The Australian
We at Montgomery were delighted to be featured by The Australian’s Andrew Main in the Wealth Section this week. In an article entitled “Power team looks to long term for competitive advantage” and Photographed by Nikki Short, we enjoyed giving the leather wingback a tour of the grounds – as you can see.
The Australian: 27 August 2013. ROGER Montgomery, a columnist in this newspaper, runs with David Buckland a fund based on value rather than scale, which has performed in a way that greatly justifies its founder’s philosophy. We spoke to him about the Montgomery (Private) Fund that was founded in December 2010, which has returned 35.05 per cent net over the 2 1/2 years to June 30.
What sectors do you invest in?
The fund can invest in any and every sector in Australia and New Zealand. The best business to own, however, is the one that can employ large amounts of incremental equity at very high returns. The worst business to own is the one that must necessarily do the opposite. Driving those high returns, we look for businesses with competitive advantages, and the most valuable is the ability to raise prices even in the face of industry-wide excess capacity.
Mining businesses do not enjoy such advantages so it tends not to exhibit a great deal of enthusiasm for that sector.
What’s the current structure and history of your funds management business?
Montgomery Investment Management is mostly owned by its staff, with a minority shareholding held by Magellan Financial Group. Montgomery launched the Montgomery (Private) Fund in December 2010 with Chris Cuffe’s Third Link Fund being the very first investor.
In August last year Montgomery launched the Montgomery Fund to investors wishing to invest more than $25,000 but less than $1 million. Montgomery also manages a large institutional mandate for one of the big four banks focused purely on ex-100 capitalised companies.
How has your fund performed in recent years?
The Montgomery (Private) Fund returned 28 per cent, including dividends, over the 12 months to June 30, versus 15.45 per cent for the benchmark index, the S&P/ASX 200 industrial accumulation index. We launched a retail version of the fund on August 17 last year and it has returned 34 per cent on the same basis, against 21 per cent for its benchmark ASX 300 index. Since inception in 2010, we’d note that the Small Ordinaries Accumulation Index has returned minus 26.75 per cent.
How many staff do you have and how much does your fund and business have under management?
Montgomery employs just six people, five of whom are on the investment team. The team includes portfolio manager Russell Muldoon, former RBA analyst Ben MacNevin, founder Roger Montgomery, former Hunter Hall chief executive David Buckland and 18-year corporate finance veteran and former Gresham Advisory Partners director Tim Kelley. Montgomery’s assets are approaching $400m and The Montgomery (Private) Fund has grown to $230m.
What separates you from your peers in terms of your approach?
We don’t chase around visiting companies since we have excellent valuation systems and we’ve found there aren’t 500 companies worth visiting in Australia.
Montgomery uniquely combines three characteristics it believes will aid investors in wealth preservation and growth over the very long term.
First, the Montgomery (Private) Fund seeks to protect investors’ wealth with the ability to allocate to very high levels of cash when opportunities to purchase extraordinary businesses at deep discounts to value cannot be found. If we cannot find high-quality businesses at attractive prices, the only alternative is the safety of cash.
Montgomery has sold investments and increased cash significantly during April and May in each of the Past three years.
Second, rather than trade or speculate in stocks, Montgomery buys or invests in businesses.
If a business is not of sufficient quality to be confidently owned for several years, it will not be purchased with the intention of holding for a day or a week or even a month.
If it doesn’t qualify for the long term, it will not be owned for the short term. Finally, rather than focus on price as a cue for action, Montgomery focuses solely on intrinsic value.
Do you believe the sectors you like are currently undervalued?
Montgomery does not invest on the basis of sectors, however sentiment towards a particular sector can drive short-term prices of all securities in that sector. But Montgomery believes there is little of value in the market at present that can simultaneously afford investors the comfort of a bright outlook.
Many commentators believe the only semblance of good value seems to be in mining services but Montgomery notes that more than a handful of the 800 public and private companies in this sector will go to the wall as investment collapses and demand from China for resources slows. The Montgomery (Private) Fund sold all of its mining services holdings at the peak in April last year.
