The Montgomery Fund

The Montgomery Fund

Last week the retail fund, The Montgomery Fund, celebrated its two-month birthday and thanks to some canny timing of the launch (rather than any skill, which cannot be attributed to a fund that is 8 weeks old) it has recorded a return of approximately 10.2% against its benchmark’s return of 5.75%. While we all have to crawl before we walk, I am pleased with the fund’s first steps.

Investors in the fund can look forward to receiving their first bi-monthly update in early November detailing the performance, major holdings, and the composition of the portfolio.

Over recent weeks we have received a number of questions about The Montgomery Fund and I thought it would be a good idea to try and answer some of those questions here.

If you have any more, feel free to post them and we will endeavor to answer them.

The first thing to point out is that Montgomery Investment Management is now the investment manager for two products. They are, The Montgomery [Private] Fund, and The Montgomery Fund.

The Montgomery [Private] Fund, a fund for wholesale investors with a minimum initial investment of $1,000,000, had its inception on 23 December 2010. In the 21-month period to 30 September 2012 it has pleasingly out-performed its benchmark, the ASX200 Industrials Accumulation Index, by 17.47%.

In our Annual Letter to investors of the Montgomery [Private] Fund, we detailed the average return on equity of our top ten holdings for the 2011/2012 financial year. At an estimated 30% this is well over double the “market average”. Montgomery is focused on businesses with superior financial strength and performance. Of course, we have a few other ‘bells and whistles, however if Montgomery can continue accumulating high quality businesses when available at a discount to our estimated intrinsic value – and that intrinsic value is rising at a good clip, then I expect the investment returns we deliver to our investors to out-perform the general market over the long term.

The newer of the two funds is The Montgomery Fund. Both funds are open-ended unit trust where investors are issued “units” in the trust. The minimum initial investment for The Montgomery Fund is $25,000 and investors who are interested in applying for units in the Fund are encouraged to read the Product Disclosure statement (PDS) and the Information Booklet before making their decision.

The portfolio of The Montgomery Fund generally contains 20 to 40 stocks, and the price of the units will vary as the market value of the underlying investments in the fund rises or falls. The Fund is priced every Sydney business day, reflecting the market value of assets in the portfolio. Investors are able to access historic daily unit prices.

Montgomery has out-sourced many, if not most of its non-investment activities. This allows us to concentrate our efforts on investing and communicating with the investors in each fund. For example, Fundhost Ltd is our Responsible Entity and Administrator while National Australia Bank provides the custodian services. The auditor of both funds is Ernst & Young.

Finally, with respect to distributions, it is useful to understand how a fund like the Montgomery funds work.

The net income distribution from each fund comprises realised capital gains plus dividends and interest less realised capital losses, fees and expenses.

Generally, net income is difficult to predict and the size of the distributions may vary from year to year however it is the aim of the funds to grow both capital and income.

When the net income is positive, it is distributed to the unit-holders of The Montgomery Fund as soon as practicable after each 30 June and 31 December. Unit-holders may elect to reinvest their distributions into the relevant fund at the Net Asset Value unit price at the 30 June or 31 December date. Alternatively investors may elect to receive their distributions by Electronic Fund Transfer (EFT). (See Section DIV on page A5 of the Application Form, which accompanies the Product Disclosure Statement).

Over time, we will draw your attention to the shares of companies we have had some success with. Two weeks ago I did that through a one of the weekly insights videos. Today, I mention another company. Codan Limited is one of those uncommon but pleasing Australian innovation success stories. It operates in a several business segments including advanced radio communications equipment and mine technology, but most of Codan’s $179m revenue is derived from global sales of metal detecting equipment, with a large part of that focused on gold detecting equipment.

Codan enjoys tailwinds when there is a gold rush on somewhere in the world.

Thanks to some patented technology and a rock solid after sales reputation, its Minelab metal detectors are regarded as the best in the world, with a superior ability to discriminate gold from other, less interesting metals, and the power to sniff out nuggets buried up to half a metre underground (and soon they will release models able to detect gold up to a meter under ground). Codan detectors can retail for $5,000-$6,000, while competitors products command less than half that. Serious prospectors want to maximize their gold-finding potential per hour, and that means paying for the best possible gear. We like businesses whose products encourage people to cross the street to seek out the best.

Codan’s non-gold businesses have operated successfully, assisted by a strong technology position. These factors have provided a measure of financial resilience for Codan, and have allowed it to earn an “A1” quality and performance rating. Net debt at 30 June 2012 was $16m and available cash flow could see this eliminated during 2013.

At last weeks’ Annual General Meeting, David Klinger, the Chairman of Codan Limited, said he expected the Company’s net profit after tax for the year to June 2013, would be up by at least 40% on the previous year to more than $40m. This would imply a return on average equity of at least 45% and at a prospective P/E of under eight times at the current price.

Both The Montgomery [Private] Fund and The Montgomery Fund are holders of Codan Limited, whose shares enjoyed a near ten percent surge following the announcement.

If you are thinking about investing in either fund please ensure you read the relevant documentation and the disclaimer below. Wholesale investors seeking an Information Memorandum in The Montgomery [Private] Fund and retail investors seeking the Product Disclosure Statement and Information Booklet in The Montgomery Fund, please see www.montinvest.com, email us at office@montinvest.com or call us on 02-9692 5700.

Disclaimer

# Portfolio Performance is calculated after fees and costs, including the Investment management fee and Performance fee, but excludes the buy/sell spread. All returns are on a pre-tax basis. This report was prepared by Montgomery Investment Management Pty Ltd, AFSL No: 354564 (“Montgomery”) the investment manager of The Montgomery Fund (“TMF”), ARSN 159 364 155. The Responsible Entity of the Fund is Fundhost Limited (ABN 69 092 517 087) (AFSL No: 233 045) (“Fundhost”). This document has been prepared for the purpose of providing general information, without taking account your particular objectives, financial circumstances or needs. You should obtain and consider a copy of the Product Disclosure Document (“PDS”) relating to the Fund before making a decision to invest. While the information in this document has been prepared with all reasonable care, neither Fundhost nor Montgomery makes any representation or warranty as to the accuracy or completeness of any statement in this document including any forecasts. Neither Fundhost nor Montgomery guarantees the performance of the Fund or the repayment of any investor’s capital. To the extent permitted by law, neither Fundhost nor Montgomery, including their employees, consultants, advisers, officers or authorised representatives, are liable for any loss or damage arising as a result of reliance placed on the contents of this report. Past performance is not indicative of future performance.

MORE BY RogerINVEST WITH MONTGOMERY

Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

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.