Montgomery’s missionary zeal

Montgomery’s missionary zeal

Over the weekend, journalist, leading economist and fellow fund manager Christopher Joye penned a profile article for the Australia Financial Review. We’re republishing it here, as opposed to just our usual press section, because we think it encapsulates exactly what it is we are attempting to do here at Montgomery Investment Management.

The missionary zeal of value investor Roger Montgomery

by CHRISTOPHER JOYE

I first met the unorthodox, rake-thin and bespectacled Roger Montgomery on a Sky business show 18 months ago. Guests can be boring or bumbling cleanskin talent. It’s rare that one is taken by a panellist’s delivery and content.

And real money managers tend to be bum communicators.

But Montgomery was an exception. A striking media machine: articulate, confident and focused on projecting his messages to Sky’s audience. At times he literally stole the show from our host, addressing the camera directly. I came off second best.

I was intrigued by Montgomery’s missionary zeal. He was clearly sharp. This passion can be a valuable trait in a money manager. Every great investor is different, but I look for folks with intense commitment, sufficient conviction in their beliefs to second-guess the market’s wisdom, and bona-fide humility. The best investors quickly recognise when an idea is a dud and swing 180 degrees.

After the show I cornered Montgomery about his eponymous Aussie equities investment business. Here, too, Montgomery had taken an unusual path, much like his career, which has traversed from equities and commodities research to retail investment education and publishing; the latter he has never stopped.

Most new funds start with lumps of wholesale money then slowly broaden into the fragmented retail world. The typical path involves proven managers securing seeding from a super fund and/or wealthy investors. Then they embark on the glacial process of building a track record and getting “rated” by researchers that act as gate-keepers to super trustees and advisers. The goal is the prized institutional mandates that can drive step-changes in assets under management.

Only once the brand and performance have been seasoned for more than three years do managers normally go fishing in the deep but dispersed retail ponds, which are dominated by advisers and the mom and pop clients they service.

NO ‘BIG BROTHER’ DISTRIBUTION PARTNER

With no ratings or platform listing, no institutional investments and no “big brother” distribution partner, Montgomery had raised $250 million in a few years. Today that number has jumped to almost $500 million. Remarkably, over 90 per cent has come from direct retail investors – not via platforms or institutions.

Montgomery has attracted these flows through strong returns combined with a unique “B2C” distribution model. There is the professionally produced blog with daily posts from his five-person investment team. Regular appearances on ABC and Sky TV, 2GB radio, and in newspapers. The obligatory Twitter account tracking every move. His book Value.able, where Montgomery sets out “three simple steps to successful value investing” and the fancy “Best of the Best” monthly e-zine, which is the “only prescription for healthy finances”. And, finally, the online stock picking tool, “Skaffold”, which “makes it easy to identify top value stocks around the world”. This is a boutique investment house with a very creative yet institutional-quality sales strategy.

Returns have also been impressive. The Montgomery [Private] Fund, with a minimum investment of $1 million, and which can have as much as 20 per cent of its capital in a single stock, has delivered 37.3 per cent after fees since its inception on December 23, 2010; the ASX 200 Industrial Index has given 15.8 per cent.

The newer Montgomery Fund, which accepts investments as low as $25,000 and spreads its money more widely with specific stock weights never exceeding 7 per cent, has returned 30 per cent after fees since its August 2012 launch, comfortably beating many competitors.

Fees are in hedge fund territory: the base management fee is about 1.2 per cent annually. A 15 per cent performance fee is also payable if, and only if, returns are positive and above the index.

FLEXIBILITY TO TAKE BIG CASH EXPOSURES

An important feature of both funds, which hunt for stocks trading at prices well below intrinsic value, is that they have the flexibility to take big cash exposures if Montgomery thinks the market is dear. The wholesale Montgomery [Private] Fund can go to 100 per cent cash, and was near that mark in May 2011 and May 2012. The retail version has a maximum cash weight of 50 per cent.

Montgomery says this allows him to mitigate the risk of capital loss when markets are expensive in contrast to other equities managers that have to remain fully invested. So while his portfolios are more concentrated than the index with, say, 20 to 30 stocks, and therefore have higher volatility, he strives to still produce decent returns when markets head south.

Right now his models say he should have a 25 per cent cash weight, which “indicates the market is a little expensive”. “I don’t think that’s because of the good quality companies,” Montgomery says. “It’s because the index also includes some rubbish that is going up as well.” A second influence on his cash exposure is volatility, which he believes “clusters”, and can signal sustained periods of heightened risk.

Asked about his life lessons, Montgomery says: “Overnight successes don’t happen overnight, they take years, and I have not reached that point yet. In your 20s you think you know everything, but you don’t. It takes time and experience. The only thing that teaches you how to manage risk is losing money. There are lots of people in finance who don’t deserve the cars they drive.”

He says that in his 20s he “treated the sharemarket as a casino: it was a place where you could punt”. “It was not until much later that I realised that it can be a venue for accessing terrific underlying businesses and their management teams. Investors spend too much time guessing what others are going to do next rather than trying to value what they are actually buying.”

On the Abbott government’s planned changes to the financial advice laws, Montgomery says: “It makes so much more sense that clients pay for the advice they receive; conflicted compensation, like commissions and bonuses, [which will be reintroduced under the government’s changes] have no role.

“It’s already difficult enough to get unbiased advice because the big banks own the vast majority of advisers and platforms.” On banking competition, “the oligopoly is not going to change”, he says.

“We have tried to change it before and failed. The lack of competition is evident not in borrowing or savings rates but in banking service prices – fees and charges – not coming down. There is no competition there at all and that is where the money is made.”

On this basis the banks are attractive investments. Montgomery holds ANZ and previously owned CBA, which he says bought BankWest for a song in the GFC. While he worries about the banks’ super-high leverage, he argues that the risk of a US-style housing correction is remote.

We hope he is right.

The author is a director of YBR Funds Management.