Portfolio Talk: Carmel Fisher

Carmel Fisher cut her investment teeth in the 1980’s, experiencing the bull market and the 1987 sharemarket crash.

The experience of managing client portfolios through extremes of market cycles has stayed with her, instilling a healthy respect the importance of fundamental investment analysis.

After four years as a stockbroker analyst she joined Prudential Assurance, where in 1991 she launched one of the first funds to specialise in small Kiwi companies. Helped by a period of stronger economic growth, the Prudential Emerging Companies Trust achieved a cumulative 110% return in the two and a half years Fisher ran it.

After a three-year stint running Sovereign Assurance’s funds management she left in 1997 to form Fisher Funds Management.

Why do you invest only in New Zealand shares?
We believe we have a competitive advantage in investing in our own backyard. We can do proper industry analysis and due diligence on companies. We understand the political and economic environment, and can react quickly to news. International fund managers have a competitive advantage over New Zealand fund managers when it comes to investing overseas. For that reason we prefer to fish in our own pond.

Why do you specialise in smaller capitalised stocks?
My background. I began work as a small company analyst for a broking firm which has given me a preference for, and knowledge of, smaller companies. They’re often easier to research as they tend to have one, core business and are often overlooked by large and international investors.

Their share prices are more likely to reflect the underlying business fundamentals than those of larger stocks, whose prices are influenced by international commodity trends and investment flows.

What is the fund’s benchmark and how has it performed against that benchmark?
Our stated benchmark is the NZSE40 Gross Index, which we have consistently outperformed - by 62% since inception. The current portfolio is more closely aligned to the NZSE40 Midcap Index, which we have also outperformed. (The index was up 13.4% in the 12 months to June 2001, versus the funds rise of 18.5%.)

Which stocks are in the fund just now and which are you most upbeat about?
Currently we hold 10 stocks. Our top tier stocks are Baycorp, Sky City, Warehouse and Waste Management.

These have been selected because they meet our earnings criteria. This criteria is that a stock must have had consistent earnings growth over at least three years, its forecast earnings growth must be in excess of the market average, its P/E to growth ratio must be one or less at the time of the initial purchase, and it must have quality management and a sustainable competitive advantage.

Our second tier stocks are GPG, Michael Hill, Nuplex and Frucor. The weightings on these stocks are lower than on our top tier stocks because they do not achieve as high a rating on one of our criteria - either their short-term forecast earnings are at or below the market average, or we have some concerns about short-term earnings momentum.

The third tier stocks are Mainfreight and Renaissance. These stocks comprise relatively low weightings within the portfolio because their ranking is somewhat lower than the other portfolio stocks. In Mainfreight’s case, we are holding back until we are more convinced of the potential of their Australian expansion and with Renaissance, we have put a toe in the water and are building our confidence in the company and the management before increasing our holding.

What stocks have you sold out of and why?
Since inception the fund has sold out of Metlifecare (because of management changes and erratic earnings), Hallenstein Glassons (departure of a managing director in whom we had confidence), Tourism Holdings (because of erratic earnings, loss of confidence in the management), Montana (we sold in two situations - when we felt that the company was about to be taken over and wanted to maximise our exit price, and because the share price at the height of the corporate activity reflected far more than the earnings potential we believed existed for the company).

How would you describe your portfolio management style?
We are growth-oriented, buy and hold, stock-pickers. Our style is a combination of Warren Buffett from Berkshire Hathaway and Peter Lynch of Fidelity Magellan, with a New Zealand overlay.

How do you go about researching companies for the fund?
We use fundamental company analysis – we meet management, understand their business strategy and competitive positioning, and establish the company’s ability to grow earnings faster than average. We consider financials, establish a realistic entry price then buy and continue to monitor. We sell only if the fundamental reason for investing changes - price movement is not a trigger for us to buy or sell. We invest like a company owner, with the share price being our final reference point.

How hard is it to find undiscovered value stocks in this market?
We don’t necessarily look for undiscovered value stocks as we’re a growth investor. But it is difficult to find stocks that meet our investment criteria.

Often companies look interesting, but don’t have a consistent earnings history or management track record. Therefore we have to wait until a track record emerges. There are plenty of "undiscovered stocks" in the market, but often there is a reason for it.

We don’t mind if we end up discovering them after other investors if that means that by the time we invest, the company has a consistent record and some predictability about it.

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