What have been some of your best and worst investments?
The ability to switch to cash when an insufficient number of qualifying investments are available has protected our investors and preserved their earlier gains.
Our investors also benefit from the ongoing dialogue we have with our clients, many of whom have deep insights into their industries from experience at a very senior level.
We have done extremely well, however, investing in retail stocks including the Reject Shop and Seek, as well as healthcare issues such as CSL and Ramsay Healthcare. However, no single investment stands out.
Do you plan on launching any new funds in the short term?
No.
What is the minimum investment?
The Montgomery (Private) Fund is $1m but investors with less than $1m can invest in the Montgomery Fund.
Are you an activist manager?
No. Focusing our investors’ funds in the highest quality businesses with bright prospects results in few reasons for an activist approach. We seek to invest in businesses that are already running.
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.
nlouwdijk
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It never ceases to amaze me that this logical investment strategy is not everyone’s standard practice ? Am I missing something as a non-finance trained person ?
Nick Dragovic
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Hi Roger,
It’s a pleasure as always to read your articles and listen to your interviews.
Newbie to the comment posting here, however a regular visitor to the website.
As a value investor once you have identified and invested in a business then it would be seen as even more beneficial if a stock went down giving you an opportunity to buy more, however at some times the fundamentals of the business changes to an extent that the intrinsic value would then decrease to a point where it would be better to switch to cash and wait for a better opportunity.
Can you give us some insight as to how you monitor the intrinsic value of the business once you have invested in it and what kind of fundamental change in the business would prompt you to sell out of the stock? Can you provide some examples?
Thanks
Roger Montgomery
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Hi Nick,
We do this automatically and daily. In terms of examples of fundamental changes, it could be anything from change of management to an acquisition and the list goes on…and on….and on….
Roger Gibson
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The fall in the $A has taken quite a slice out of Australian based investments in international value terms. Any plans for The Montgomery Fund to pursue value from international shares?
Roger Montgomery
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Hi Rog,
Yes, its not out of the realms of possibility but our focus must be on The Montgomery [Private] Fund and The Montgomery Fund for the indefinite future.
Andrew Legget
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Congrats on the Montgomery Funds increasing exposure and your continuing success.
I have to say that yours is a model which is how i belive investment funds should be instead of a mandate driven need to try and find opportunities that without said mandate you wouldn’t touch.
Your last point resonated with me as i have been thinking about it recently. Comparing your blog to another one which uses a more quantitative approach shows quite a difference. The other one spends a lot of time talking about various battles it is having in some investments where as yours is always focused on the big picture and quality of a particular area.
I have always beena bit sceptical of the graham Net-Net approach which i believe basically values businesses if they were dead. Just like my belief that businesses/managements attract the investors they desire so does the valuation approach.
If you value businesses based on a liquidation value then you will likely find companies that if not better off dead at the least will likely have various governance issues which have caused the price to be around that level. So you need to spend more time being “activist” and less time trying to spot the next great opportunity.
In contrast, it seems logical that if you focus on “quality” companies that you will have less reason to be “activist” as these businesses are quality due to their management and general business model.
Nothing i have said here is particulary new or mind blowing i know, just thought i would share my thoughts about making sure that your desired to approach to investing matches up to the systems and processes you use to choose and make those investments.
If you desire quality businesses then valuing them like their dead will likely bring you the opposite as the quality ones are more valuable alive and their prices reflect this. If you want to be like Carl Ichan however, you might just find opportunities in such approaches.
I don’t have the resources to be an activist investor, but i am interested in building the models and processes for this approach as a general education exercise but i would never use these filters to try and find a business of A! quality.
Greg McLennan
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I read that article while Child #2 was at her ballet class. Preaching to the converted in my case of course but I’m sure it would have been an interesting change for the uninitiated reader.
I hope Bucko didn’t do his back in carrying you around on that chair!
Roger Montgomery
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Hi Greg,
We took turns carrying each other down the stairs and back up again!
Hedley Calvert
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Nice socks!
Roger Montgomery
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Happy Socks I believe they’re called. Thank my family for those beauties.