A good time to be small
As fund managers go, Montgomery Investment Management is not a large operation. With around $0.6 billion under management, it trails well behind the big name fund domestic managers with many billions of dollars invested in the Australian market.
That’s partly because we’re relatively new – the longest running fund we have is just over 4 years old – but it’s also our goal to remain small.
Based on our estimates, the Australian market only provides scope for us to invest around $2 billion domestically and still get the sort of returns we want. When a fund manager grows too big, it becomes very difficult for them to get good results, and our intention is to close the door to new money when that day is at hand.
Right now feels like a good time to be small. Large tranches of the Australian market look to us to be facing difficult times, particularly the resources and related sectors, and a good part of the retail sector.
We can’t identify a whole lot of bright spots out there, so we’re glad we don’t have to. Being a bit smaller allows us to deploy our capital into the relatively limited opportunities we can see, rather than being forced to hold ordinary businesses simply because they are large.
It will be interesting to see what comes out of the half year reporting season in February. Our suspicion is that there will be a significant number of disappointing results. Hopefully we have positioned our funds to avoid the downdrafts should they come to pass.
Tim joined Montgomery in July 2012 and is a senior member of the investment team. Prior to this, Tim was an Executive Director in the corporate advisory division of Gresham Partners, where he worked for 17 years. Tim focuses on quant investing and market-neutral strategies.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
Chris B
:
Fantastic Grant. I’ve heard this a few times. ARB say a similar thing. They win on quality, the Chinese competition is low quality. ARB is a niche market and not that big volume. Some manufacture is going back from China etc back to the developed countries. It is generally the high volume less sophisticated stuff that China manufacture. But the good more intricate manufacturing needs smart engineering and smart manufacturing doing it, this is happening in textiles.
Pam Totolos
:
Dear Rog’e,
congratulations on getting over the $500 million mark. I note from my Investment notes, that a fund of $1 billion is very hard to manage. I assume trying to dump all of the Australian Equities prior to Black Tuesday in October 1987 was very hard as well.
Entering the market and picking the “Bottom of the Market” with cash, as cash is king at some points of the cycle, such as by, February 20th 2009 ASX for Australian Equities and 9 March 2009 for DOW JONES for US Equities.
A question without notice from my son, what ever happened to Babcock and Brown ???
Kind regards,
Pam.
Roger Montgomery
:
Thanks Pam,
There is plenty of material on the web chronicling the rise and demise of B&B. Not a company that would have qualified here.
Chris B
:
Buffett has been saying for 20 years that the larger Berkshire get, the harder it is to get good returns. If you have $10,000, you can pick your best investment ideas. But if you have $100m, you can’t invest $5,000 into each company, it is too many investments to keep your eye on, so it is harder to invest in small caps which have higher returns.
I’ve applied this idea to my superannuation, I don’t have my superannuation in a large fund like REST or HESTA.
Patrick Poke
:
Having spent 8 years working in the super industry, I can tell you that regardless of size, the equity portfolios of the industry funds and most retail funds are just ‘closet index trackers’. They differ mainly in fees, insurance and asset allocation. I’m not saying these factors are insignificant, but if you think that by going with a smaller industry fund you’ll get your stocks picked by a manager like The Montgomery Fund, you might be disappointed. The only ways to really achieve this is via an SMSF or a platform, which let you choose your own managers or even individual equities if that’s your thing.
Grant Flanagan
:
As a 5 year old manufacturing company, I believe the future for manufacturers is in being small and flexible in niche markets and adopting state of the art technology where required. I can manufacture low volume parts cheaper than anyone. How? My experience and open minded approach. I have survived the GFC and the current climate in the manufacturing sector and If I can survive this period I believe I can survive the long term.