Transcription of Finance News Network Interview with Fairview Equity Partners Portfolio Manager, Leigh Cronin
Clive Tompkins: Hello Clive Tompkins reporting for the Finance News Network. Joining me from Fairview Equity Partners for an update is Portfolio Manager, Leigh Cronin. Leigh welcome back.
Leigh Cronin: Thanks Clive, good to be here.
Clive Tompkins: You’re one of the Managers of the Fairview Emerging Companies Fund. Which stocks do you invest in and what is the market cap of stocks within this group?
Leigh Cronin: The Fairview Emerging Companies Fund is a boutique specialist smaller companies Fund, benchmarked to the smaller ordinaries index, which means that we’re primarily invested outside the ASX 100. What that means in a practical sense, is that we’re invested in companies ranging from as low as around $100 mil market capitalisation, through to companies a little bit in excess of $2 billion in size.
We’re seeking to invest in companies that we don’t think are yet to be fully discovered by the market, or that have growth prospects that we think are being underestimated by the market. Be that because of their stage of maturity, be that because they’re benefitting from structural change or growth through acquisition.
Clive Tompkins: Thanks Leigh, so what is Fairview’s approach to investing?
Leigh Cronin: We’re very much bottom-up stock pickers, as opposed to focusing in a more macro level or trying to necessarily call, or time markets. We operate under what we describe as a core approach, which means that the majority of our efforts are directed towards stock selection. But then, we reflect on the portfolio and ensure that it has the appropriate degree of balance. To date in all but two quarters over more than five years, we’ve been able to deliver outperformance and we think that is testament to that process, and that approach.
Clive Tompkins: Leigh, we’ve just concluded the half year reporting season for most companies, what was your assessment and what was some of the standout results for companies that you own?
Leigh Cronin:The short answer is that the reporting season that we’ve just seen came in broadly in line with both our and the market’s expectations. The market wasn’t required to change its earnings estimates materially, still looking for mid single digit growth for the 2014 year, accelerating into low double digit growth for the 2015 year. With some expectations lowered leading into the reporting season, what we basically saw was the lack of any further disappointment or negative revisions, was what drove the February market higher rather than positive revisions perse.
For industrial companies more broadly what we saw was a stabilisation of earnings trends. We saw companies still looking to prudently manage their cost base. What we didn’t see any material signs of economic conditions improving just now, and outlook comments from companies were still, had an element, or a tone, of caution.
Retail and IT services were two sectors where we still saw a more challenging top line environment come through. And, obviously the mining services sector, the lack of visibility given that we’re seeing resource companies reining in both CAPEX and OPEX saw disappointing results there. Now, that’s at a very broad level. Obviously we’re very much focussed at a stock specific level and we’re primarily investing in stock specific stories where we think earnings growth that can be achieved will be far greater than what the broader economy will deliver.
So, some of the standout results from our perspective in terms of companies that we own included REA Group Limited (ASX:REA), Select Harvests Limited (ASX:SHV), Infomedia Limited (ASX:IFM), Mayne Pharma Group Limited (ASX:MYX) and the recently floated Vocation Limited (ASX:VET). Whilst Ardent Leisure Group (ASX:AAD) and Breville Group Limited (ASX:BRG) and also saw strong results and a requirement for the market to upgrade expectations.
On the flipside, two companies that we own that posted disappointing results were Super Retail Group Limited (ASX:SUL) and the IT services company UXC Limited (ASX:UXC), or be it that they flagged that ahead of the reporting season.
Clive Tompkins: Now there’s been a spate of IPOs in the last six to 12 months. What factors do Fairview consider when deciding to invest or not?
Leigh Cronin: We’ve certainly passed on more than we’ve participated in. There’s been perhaps 15 to 20 IPOs over the last six months and we’ve participated in only a small handful, including Affinity Education (ASX:AFJ), Vocation (ASX:VET) and iBuy (ASX:IBY). The major limitation for us is investors in that IPO process, is getting a sufficiently long track record, a history of financial performance. We typically prefer to analyse companies and indeed assess management over longer periods of time, than you are able to over the IPO process.
We also need to assess who the vendor is and what their motivation is behind selling. If it’s at the one extreme, a private equity investor who’s really only interested in maximising their exit price, and who don’t really have as much regard for the aftermarket. Or at the other end of the spectrum, you’ve got a founder who’s not looking to relinquish control of the company, who’s just looking to raise money to further expand their business and who’ll remain aligned, with the investors.
So given that limitation, I guess it comes down to price, the price needs to be right. We need to be sure that at the prospectus price that money can still be made, by not only the exiting investors, but also us as new investors. And we also need to be very cognisant of meeting those prospectus hurdles in the first instance.
Clive Tompkins: Now to your Fund in more detail. What are some of your bigger positions?
Leigh Cronin: We’ve currently got about 60 companies within the portfolio at the moment. So a good spread of companies across a range of industries. Some of the larger positions in the Company at the moment and a couple I’ve already touched on include, G8 Education (ASX:GEM), REA Group (ASX:REA) and Carsales (ASX:CRZ). Then there’s Ainsworth Game Technology (ASX:AGI), which is involved in the design and manufacture of gaming machines. It’s gaining market share here in Australia but importantly, growing very strongly in international markets.
And another one to mention is Mayne Pharmaceuticals (ASX:MYX), which is involved in the manufacture of both branded and generic pharmaceutical products. And again, is growing very strongly in international markets. In the case of each of those companies, they’ve all got growth rates significantly above that which is being delivered by the broader economy. Be that because they’re benefitting from expanding business lines, they’re expanding through acquisition or they’re expanding geographically.
Clive Tompkins: And over the last 12 months, what were some of the biggest contributors to performance?
Leigh Cronin: Well over the 12 months to the end of February, our three biggest contributors to performance in the Fund were G8 Education, REA Group and Mayne Pharmaceuticals. Each rose on average over 100 per cent during that period. Other stronger stocks within that 12 month period included Flight Centre (ASX:FLT), Ramsay Health Care (ASX:RHC), Greencross (ASX:GXL) and Select Harvests (ASX:SHV).
Clive Tompkins: And Leigh on the flipside, which stocks disappointed?
Leigh Cronin: Well of the stocks that we’ve owned within our portfolio that detracted from our performance, included Codan (ASXCDA), included Red Fork Energy (ASX:RFE) and Atlas Iron (ASX:AGO). Now in Atlas Iron’s case, it was also combating a deterioration in the iron ore environment. In the case of the other two stocks, they were both stock specific issues. Now consistent with our process, our investment thesis in each of those cases was invalidated. So we’ve exited all three of those stocks.
Clive Tompkins: OK so overall, how is the Fund performing?
Leigh Cronin: We’re quite pleased with the performance of the Fund over the last 12 months. In the 12 months to February, the Fund’s returned seven per cent to investors net of all fees, which is about 10 per cent ahead of the small ordinaries benchmark. Since the inception of the Fund, we’ve returned in excess of 15 per cent per annum to investors, net of all fees. We’re quite pleased with the balance of investments within the portfolio at the moment. And we’re really encouraged by the nature and the number of opportunities that are in front of us, at the moment.
So whilst valuation multiples more broadly have increased and we probably do need to see positive earnings’ revisions, to take the broader market materially higher in the short term. Obviously we’re focused very much at the stock specific level and we’re still seeing a whole range of opportunities. So we’re very positive on the outlook.
Clive Tompkins: Leigh Cronin thanks for the update and congratulations on another very good 12 months.
Leigh Cronin: Thanks Clive.
Ends
FLT Price at posting:
$52.19 Sentiment: None Disclosure: Held
(20min delay)
