The 21st century has unloaded a whirlwind of disruptions for financial markets, with asset managers needing to find an equilibrium between adapting to change while maintaining a steadfast commitment to their investment philosophy.
This has been the case for Merlon Capital Partners, a boutique investment manager specialising in Australian listed shares, founded in 2010 in the aftermath of the global financial crisis (GFC).
Speaking recently on an episode of Relative Return, one of the firm’s founding members, Andrew Fraser, noted that market disruption “comes with the territory”.
“We look at those big key moments that disrupt markets like the GFC, like COVID, as being quite pivotal points,” Fraser told InvestorDaily.
“But the reality is that investing, and not knowing the future, is always challenging and has a degree of stress. But for myself and my colleagues, that’s what we love.”
While serving as a potential “detriment to the hairline”, Fraser explained that confronting new challenges in the market cycle can be very rewarding, even in times where a fund’s performance in certain market cycles is not conducive to a firm’s style or philosophy.
“After a few tough years, sticking true to our philosophy and our process and seeing our investors rewarded with exceptional returns is ultimately the prize for us.”
Looking at the last 14 years, he said that not only have markets had to deal with the investment cycle, but also the “demonstrable” changes within other industries that are having trickling impacts on listed asset specialists.
“Just thinking around the post-royal commission and what that’s meant for the financial advice platform businesses, which has a twofold impact on us as investors.”
Fraser explained that navigating the regulatory changes that have hit listed businesses like Insignia and Netwealth has “been interesting to say the least”.
“But also for us, in terms of growing our business, is the fragmentation as advisers have moved out of those more traditional banks and the AMPs and IOOFs of the world. So there’s been quite some challenges there.”
Throughout the highs and lows of this disruption, Fraser said that Merlon has been led by the philosophy that being contrarian in nature is key to investing successfully.
Particularly during market pessimism, the boutique firm invests in companies that are typically unpopular, but have a good history of generating free cash flow to investors.
“One of the challenges with investing is this belief that we can precisely value a company or forecast its earnings,” Fraser said.
“For us, actually understanding a range of valuation outcomes is actually more instructive to try and work out whether the markets become overly pessimistic or indeed overly optimistic about a company’s fortune.”
