What’s your investment philosophy?
It sounds a little trite, but it’s to make money in all sorts of markets. We use a combination of value and growth-oriented strategies and we also believe that you have to be nimble in markets and not just sit there and watch things fall when you know that there’s bad news coming or you’re in the middle of a down cycle.
So we’re happy to go to cash. We’re happy to protect a portfolio using options.
Your portfolio is more aggressively positioned now than it was this time last year. What have you been investing in?
A couple of mining support companies that have done very well for us, Boart Longyear (BLY) was one of them. We’ve also put some money into some oil and gas players producing oil.
We’re still buying some of those companies so we’re not at liberty to disclose the names but they make sense.
[Co-portfolio manager] Tim Reardon has spent many months researching and visiting these companies and we think there’s a really interesting story to tell in the oil and gas sector in Australia.
When you say gas you mean offshore gas or coal seam gas?
We’re talking shale gas.
We have a consultant geologist we use to look at interesting prospects that we find or existing businesses that we like. He’s just actually come back from Chile and Peru a few months ago and we think there’s some fascinating stuff over there.
Your biggest holding in the fund is in a US dollar ETF. What’s your thinking behind that?
We have made three big trades in the US dollar exchange-traded fund last calendar year. We made 30 per cent return on roughly 10 per cent of the portfolio from that trading. We re-entered the US dollar position as the [local] currency crested over US107¢. What we’re doing simply is buying US dollars, selling Aussie dollars within that fund. We’ve seen it fall back to 104-103 and we believe in the short run that should fall back towards par.
So buying into this ETF is essentially a bet on the Australian dollar weakening?
Absolutely. Why are we doing it? We think that commodity prices are peaking out. So the thinking behind it is China is slowing down. There’s no doubt about it. We have very good contacts there. We’re anticipating 7 per cent GDP growth over the next calendar year rather than the 8 [per cent] and 9 [per cent] of [recent years] and so we don’t think long-term commodity prices are sustainable at these sorts of levels. The other reason of course is supply. Supply is going to kick in for commodities like iron ore and coal in the 2014-15 calendar years.
In the longer term I think for Australia to remain competitive we need to see that currency lower around the 80¢ to 85¢ mark. It’s really hurting some of the export companies.
But we’re not trading that for the long, long view. We’re trading that for a short to mid-term view.
You also have some gold exposure in the fund. How do you incorporate ideas like the US dollar ETF and gold into your portfolio? How does that fit into your overall process?
Very simple. We have a basic overlay where we say we’re an Australian fund, therefore we should have Australian investments in that fund. If we’re fully invested – which we’re not at the moment – roughly 60 per cent of our investments would be in [selected] top 50 stocks.
We have Coca-Cola (CCA) and Woolworths (WOW) in there and that’s pretty much it.
Then the other 40 per cent, we have a great rule: we can do anything, absolutely anything, as long as we stress test it and make sure we’ve thought about all the implications of that transaction.
That’s great because it gives us 60 per cent of liquidity and security and then 40 per cent of things that are less liquid or maybe a little bit more imaginative in the sense that people probably haven’t used those in their own personal portfolios before or probably can’t because of size restrictions. That’s the way we do it.
What’s the best way to protect your portfolio against volatility?
Go into cash quickly and use options to protect the downside. We’ve averaged 17 per cent each year compound for the past three years.
We’ve done that at roughly 20 per cent lower volatility than the S&P/ASX 200 itself. The key is being able to protect on the downside.
If you were given a windfall of $100,000 where would you be putting it?
At the moment we’re investing in a company called Forge Group (FGE). They’re an engineering procurement business in Western Australia. We really like their management.
In fact we had a meeting with them last week one-on-one. Peter Hutchinson is running the show and he’s a highly astute person and we respect his management style.
They’ve got a joint venture with Clough (CLO), which is working very well for them and they’ve just bought a business in January called CTEC. All up, including key performance indicators, they’ll have to pay the previous management $38 million. [In return] they’ve received $600 million worth of contracts on their books over the next two-and-a-half years.
It brings them a whole suite of electrical expertise that they’re really very interested in on top of the building side of their engineering division.
So I’d put $100,000 into that. Obviously that would be risky to do all in one hit but within the fund or within a big personal portfolio then I’d certainly be looking at doing that now.
What’s a larger company you’ve invested in recently?
Has the company’s management explicitly mentioned these possibilities?
You mentioned shale gas before – isn’t that a US phenomenon?
It is. We saw BHP Billiton make a move into it recently. [But] it’s definitely happening in Australia.
Where? In Queensland, NSW?
In both of those states. Well, more particularly, South Australia and Queensland.
I’ve always been a great believer in Woodside (WPL) and they’ve rewarded me and my clients handsomely over the years. [But] we are all aware that come 2020 – unless there’s substantial investment – the ballpark [for Woodside] is going to change. [The gas] is not going to go on forever and to find more LNG is a huge expense. You see Shell wanting to back out of Woodside. We think there are a lot of onshore opportunities and that’s what we’re spending a lot of time looking at and [doing] deep research.
What’s the next thing?
For us that is the next big thing – [the shale gas] sector and the three or four stocks we’ve been investing in heavily for the past six months. We’re keen on that sector locally. We think there’s a lot of wealth to be made for Australia in that sector. There’ll be some big volatility definitely. In fact I don’t think it’s going to go on at the same rate – I mean three of those stocks have risen by 70 per cent in the past quarter.
Santos (STO) is making a play in this area but of course you won’t necessarily get your bang for your buck with Santos.
We’ve done a lot of proprietary work on it and we’re pretty happy with that sector.