People over PE: Strategies of Australia's up-and-coming managers

A new league of portfolio managers have stepped onto the playing field, ready to take on incumbents with new strategies, refreshed focuses and an insatiable hunger for success. 

While some of these newly minted managers have hit the ground running, it's still early days. And it's worthwhile noting that these funds, with less than a three-year track record, could potentially be a risky investment. 

However, for those looking for something innovative ... you've come to the right place. 

Over the next few weeks, we will be profiling: 

• Michael Frazis, Frazis Capital Partners
• Emanuel Datt, Datt Capital 
• Heath Behncke, Holon Global Investments 
• Omkar Joshi, Opal Capital Management 
• Jesse Moors and Nicholas Quinn, Spatium Capital 
• Shaun Zhang, Snowball Asset Management 
• Scott Williams, Fiftyone Capital 

And of course, Ben Rundle, whose Hayborough Opportunities Fund is possibly the freshest of the lot given it opened to investors in March this year. 

The former NAOS, Moelis and Ord Minnett Aussie equities specialist has joined forces with Taylor Collison Stockbrokers' George Capozzi to launch Hayborough Investment Partners, with its fund investing in 20-40 holdings within the small and mid-cap arena.

In the wire below, Rundle shares how he and Capozzi launched the new fund, what he believes sets it apart from existing managers, as well as two investment ideas that his investment process has uncovered.

The interview below is part of our Fresh Fundies series, focusing on newly launched funds (and their portfolio managers) with less than a three-year track record. 

Fund at a glance: The Hayborough Opportunities Fund
Fund Manager: Ben Rundle 

• Asset class: ASX-listed small and mid-caps 
• Objective: To outperform the S&P/ASX Small Ordinaries Accumulation Index over rolling 5-year periods via an actively managed ASX-listed equity portfolio constructed of a mix of small to medium, high-quality companies.  
• Minimum investment: $100,000 (unless agreed with the trustee)
• Investment outlook: Five years + 
• Suitable for: Wholesale only
• Launch date: March 2021
• Performance since inception: 2.6% net in March (vs benchmark's 0.8%)
• Management fee: 1.25% p.a. of the net asset value of the fund 
• Performance fee: 20% (excluding GST) of the amount the fund outperforms the benchmark, calculated monthly, and payable on 30 June and 31 December each year 

Take us through how you built your fund from scratch to set it up for long-term success? 

The launch of the Hayborough Opportunities Fund was the culmination of many years building up a knowledge base on companies that we feel fit our investment criteria. That gave us the confidence to start with an initial portfolio of high-quality businesses rather than build into positions slowly over time. 

It is a small-cap fund invested in a portfolio of 20-40 ASX-listed companies. We have a process that focuses heavily on the people running the business, followed by detailed financial analysis. We begin firstly with understanding a company’s business model and how they make their money. There are still to this day many businesses where we feel that we don’t have an edge over other investors as they don’t fit within our circle of competence. 

We invest in management teams who think and act like true owners of the business and who are aligned with shareholders. Most of the time these companies are still founder-led which is something we like to see. 

The two of us both have an accounting background, and we are therefore well versed in knowing that the profit and loss statement is often not the best way to assess a business, even though many sell-side analysts will focus on price to earnings as their main metric when it comes to valuation. 

The issue with the profit and loss statement is that it fails to show how much capital a business requires to generate its earnings. We have seen many businesses that are able to grow their earnings per share, but at a large cost to shareholders by having their equity diluted over time.

We also see many businesses which may show a healthy net profit but little sign of operating cash flowing to shareholders. It is the cash that is of most importance when we are looking for earnings.

What are the strategies and techniques that set you apart from other fund managers? 

One particular focus for us is the people working inside the business below the senior management team. It is our view that companies can obtain a significant competitive advantage over other businesses by having a strong culture within their team. One of the most obvious ways that can be seen is through customer service. 

Some of the most successful companies in the world do not vary widely from their competition other than offer higher levels of customer service which can be reflected in superior financial returns for shareholders. 

I vividly remember a conversation I had a few years ago with one of the original company executives of Home Depot in the USA. Home Depot is one of the most successful companies in US history and their business model was successfully translated by Bunnings in Australia. This former executive told me that the company would refund products even if they were not stocked by Home Depot. It did this as management believed the value of one customer referral and goodwill was worth much more than the financial cost of refunding the client his money. 

Here in Australia, when the well-funded competitor Masters tried to compete with Bunnings, they failed. We believe this was partly due to the strong culture, quality of people and service levels within Bunnings. Another great example of a company listed here in Australia with a high level of customer service is Lifestyle Communities (ASX: LIC). They run their business on two key adages;

1. You never get a second chance at a first impression and;
2. A customer will never forget how you made them feel.

Lifestyle Communities has compounded returns for shareholders at almost 25% per annum since listing in 2007 - far outpacing their sector as well as the wider market

Where are you seeing opportunities right now? 

A company we particularly like the look of at the moment is Pacific Smiles (ASX:PSQ). The business listed on the ASX in 2015, but has not really done much in that time in the way of share price performance. They operate a collection of dentistry centres across Australia, which should be quite a defensive business. 

In 2018, they recruited Phil Mackenzie to their CEO position who had an exceptional track record running a business called Audiology Management in the US. Since Phil has stepped into the role, the return on capital of the business has increased significantly. The company recently raised additional capital to accelerate its planned centre rollout. Given Phil’s track record we have confidence they can maintain these impressive return metrics as they execute their growth plans. 

We love to find businesses that have high returns on capital along with options to reinvest that capital at high rates. PSQ occupies 2% of an $11bn industry so we feel there is a large runway to grow the existing business organically. 

Want to learn more about other newly launched funds? 

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