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How do you invest?

We are a value fund. We try to buy stocks for less than they are worth, which I guess is what a lot of people are trying to do. Our particular area of expertise is asset plays, cigar butts, the very unpopular stocks in the market. We go around looking for examples of those where we think they are worth significantly more than the current price and where we can see that value being realised at some point in the future.

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We run two funds. The main one, with a long a history, is an ASX-listed stock fund and we have a mandate to invest in any ASX-listed securities we want. It tends to be concentrated around 15 stocks, very rarely more than 20. It is often very different sectors. We are not constrained at all about what we can and what we can’t invest in. 

It can be anything, at the moment it is 80 per cent small caps, but three years ago it was probably 50 per cent small caps, 50 per cent large caps. It is all a function of where we see the value. 

I would say in general that we find the most attractive opportunities are at the smaller end of the market. The asset opportunities are better at that end of the market because things just get thrown out of people’s portfolios. For example, something will sink to less than a $200 million market cap, or a $100 million market cap, and people will have to sell it. We have made a lot of money in stocks that are not even long-term growth stories; they are just asset plays that have worked out for us. 

Isn’t that more of a stock play than long-term value investing?

We value stocks earnings the same as anyone else and we have owned a number of growth companies that have done very well for us... I just think that part of the market in Australia is very, very competitive in terms of the fund managers that are in it. There are a lot of people out there looking for good businesses, with great management, that have got that long-term growth story. We would love to own those businesses at the right price; we just don’t find enough that are at the right price. 

For us, asset plays are as much value investing as anything else. It is just a style of value investing. I guess it is the more old school Ben Graham style of investing than the newer Warren Buffet style of investing.

It has just been a function of experience and time that we have built up this particular expertise in these asset plays. We do invest elsewhere in the market as well, but we are constantly asking that question, ‘What is the edge we have? What is it that we know? What is it that we better understand here than the market?’

Who are your investors?

We are almost exclusively retail. We manage about $65 million, around $32 million of that is in our own fund that we started around four years ago. That is all retail and they are mostly old subscribers of the Intelligent Investor newsletter.  

We started this fund management business off the back of this newsletter we were writing for 10 years [and] most of my clients in the funds management businesses are former or existing clients of that newsletter. 

We do run a wholesale fund as well... The Intelligent Investor wholesale fund, and that is on behalf of a bunch of Western Pacific financial advisers. But the stocks are almost identical across those two portfolios. 

We have a got an international fund as well, which we started in February and which has got about $22 million in it. That is, again, direct to retail clients.

Has your fund reached its capacity?

We think there is a natural cap to investing in this particular strategy [and] to what we can do in the ASX-listed market. That is probably $150 million to $200 million in terms of capacity. We are at a nice spot now at $65 million, where we are actually big enough to assist with capital raising, and certainly have an influence in the business [and] where we can actually help realise the value there.

Do you have liquidity or diversification difficulties with this strategy?

I liken it sometimes to private equity. We need to go into these businesses expecting that we are going to have to hold them for a long time and with a plan of how it is going to work out. It is no good us owning seven or ten per cent of a company and then changing our mind saying we want to get out. We put a lot of work into insuring that there is some value realisation mechanism that is not necessarily dependent upon the market. That could be some asset sales or a takeover or some sort of transformational issue that will allow us to realise our investment as well. We spend a lot of time thinking about that upfront.

For almost all of our clients, this fund is a smaller part of a well diversified portfolio. We have been very clear upfront with that in all our communication, that it should probably be less than 20 per cent of their portfolio. We intentionally run a very concentrated portfolio, it comes with volatility risk, but to be honest in terms of actual business risk across the 15 stocks, you can end up with as much diversification as you need.

 

Head to Head: Intelligent Investor Value Fund’s Steve Johnson
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