In this week’s investment report we take a moment to inform our readers of the top performing portfolio on TAMIM’s investment platform over the last 12 months; The TAMIM Australian Equity Value (TAEV) portfolio. The underlying fund, which is headed by James Williamson, has achieved a return after fees for investors of 18.1% over the last year, compared to a return of the ASX 300 of negative -9.5%. The underlying fund would rank second of all Australian managers in the Morningstar rankings closely behind a microcap fund if it was included (it is not included as it is a managed account). When viewed on a risk adjusted basis this is a very impressive result. So with the market down almost 10% in the last year, and a lot of Aussie equity managers showing negative returns over the same time frame, you’re probably asking how have we done it? Please continue reading for an understanding of our stock selection process. Next week we detail one of our investments in the fund in order to demonstrate clearly our process in action. This is a must read for those of you investing for your own portfolio and maybe finding the recent market conditions a tad tricky!
INVESTMENT APPROACH The prices of shares tend to vary far more than the value of the underlying businesses. Some of the factors that contribute to this are:
General market sentiment towards equity investments as a category
Market’s view that the business model is broken (at least in the short term) or conversely over optimistic expectations and
Lack of sell-side research due to size or free float in the shares of the company
The TAMIM Australian Equity Value Portfolio aims to invest in companies that in our view fall below their underlying value (often for the reasons mentioned above) and sell when the price rises above our assessment of fair value. The key aspect of our investment process is determining the underlying or intrinsic value of the businesses.
We therefore spend a great deal of time developing differentiated information that helps us determine the intrinsic value of a target company. This involves rigorous research and analysis of the industry and competitors, in order to construct a detailed picture of the dynamics of the market and investment being reviewed. By not limiting ourselves to any market capitalisation size or sector, and by allocating more time to research and investing (rather than trading), we believe this strategy gives us a structural competitive advantage to generate returns in excess of our benchmark.
Growth of $1,000,000 Chart
The Fund represents the Wentworth Williamson Australian Equity Fund net of fees and with distributions reinvested. The Index Represents the ASX 300 Accumulation Index and Cash represents the RBA Cash rate.
TO BE IS TO DO We are unwavering in the pursuit of generating above market returns in the medium to long term for clients. For those who have invested with us previously, our behaviour will be similar to that which you have observed from us in the past. 1. We resist crowd psychologies. When we acquire investments it is likely the companies are unpopular with investors (and possibly actively shorted) or simply currently under the radar and overlooked by most investors and market commentators. With our value investing approach, we resist paying up for future earnings. 2. We are benchmark unaware and therefore able to pursue most ideas regardless of sector or market capitalisation. Furthermore, protecting your capital is very important to us, we have the flexibility to significantly vary our cash levels. Generally, you should anticipate us holding low levels of cash during periods of share market weakness and start to exercise more caution when investors are coerced up the risk curve. We are unlikely to get market timing exactly right in the short-term, but over the long-term, we hope to profit from market fears and excesses. 3. Over time we are likely to own between 10 and 25 well understood investments. When running such a concentrated portfolio and value strategy it is important that we stick to our rules and philosophies. We seek businesses with long histories of profitability that are trading on low normalised earnings multiples, along with sensible capital structures. 4. We are conscious that after tax returns are important to you which is one of the reasons why our stock turnover should average ~25% per annum over time. We will not fall in love with our investments, when they become expensive we will divest them from our portfolio. If we see originally unforeseen circumstances or our investment thesis changes, we will also trade out.
We don't follow the crowd
We are active managers and do not follow a benchmark
INVESTMENT SUMMARY It’s highly unlikely you will find our investments in well-presented good news stories with a strong investor following that always seems to find a way to explain lofty valuation multiples. We are in the business of looking for mispriced assets in the share market that will make us money. Over the years we have been successful investing in two areas of the market: Firstly, we have exploited opportunities in stocks that have been oversold as they have disappointed (or more ideally embarrassed) investors the most in recent years. Many of these companies attract the attention of short sellers; UGL and TSE (now Broadspectrum BRS) are recent examples of ours. The second area we have invested in is small to mid-sized companies that are not actively followed by sell side researchers and institutional funds due to low free float or liquidity. Next weeks article on Nuplex is a good example of this strategy and it has returned the portfolio over 80% since its purchase. We will also be expanding on our thoughts around oversold companies as well as those that are not actively followed.Be sure not to miss these posts as they will be an excellent set of examples of our investment style in practice.
We like stocks that are over sold
We like stocks that are not actively followed
While it has been a very tough year for global share markets, and we understand a lot of Australian investors with concentrated blue-chip portfolios are also suffering from a period of negative returns. For those of you reading this at home and sitting on your hands because of concerns about the global economy, and for fear of locking in losses on positions in the last year, we think it is worth noting that value funds prosper in these volatile conditions.
It is worth reiterating our opening comments: “The underlying fund increased 18.1% for 12 months to March 2016 compared to negative -9.5% for the S&P/ASX 300 Accumulation Index. Furthermore, in a quarter where the market dropped by 2.6%, it was pleasing to see the fund increase by 1.7%. While this won’t always be the case, our primary focus on capital preservation typically sees the fund meaningfully outperform the general share market during down or flat markets.” Happy investing,
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