility.

With a focus on acceptable levels of return over the medium term, Westoz considers the portfolio remains well placed to perform satisfactorily, albeit at lower levels than those recently recorded.

A relatively new entrant to the fund management sector is Oceanic Asset Management, which runs two funds - Australian Natural Resources Fund and Global Resources Fund.

The Natural Resources fund invests in a diverse portfolio consisting of small to medium-sized Australian companies involved in the mining/extraction and/or processing of natural resources and associated operations.

The fund's performance has reduced to 9.9 per cent this year from 57 per cent in 2007 and retains a tactical cash position to take advantage of the continued volatility inherent in the equity market.

Investors have a considerable selection of sector specific funds to choose from rather than traditional balanced funds.

One sector specific manager to have felt the brunt of the decline in equity markets over the past six months is Entrust Funds Management, a wholly owned subsidiary of Entrust Private Wealth Management which focuses on small and mid-cap industrial companies.

The unit price of Entrust's fund has declined 32.3 per cent for the financial year, which Entrust has described as "disappointing".

The magnitude of the market downturn surprised Entrust managing director David Franklyn, in light of what he felt was a cautious investment approach.

Entrust has set itself the difficult task of rebuilding the value lost during the past year and will not take performance fees until the losses are recouped.

"You must be prepared to invest on a longer-term horizon - say two years rather than two days, two weeks or two months," Mr Franklyn said.

"This is because at present the market is not overly rational, value is not the primary consideration - margin calls, panic, fear and forced selling are currently driving share prices.

"Our approach from here is to buy great quality businesses at a fair price. Fortunately in this market we are finding more of these opportunities."

Another boutique manager that predominantly invests in industrial and financial service companies is Growth Equities Pty Ltd, which was established in 2003.

Growth Equities managing director Russell Lester focuses on non-resource companies as he believes that, when valuing investments, the underlying commodity prices cannot be determined with a high degree of accuracy over time.

"We remove the risk of getting it wrong by not investing in that sector," Mr Lester said.

While fiscal 2008 was a poor year for investment markets, Growth Equities' investing rationale is to remain disciplined and stick to the strategy it still sees as valid in an environment of uncertainty.

"The worst thing you can do during a market period like this is to change your objectives and your strategy; essentially throwing the baby out with the bathwater is completely the wrong thing to do," Mr Lester said.

The rules of the Growth Equities funds are simple - they will not invest in any more than 20 stocks, and never resources stocks.

"We're long-term investors and our strategies are able to perform well going through all market periods in the long term rather than focusing on a relatively short period of time," Mr Lester said.

To date, the 2008 market has been challenging for most equity funds. Investment bank Argonaut unfortunately unable to replicate the spectacular returns achieved by its AFM Perseus Fund in 2007 of 183 per cent, with its NTA falling by 40.4 per cent this year.

The fund is an active investor in the small and micro-cap sized natural resource sector, although it is re-weighting the portfolio to well-funded production or near-production investees to minimise exposure to a sector of the equity market where investor sentiment has evaporated.