28 THE WEEKEND AUSTRALIAN, FEBRUARY 9-10, 2013

TIM BOREHAM CRITERION

Source: Bloomberg

1.55

1.50

1.45

1.40

1.35

1.30

1.25

1.20

$

Nov JanDec Feb

Australian Leaders Fund$1.425

The Australianaccepts noresponsibilityfor stockrecommen-dations.Readers shouldcontact alicensedfinancialadviser. Theauthor does nothold shares inthe stocksmentioned.

Australian Leaders Fund(ALF) $1.48IN tapping the market in a $29.7 million placement,this listed investment company (LIC) is positioningitself to snap up mispriced stocks emerging duringthe market rally. But the difference betweenAustralian Leaders and out-and-out bulls is its long-short strategy, which means its net exposure isnegligible but it can exploit mispriced stocks on boththe undercooked and overdone side.

‘‘By adjusting the size of the long and shortportfolios we are able to manage market risk far moreeffectively than a traditional fund,’’ says JustinBraitling, of the LIC’s manager, Watermark.

ALF’s top 10 ‘‘long’’ holdings are an eclectic mix ofthe minnows and the household names: MaynePharma (market cap $200m) is the biggest exposure;followed by National Australia Bank and NewsCorporation.

As for the biggest ‘‘shorts’’? Well, it wouldn’t bepolite of the fund to reveal what companies arestinkers (or simply overpriced). ALF’s quest forabsolute returns have reaped reward on both sides ofthe fence, with a net portfolio return of 36.9 per centin calendar 2012 and 8.8 per cent in the last two years.

While the overall market fell in three of the pastfive years, ALF’s returns fell only in 2007-08, while inthe subsequent year the fund returned 19 per cent asthe overall market tumbled 22 per cent.

ALF is a buy for the optimists — and the pessimists— who prefer to hedge their bets.

All-weather stocksFANCY a share that will perform consistently intimes of joy as well as adversity? Don’t we all. Findingthese gems, though, involves more than trawling thelist of blue-chip faves and supposed defensives thatmay prove anything but.

In a useful analysis, Rudi Filapek-Vandyck offinancial analysis website FN Arena explodes a fewmyths about the perception of what makes an ‘‘all-weather’’ stock.

‘‘Probably the biggest misconception . . . is the ideathat most companies are strong inventive masterswithin their own universe,’’ he says. ‘‘Yet in truth,most businesses are weak and vulnerable andbusiness practices, strategies and models have tochange constantly just to stay in business.’’

An impressive five-year performance, for instance,can be misleading because often the outperformancepertains to a narrow window. Goldminer Perseus’sshare price almost doubled in the five years to 2012,but this was distorted by a 298 per cent rise in 2009.Filapek-Vandyck says the all-weather champs tendto enjoy a loyal customer base, a lack of destructivecompetition and protective government legislation.They’ve also got to pass the metrics of low debt andhealthy cashflow and decent return on equity. ‘‘At thecentre is a robust business model that doesn’t falter orpanic the moment the overall environment turns abit grim,’’ he says.

The all-weathers’ returns also exceed those of theclassic defensives, such as energy utility AGL. Andnow — drum-roll time — the impervious all-weatherchamps. The list consists of Ansell (ANN), Amcor(AMC), 4WD accessory maker ARB (ARP), vitaminhouse Blackmores (BKL), CSL (CSL), Coca-ColaAmatil (CCL), Domino’s Pizza (DMP), funeral groupInvocare (IVC), salary packager McMillanShakespeare (MMS), Ramsay Healthcare (RHC) andcafe and bakery franchisor Retail Food Group (RFG).

