Portfolio Talk: Stephen Walker
AMP Asset Management equity manager Stephen Walker discusses the major turnaround in the National Bank NZ Equity Growth Trust.
Tuesday, June 29th 1999, 12:00AM
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PORTFOLIO TALK: Stephen Walker |
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Description: The trust is actively managed by AMP Asset Management. The portfolio is widely diversified, typically holding around 20 stocks. |
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AMP Asset Management manage the fund for the National Bank |
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“At the time there were two significant jobs in New Zealand, AMPAM and Southpac. Fortunately this was the one that came up!”
AMPAM took over Southpac early last year and Walker is now in charge of managing some 16 New Zealand equities funds, active and passive, worth around $1.6 billion, including the National Bank's New Zealand Equity Growth Fund.
The equity growth fund has had a chequered track record since its inception seven years ago. In its early years, when it was managed by James Ring, it was a top performer, however it suffered a mid-life crisis and moved from being a top quartile performer to one of the market laggards. In the past year or so the fund has staged a significant turnaround and now holds a five star rating from IPAC, showing that its recent track record has been excellent.
Walker took over managing the fund after AMPAM bought Southpac. He's been in the investment business for over a decade, most recently with Canberra-based Commonwealth Funds Management as portfolio manager, industrial equities. Returning to New Zealand for family reasons, the biggest thing was getting used to a small market in which the companies were predominantly domestic.
"That makes understanding the companies and valuing them much easier, but it's less challenging."
For this Portfolio Talk, we're focussing on the National Bank NZ Equity Growth Trust, an actively managed fund which you have been responsible for since early last year. What are its objectives?
The requirements of the investors, we're told, are: don't lose money, beat the index and produce very good returns. Those aren't three things that are very easy to do at the same time. If you want to be sure of beating the index, you have to track it quite closely. We focus on (achieving) good returns and the other two follow.
The results so far?
For the last 12 months before tax and before fees, the trust has achieved 30-odd percent against an index which has done nothing.
How would you describe your portfolio management style?
Active management (this style is currently used only for this particular fund), where we take little or no account of index weights and invest only where the research team has a high level of confidence that a company or security is significantly undervalued. Valuations mainly use discounted cashflow techniques.
We will only take positions in companies which are in fundamentally attractive businesses, have superior management teams, particularly with regard to future strategies and capital allocation decisions, and which are attractively priced.
We don't like to go too small, say $50 million to $100 million market cap minimum - and they have to be very good to be in there under $100 million.
Once an investment is established, we will maintain it until either full value is recognised, or we change our view of management. Our typical holding period is over 12 months, often extending to two to three years. A portfolio will be widely diversified, typically holding around 20 stocks and, because it takes little account of any index, will have a very high tracking error.
What has the portfolio turnover been up until now?
Initially it had quite a big turnover, as we changed from what we got to what we wanted. During Jan-Feb 1998, we turned over 50 per cent of the portfolio (ie 300 per cent annualised). The current portfolio turnover is around 100 per cent annually. and we expect this level of turnover to continue.
This fund has achieved quite a turnaround in returns. Do you think its erratic performance has now been changed so that it will be a consistent performer, and why?
It depends what you mean by erratic performance; relative to the index or absolute. The absolute performance of the portfolio will be strongly influenced by the performance of the stockmarket generally (the trust portfolio has a similar risk level to the index). We have a reasonably positive outlook for New Zealand equities as economic conditions improve.
The composition of the trust portfolio is significantly different from the index, so in the shorter term monthly deviations from the index return are likely to be somewhat erratic. However, the portfolio positions are determined based on our in-house research, an area where we apply considerable resource and have confidence in the quality of the output.
Accordingly we would expect that returns over the longer term will be measurably superior to those of the index, as they have been over the past 17 months since we took over the management of the trust.
How do you go about researching companies for the fund?
Stock selection is driven from our in-house research team, which evaluates the performance of each company's operations and strategies through active communication with management. In a typical year, our team of portfolio managers and analysts will have over 200 meetings with corporate management teams, along with frequent phone contact and regular broker feedback.
Initially, we usually see the CEO or whoever is doing that role. AMPAM is big and bold in the market: a lot of others don't get that kind of access to CEOs.
We also do much more in-depth research valuing the companies. There are no short cuts... and we need to take a longer term view than most people take; we can't do the same as the market because of our size.
Stock story: Michael Hill International
Michael Hill is a good example of the type of company we like to invest in. MHI currently has over 100 jewellery stores in Australia and New Zealand. Over the next five years we expect them to add over 50 additional stores, mostly in Australia. The Michael Hill store format is excellent, with high sales per square metre.Each additional store produces a pre-tax return on investment of around 30 per cent. Clearly that combination of growth and return generates significant shareholder wealth, provided the company executes well. The management teams in Australia and New Zealand are excellent and have already grown the company significantly in both markets, while improving same store performances as well, so we have no concerns at all about execution.
As far as the fundamentals go, we forecast the gross dividend yield to be 7 per cent for the June 2000 year, while we expect the company to produce earnings growth averaging over 10 per cent per annum over the next 5 years. The company currently trades at 12 times 1999 earnings.
Stock story: Fisher & Paykel
Fisher & Paykel is an example where there is a significant amount of unrecognised value. Fisher & Paykel Healthcare is an excellent business which has great products, is growing rapidly, requires modest capital investment and produces significant amounts of cashflow. The earnings streams are also quite stable, which should result in low cost of capital, or in simple terms a high P/E multiple being applied to these earnings. However the company is still perceived to be a cyclical whiteware company, with volatile earnings, resulting in a low P/E multiple.The whiteware business has excellent products and many of the elements of a great business, but it is currently performing poorly. The company has invested heavily in research and development and in plant. However sales have not been sufficient to get adequate plant utilisation and to justify these investments. To earn its required return on capital the whiteware business needs to generate earnings before interest and tax of around $75 million, roughly three times the current level.
Should this business generate an adequate return, the whiteware business would be worth the capital employed in that business, which should result in about $2 of value increase per share. We are pleased that the company has already taken a number of steps to improve the performance of this business and we would expect it to generate acceptable returns within three years.
We forecast a gross dividend yield of 5 per cent for the March 2000 year, while we expect the company to produce earnings growth averaging almost 20 per cent p.a. over the next 5 years. The company currently trades at 20 times 1999 earnings.
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