Feeling uncomfortable? Australia’s #1 ranked fund manager certainly is
Three core principles underpin the philosophy of the Collins Street Value Fund. The team, led by portfolio manager Michael Goldberg, seek to preserve capital, relentlessly challenge consensus and achieve a strong alignment of interests across the board.
However, according to Goldberg, when it comes to defining the companies that make it into the portfolio, there’s one rule that matters.
Rule #1: “If we don’t love it, we won’t buy it.”
And if they do decide to invest, they like to take a meaningful stake. This concentrated approach has delivered 18.4% per annum net of fees since 2016, outpacing the ASX200 accumulation index on average by around 7% per annum. The Fund was ranked #1 for Australian equities in 2020 by Mercer and is the category leader over 1, 3 and 5 years, according to Morningstar.
In this Fund in Focus, Goldberg provides more detail on the firm's philosophy, performance history, the current sector positioning for the Collins Street Value Fund and shares his insights into the art of “being comfortable feeling uncomfortable.”.
Click on the video below to watch the presentation or read an edited transcript below.
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Hi everyone. I'm Michael Goldberg, managing director and portfolio manager from Collins Street Asset Management. Today I thought we'd talk a little bit about our flagship high-conviction fund called the Collin Street Value Fund.
Now, before we get into the nuts and bolts of our process and philosophy, I think it's worth mentioning how we view our role and discuss very briefly the sorts of investors that might be interested in investing in our fund. Additionally, there'll be a number of reoccurring themes that come out through this process, that I think it is worth touching on now before we get into the deep dive within the fund.
Number one, we love to challenge consensus views. We love to challenge the status quo. We are always seeking to find if there's a better way to do things. Anecdotally, from our experience, it seems to us that the mob consensus gets it wrong often enough that if we've got conviction in our idea and we're prepared to go against the grain in search of a positive outcome, that there are plenty of opportunities to be had in being that contrarian investor.
Number two, we've gone to lengths to align our interests with our investors. When we look to invest in a listed company, we are always concerned about where the interests of the directors lie. If our interests are in the best return on capital, the best earnings per share result and his interests lie elsewhere, well, too many sad outcomes have occurred when interests are not aligned. And so, I'll discuss shortly how we go about aligning those interests.
Thirdly, we very much think towards the long-term. Now, certainly, our results have been very good over the last five years. And, there's no question that our investors have appreciated those short-term results. But, I think, for most of our investors, it's less about generating results for today. And, for a lot of them, it's about preserving and growing their wealth for the next generation.
Many of our investors have come to us after they've built businesses over a lifetime, after they've built a portfolio of properties over a lifetime. They're looking for an opportunity, having sold those businesses or sold those properties, to diversify into equities. Lots of our investors have simply accumulated wealth through a self-managed super fund or made big contributions of late. Especially so for our investors who are nearing retirement age or thinking about retirement, capital preservation is first and foremost of their considerations. And so, capital preservation needs to be first and foremost on our minds, as well.
It can manifest itself in many different ways through the portfolio, to the processes, the philosophy, and the construction of our portfolio. But, one of the key ways it's easily identifiable within our portfolio is the way we treat cash. A lot of funds will have a mandate to be fully invested all the time. We're not concerned about that. Our mandate is to invest in our favourite ideas. This means if we don't have an idea that we are absolutely enamoured with, that we are not 100% confident in, we are happy to hold cash.
What that means is in times when markets get expensive, we tend to accumulate cash. For example, during the early stages of 2020, we saw that markets had become expensive and we'd actually built up a 30 or 35% position in cash. Now, we didn't call, we didn't predict COVID-19, but certainly, when COVID-19 did come, and the inevitable correction did occur, we were very well-placed to take advantage of that dislocation and those share prices. They were at significant discounts, the intrinsic value of the companies that we wanted to invest in.
So, that brings me to results. Certainly, the team, Vas, Anton and Rob and I, have been involved in the industry for many years longer than the fund has been around. We've done really well for our investors over that journey. Focusing specifically on the fund, it's worth pointing out that since we launched in 2016, we have generated an average return of about 18.5% after fees for our investors. That's about a 7% outperformance against the ASX Accumulation Index, which of course includes the total return and the dividends earned via the index.
Interestingly, we've been tracked by a number of sources over the journey. Two of the main sources and most well-known sources that track funds within the industry, Mercer and Morningstar. In 2019, Mercer recognised us as being the fourth-best performing Aussie equities fund within the country before 2020 saw us go a couple of spots better, ranking as the number one performing Australian equities fund within the Australian market.
Additionally, it's been very interesting to see that a lot of our outperformance and a lot of our returns have actually come during periods of uncertainty and dislocation, and weaker markets in general. If we look back to 2018 and 2019, and even 2020, even though markets had a difficult time during that period, our outperformance shone most brightly. In fact, if you isolate each month along the journey since 2016, what you would find is for every 10 times the market was down in a particular month, the Collins Street Value Fund was actually up in that month.
It's clear from that description and our positions that we have a different sort of approach than the general market. Our holdings are different to what you'd expect to find in an ASX ETF. It's certainly different to what you'd expect to find in many of our peers' portfolios.
