16 May Fund Manager Focus – Perpetual WS Industrial Sh Fd
Our Fund Manager Focus Newsletters focus on a fund manager within our investment portfolio and provide information to help our clients understand their investment philosophy and outcomes.
This newsletter focuses on The Perpetual WS Industrial Share Fund.
Introduction
Those who have been receiving investment advice from us for some time will have noticed few changes in the ‘Australian Shares’ part of your portfolio over recent years. Where we feel no change is required we tend to leave well enough alone. We also prefer to employ as few individual managers as we can, as long as we can generate an effective level of diversification. We periodically test our blend of managers to assess whether the combination meets our criteria of better returns with lower risk. In terms of risk, we are generally trying to minimise the variability of returns without having a substantially negative impact on those returns. Often we see significant deviation of returns between managers in the short term and this prompts clients to ask why we persist with a particular laggard. Different parts of the market have specific performance attributes at different times in the economic cycle. Rather than try to pick the changes in the economic cycle, we attempt to select a blend of managers that will generate acceptable risk adjusted returns across the cycle.
As a general rule, Industrial Share funds do not invest in mining & resource stocks. Therefore the performance can deviate from the broader market quite significantly. As mining & resource companies have increased their prominence in the market in recent years, so has their impact on market returns. Mining & resource booms are a regular feature of the Australian economic landscape. During the boom stages of the current cycle it appeared that mining & resource stocks were the only place to invest. As the current cycle has started to mature the market has become more circumspect in regards to mining & resource stocks. Other Australian equity managers in your portfolio will have an appropriate exposure to mining & resources and will adjust these as their analysis dictates. Investing in a fund not directly affected by resource related booms & busts provides an anchor for this part of your portfolio. Industrial shares will generally provide higher dividends, above average franking credits and more stable long term growth prospects.
About the Manager
There are various fund managers who invest exclusively in industrial shares however Perpetual virtually invented the concept. The Perpetual Industrial Share Fund was established in September 1996. Although the fund has had a number of portfolio managers come and go since inception, the strength of this fund is the underlying investment process. This process has been consistent and repeatable despite staff changes. The recent departure of John Serviour saw Matt Williams become Head of Equities and Senior
Portfolio Manager at Perpetual. Matt has been an investment professional for 21 years, 18 of which have been at Perpetual. The fund is currently managed by Charlie Lanchester, an investment professional for 18 years, 12 of which have been with Perpetual.
Investment Philosophy
Across all of its fund offerings Perpetual maintains the same investment style. This is described as the ‘Value’ approach to investing. Generally a ‘Value’ manager will seek out stocks that appear undervalued. By investing in companies that appear undervalued the risk of over-paying for an asset is reduced. This appears to be a rather simple concept but trying to establish if a company is undervalued because it is misunderstood by the broader market or ‘out of fashion’ is different to determining if a company is cheap for good reason. A number of ‘high flying’ companies over the years became progressively cheaper over time prior to disappearing altogether. Perpetual portfolio managers seek to identify companies with strong business models and sustainable earnings. One of the keys to this process is assessing the strength of the management of individual companies. The portfolio managers and their analysts perform regular company visits to assess the management capabilities of companies in which they invest or may potentially invest in.
Since inception the fund has produced an annualised return after fees of 10% p.a., compared to the ASX/S&P300 Industrial Accumulation index, which return 8% p.a. over the same time period. This return is made up of 7.3% p.a. of income and 2.7% p.a. growth. The manager expects distributions over the next 12 months will include dividends with a combined franking level of 90%. This compares with a broader market average of 70 – 80%.
The following table illustrates the performance of the fund to April 2012 (after fund manager fees):
The fund currently holds 46 stocks which includes a number of stocks outside of the S&P/ASX 300 index. Some of these non-index holdings are included in the following illustration of the fund’s top active weights as at April 2012:
The returns from Australian equity markets in the past 18 months were largely driven by the mining & resource sectors of the market. This has meant the Perpetual Industrial Share Fund has tended to provide lower returns than the broader market. Nevertheless the fund continued to provide acceptable returns in both relative and absolute terms. More recently, as commodity markets have cooled, industrial shares have tended to out-perform the broader market. This is clearly illustrated in the table above (S&P/ASX 300 Industrial Accumulation Index vs. S&P/ASX Blended ordinaries Accumulation Index) and we believe this justifies past decisions to retain this fund. At this time we remain confident that a blend of investments including this fund will help to deliver acceptable returns over the long term, with a lower level of capital volatility.
For further information regarding this or any other investment please contact this office.