Notably the list doesn’t include a resource stock,the sector beholden to the commodities cycle.borehamt@theaustralian.com.au

Lanyon AustraliaValue Fund

PRODUCT WATCH

WHAT IT IS: A deep-value, long-term Australian equityfund seeking stocks trading well below Lanyon’sestimate of their intrinsic worth.WHAT IT DOES: This Sydney-based fund started inJuly 2010 and takes a bargain hunter’s microscope tolisted assets and is happy to sit in cash. It posted netreturns of 27.6 per cent after all fees for the year toJanuary 31, and says it has returned 52.3 per cent on thesame basis since inception. Last month was good,returning 4.9 per cent net.WHAT WE LIKE: Erik Metanomski’s individualisticoutfit won the Golden Calf award for boutiquemanagers at the 2011 Fund Manager of the YearAwards, which predates the 27.6 per cent result.WHAT WE DON’T LIKE: Not a lot, but it’s not one forinvestors who want to hunt with the pack.WHAT IT COSTS: One per cent a year and 20pc ofperformance above benchmark, plus GST.MINIMUM INVESTMENT: $25,000.LAST WORD: They like cash. It’s currently sitting on48.3 per cent.

ANDREW MAIN

THE COACH

Question: We are self-fundedretirees with a share portfolio andrely on dividends for ourretirement income. We have doneall right up until now but realisethat portfolios need rebalancingfrom time to time and would likeyour advice on who we can consultfor professional advice. We do nothave much faith in brokers andwould like independentconsultation.

ANSWER: Share portfolios are like gardens; from timeto time they need a prune and makeover. You have twooptions; accept advice or do it yourself.

There are generally two types of brokers; full-service brokers who offer advice on buying and sellingshares and managing your portfolio, and provideaccess to research.

The other is a non-advisory broker who willfacilitate a trade without advice. They are generallyinternet or telephone-based.

When selecting a broker, ensure that their servicewill meet your expectations.

You may wish the broker to provide a sanity checkon your existing portfolio only.

Do you wish them to actively trade the portfolio orcome to you with suggested changes or with newideas?

They should understand your objectives for theportfolio and your appetite for risk. They shouldprovide a written recommendation to you.

Independence is important to you so ensure youknow where they source their research. Understandhow, and how often, they rate stocks and how widetheir universe of stocks is.

Understand their fees. Brokers can be remuneratedon a per-trade basis or with an annual portfoliomanagement fee.

The ASX has a ‘‘find a broker’’ service on its website(www.asx.com.au). Seek a referral from youraccountant or financial planner. Continue to monitorthe service to make sure you are getting what waspromised.

Alternatively you can manage your own portfolioand subscribe to stock research.

Be careful relying on one source of information.Most sites will offer a trial period so try a few out.

It is also worth registering with online stock forums.Please recognise that they are not research houses but‘‘gossip’’ sites where people share their views on stocks.

ANDREW HEAVEN

ONLINE Visit the Wealth section atwww.theaustralian.com.au to send your questions,which will be answered by Andrew Heaven, an AMPfinancial planner at Wealth Partners FinancialSolutions

We firmly believethat industrystructure and thecompany’s relativeposition within thatindustry are criticaldeterminants ofreturns

Investment doldrums defied asArnhem lands the big returnsPORTFOLIOSTRATEGY

ANDREW MAIN

JAMES CHARACTER

George Clapham, managing partner for Arnhem Investment Management, says his funds consistently outperform in down markets

Portfolio Benchmark

Crown 3.4 0.4PRY 2.8 0.2RMD 2.8 0.3News 3.2 0.7Santos 2.6 1.0QR National 3.0 0.6CRZ 2.6 0.2SKT 2.1 0.0Brambles 3.1 1.0Woolworths 5.3 3.3

TOTAL 30.9 7.7

Arnhem AssetManagement portfolio tiltsTop 10 overweights

GEORGE Clapham is the man-aging partner for Arnhem In-vestment Management, whichwon the Golden Calf Award forbest boutique fund manager atlast year’s Fund Manager of theYear Awards.

The funds he runs reportedan average return of 13 per centin the 2011-12 financial year,which we can all remember asbeing totally forgettable inindex terms, and an impressive19.27 per cent for the calendar2012 year.

We put him under the spot-light to find out how he turned a‘‘nothing’’market intoaveryrealreturn.

Describe your different funds:All of Arnhem’s funds leveragethe same investment philos-ophy, process and team of ana-lysts, but each fund has a differ-ent risk profile. Arnhemmanages three Australianequity trusts, representing thethree different capability riskprofiles.