I think what has been driving those differences is the key question. First and foremost, one of the things that give us an advantage is our flexible mandate. We are investing in companies that we want to own rather than companies that we feel you must own because of some arbitrary weighting within the index, or, some mandate that demands we hold a position that we otherwise wouldn't hold. Being able to focus on those positions that we like and being able to avoid those positions that we're not as enamoured with does give us the opportunity to generate wonderful returns both in the past and, we expect as well, in the future.
Additionally, we think of ourselves as buyers of businesses rather than traders of shares. Both Vas and I, both of us being the principles and founders of the fund, come from a business background. And, we think that when we look at companies, we look at them through the prism of our business experience, which gives us a little bit of a unique insight into what makes a quality business, what makes quality management and what makes sustainable earnings.
Additionally, we are unconstrained in where we seek value. Certainly, we've invested in companies like ANZ (ASX: ANZ), which has an $80 billion market cap. However, when we find value outside of the top end of town, when we find value in companies, wonderful companies, like National Tyre and Wheel (ASX: NTD) with a market cap of less than a hundred million dollars, we're more than prepared to invest in those wonderful businesses. We're always seeking value wherever we can find it. Similarly, when it comes to sectorial exposure, certainly we would gravitate, as value investors, to industrial stocks that tend to be the stomping ground for many value investors. Although, when we're able to identify value elsewhere, we've been more than happy to invest in commodity stocks, technology stocks, and even in biopharmaceutical stocks.
That is likely explained by our different views on risk too. We're not concerned about relative returns and we're not concerned about a little bit of volatility. Instead, what keeps us up at night is just a concern for the risk of permanent loss of capital. That keeps us laser-focused again on capital preservation. The reason for that is because we've gone to lengths to align our interests with our investors. We don't charge a fixed management fee. The only fee that we get is a performance fee. So, if our investors don't profit, we don't get paid, which means we're super cautious with the companies we decided to put into our portfolio. We're always only investing in those that we have the highest conviction in.
Additionally, we don't have any third party shareholders within the management company. We also don't have any cornerstone institutional investors that might have their own unique interests. So, that means we're accountable to nobody but our investors. To you. That means we can wholeheartedly and without reservation continue to invest in the way that we have historically and focus on the long-term results rather than being concerned about a short-term need for a third party.
Now, our philosophy is rather simple. We believe that there is immense benefit in delving deeply into any business that we consider investing in. Just as we would do a deep dive into a business if we were looking to buy the business in its entirety, we think it's essential to do a deep dive if you're looking to buy a share of that business.
Additionally, we think there's tremendous value in being comfortable in being uncomfortable. That means two things. It means, number one, asking the uncomfortable questions of management. Going through a research process where we might step outside of our area of comfort and do things to earn or achieve information advantages that don't necessarily feel good to us but add significant value to our investors. It also means occasionally investing in areas of the market, or sectors or businesses, where the market might not like that business for one reason or another. We do all of these things because fundamentally we believe that if we can achieve an information advantage by getting out from behind a computer screen, from getting out in the street and having conversations "in the coalface" and on the ground due diligence, that by achieving that information advantage, we can generate significant and sustainable apt performance for our investors.
Once we have gone through all of that work, we also think that it is absolutely essential to invest with conviction. Once you've gone through the process, once you've found these wonderful businesses trading at 50 cents on the dollar, it makes no sense to just allocate a little bit of capital. Our view is if we find something we like, we're going to invest between five and 10% of our investible capital in that business. That means two things. Number one, we're going to make darn sure that we've got a high degree of conviction in that business. Number two, it means that if we inevitably get it right, and thankfully we get it right more often than we get it wrong, that position will have the ability to meaningfully impact our portfolio going forward.
The process of how our investigation would go for different companies will be different depending on the sort of business. We recently invested in a company like Retail Food Group (ASX: RFG). We were able to visit operations. We talked to customers. We talked to competitors. We talked to the staff. We got a really good sense of how the business was going. Again, in seeking that information advantage, we felt like we could invest in that company significantly.
However, not every company is the same and different companies require different sorts of due diligence. Sometimes, but rarely, it entails just a desktop assessment of the financials Sometimes, it involves trying out the product. Sometimes, it involves doing research overseas. Every company is unique and so too will our investigation into those companies.
In wrapping up, our process has worked for us for many years now. By combining the philosophy and process of value investing with a mandate that insists on conviction. By being prepared to do a little bit more than the next guy in searching for an information advantage. By aligning our interests with our investors and through a fanatic focus on capital preservation, our fund has generated wonderful returns for our investors and an enviable record for the fund itself. We can't know what's going to happen tomorrow, but, we can be confident that if we continue to focus on identifying wonderful businesses that are trading cheaply, that we will be able to generate exceptional results going forwards.
If what I've said today is of interest to you and you'd like to learn more about the Collins Street Value Fund. If you're thinking about investing with us at some point, or if you'd just like to get some more information and a look at our upcoming quarterly reports - in which we'll do a deeper dive into some of our holdings and discuss our philosophy - please feel free to reach out to our head of investor relations and distribution, Rob Hay. His information's on the screen, or visit our website. I look forward to hearing from you soon. Bye, for now.
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