The Arnhem AustralianEquity Fund is our largest andlongest-standing fund withmore than 12 years’ history. Thisfund owns about 35 companies.The Arnhem ConcentratedAustralian Equity Fund, whichhas an eight-year track record,has fewer stocks than the Aus-tralian Equity Fund; about 20companies. The Arnhem LongShort Australian Equity Fundhas a 130/30 strategy. It can buy

and short-sell companies and atany stage may have 30 per centof the fund in short positions.Typically the Long Short holdsup to 25 long positions andabout 10 shorts. This fund hasover seven years’ of track record.

Name or discuss positions orstrategic tilts that have con-tributed to the fund’s perform-ance, or will do in the future:Arnhem’s investment style has abias towards industries andcompanies with above-averagelong-term growth prospects.

We use an industry-centricapproach to assess investmentsas we firmly believe that indus-try structure and the company’srelative position within that in-dustry are critical determinantsof returns. Our target compan-ies have highly sustainable com-petitive positions within theirindustries. Airports, medical de-vices, healthcare services, paytelevision, certain internet ser-vices, food retail and casinos arejust a few examples of such in-dustries. ResMed, Carsales,News Corp, Woolworths, Bram-bles, Sydney Airport, McMillanShakespeare and Crown are afew of our holdings.

Likewise, our Long Shortstrategy also enables us to capi-talise on opportunities in indus-tries which face structural chal-lenges, such as airlines,contracting services, free-to-airtelevision, newspapers ordepartment stores.

What is the structure and his-tory of your funds manage-ment business?Arnhem is a boutique invest-ment manager that was effec-tively founded in late 1999 whenABN Amro Asset Management,a subsidiary of Holland’s largestbank, established an Australian

equities capability. Three of thefounding members are the man-aging partners and senior port-folio managers. The investmentteam bought in in early 2008and retain a 60 per cent interest.The 10-member investmentteam has an average of 18 years’experience in equity markets.BNP Paribas Investment Part-ners retains a 40 per cent inter-est, having inherited the originalABN Amro stake. BNP Paribasprovides Arnhem with all mar-keting, client and operationsservices.

What separates you from yourpeers in terms of yourapproach?Three things. One, although wehave a bottom-up process, webelieve that we spend more timeon industry analysis, using bothquantitative and qualitativemeans, than other managers.Two, we are generally con-sidered by consultants to bemore focused on sustainablegrowth than other growth man-agers. This tends to result in ourfunds consistently outperform-ing in down markets. And, three,our approach logically delivers along-short strategy in which ourcore long strategy is not com-promised.

Do you believe that particularsectors or stocks are currentlyundervalued and, if so, why?Thepast 12-18monthshasseenapolarisation in sector returnswith what I call the bond proxystocks — property trusts,utilities, banks and telcos beingupwardly rerated by 30-40 percent and commodity relatedcompanies suffering commen-surate declines. The quest foryield has driven such stocks toexpensive territory and youneed to assume bond rates will

fall or stay at low levels tosupport prices here. We do,however, see some selectivevalue in some domestic andinternational growth compan-ies. ResMed, Crown, Ascianoare a few stocks with goodgrowth prospects. Resources, tous, look fair value without beingcompelling. Certain resourceservice providers now lookcheap: Orica and QR Nationalstand out. We like their positionin the industry value chain.

How do you view the state ofthe global economy and how isyour fund approaching themarket?I think the post-GFC environ-ment is one of generally lowerglobal growth rates, even inemerging economies such asChina. Lower growth has meantexcess capacity in numerous in-dustries, thus greater structuralrisks, not just in manufacturingbut in service industries such asbanking. We are cognisant ofthese factors when framing ourinvestment strategy. This doesnot mean avoiding risk. In fact,low growth, low interest ratebackdrops present good oppor-tunities in sound growth indus-tries. Companies in these indus-tries will attract and sustainpremiums and, likewise, weakerindustries with poor fundamen-tals will struggle.

What’s the minimum invest-ment your funds accept? Howcan investors access them?The three funds require a mini-mum upfront investment of$20,000 and minimum ad-ditional investments of $1000.They can be accessed throughwww.arnhem.com.au, and click-ing through to the BNP ParibasInvestment Partners site, www.-bnppip.bnpparibas.com.au.

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W E E K E N D E D I T I O N Edited by Andrew Main

WEALTH DON STAMMER

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