by Jenny Ruth
Monday 28th May 2007
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Fisher Funds Management manages more than $1 billion in a number of unlisted funds and two that are listed on the New Zealand Exchange, Kingfish and Barramundi. It specialises in investing in small to medium listed companies in New Zealand and, more recently, has branched out into Australian stocks. Its flagship New Zealand Growth Fund has delivered a compound average 19.4% annual return since it was founded in August 1998. Kingfish was floated in March 2004 and the shares, issued at $1, were trading at $1.66 ahead of this interview compared to diluted net asset value (NAV) of $1.65 on May 16. Shares in Barramundi, floated in October last year at $1, were trading at $1.16 compared to NAV of $1.105. While the Kingfish issue fell short of the maximum $75 million sought, raising $58.5 million, the $100 million Barramundi issue was $26 million oversubscribed.
Sharechat: Why do you think your two listed funds are trading at slight premiums to diluted net asset value?
Carmel Fisher, managing director of Fisher Funds Management: Kingfish certainly has traded at as high as a 20% discount in the past. We're delighted with the way the shares have tracked in the last six months. In the annual report last year, we talked about the large discount. Normally, when you get a listed investment company trading at a discount, either they've had a bad track record, which we haven't, or another reason is there's an element of the company or the portfolio which is unknown - if we had an unlisted investment that had to be valued periodically. All of our holdings are listed and valued at least weekly and they're published as well, so an investor knows exactly what they're getting. Those traditional reasons don't hold for Kingfish. The other reason they could trade at a discount is if people thought they wouldn't continue to perform. We didn't understand why people would think that either. So we wrote about that in the annual report. We've tried to communicate that also to share brokers around the country. At the same time, we've also had the buyback.
SC: How important is the buyback in maintaining the KFL share price near NAV?
CF: I think that's been a significant support for the share price. If the company itself is prepared to buy back its shares, that suggests that they may be under-valued.
SC: Why don't you just cancel the bought back KFL shares?
CF: We've reissued some. The company can use some of them to pay our performance fee, because half our performance fee comes in the form of shares. Sometimes it's quite difficult to buy decent lines of Kingfish shares. There's a possibility that substantial investors might want to take a placement. It just provides Kingfish with flexibility in capital management.
SC: Why buy back the warrants? Aren't you depriving KFL of a future source of capital?
CF: We just thought it was appropriate to buy a combination of shares and warrants. There's an argument that the warrants are dilutionary. Until they're exercised, every dollar of performance is diluted by the presence of the warrants. If you buy back and cancel some, you're reducing that dilution. Fisher Funds and Kingfish aren't reliant on the warrants being exercised for capital. If by cancelling the warrants there's less dilutionary impact, then every dollar of performance is represented in NAV. That's good for investors. If there was a need for more capital, Kingfish could issue more warrants to have a capital raising in future.
SC: Why don't you use gearing in KFL because you are allowed to borrow?
CF:We prefer to just use it as and when we require it. We wouldn't gear Kingfish on an ongoing basis.
SC: Wouldn't that help improve returns?
CF: Yes, but it also introduces a significant element of risk. One could argue that there's already risk in a share investment, particularly with smaller companies. We're happy to use gearing when we see great opportunities that we want to take advantage of when we don't have a lot of cash, rather than being forced to sell an existing holding that we like. That allows you to add to your portfolio without putting your existing portfolio at risk. In circumstances such as with Waste Management, for instance, when we knew we were going to lose Waste Management from the portfolio but we weren't going to get paid out for a couple of months, that was an opportunity to use gearing. That way you're not leaving your portfolio exposed when you lose a Waste Management.
SC: Why does Barramundi still have so much cash, 25% according to the latest report?
CF: It's a whole lot less than that now. It's less than 10% now. Why was it so high? We couldn't find enough of the stocks that we wanted and we didn't want to overpay. I think Frank Jasper (Senior portfolio manager and director who is responsible for overseeing the Australian portfolios) has done a marvellous job with Barramundi. He's waited and taken advantage of a couple of placements to access stocks at a discount.
SC: When do you expect it to be more or less fully invested?
CF: I would expect in the next three months it would be close to fully invested. I think Frank was waiting for one placement that's taking place in the next week or so.
SC: Will the new PIE (portfolio investment entity which will mean that qualifying funds will no longer be liable for capital gains tax) regime change your investment style at all?
CF: I don't think it's going to change our investment style. We will still be buy and hold investors. We're still going to have concentrated portfolios. What the PIE regime's going to allow us to do is take advantage of short-term trading opportunities that we wouldn't otherwise have done. I wouldn't imagine that would be a weekly thing, but there will be opportunities we can take advantage of. Recognising, for instance, that a stock might be under-valued because of bad news. We could buy with a view of selling in a few weeks. We haven't been able to do that because of the tax implications.
SC: Are you going to be a Kiwisaver provider?
CF: Yes, we are. Our Kiwisaver scheme has not yet been registered, but we would expect it to be so in June. Our's will be a growth-focused scheme rather than a balanced or widely diversified fund.
SC: FundSource categorises your funds as being high risk. Do you agree with that?
CF: I wouldn't describe our funds as high risk. I've never described our funds as high risk. We might have a slightly higher variation of returns than other funds which research houses like FundSource would categories as high risk. Our funds look quite different to other funds. Our portfolio and our approach is quite different from other funds. If you look at our returns versus other funds and versus the market indicies, the difference between our returns and everyone else's is significant but the difference in risk isn't that significant. They would describe us as higher risk because our returns are more variable. That's enabled us to be a much better performer than our peers.
SC: Your investment style is similar to that of (US fund manager of Berkshire Hathaway) Warren Buffett isn't it?
CF: The press would describe Warren Buffett as a value investor whereas we would describe ourselves as a growth investor. I think there are real similarities. Obviously, we've had to change our approach slightly to cater to the small New Zealand market, the idiosyncrasies of our local market, but in broad approach, we have a very similar approach to Warren Buffett.
SC: What has been the average turnover of stocks within the Kingfish fund each year since it has been established?
CF: How many holdings have we bought and subsequently sold? There have been two small holdings and we lost Waste Management. The average turnover has been 10% to 15% of the portfolio per annum. To put that in perspective, most portfolios in New Zealand have a turnover of between 80% and 100%. Our New Zealand Growth Fund has always been one of the lower turnover funds, averaging around 20%. Kingfish has always been lower than that. We're a true buy and hold manager.
SC: How do you manage the process of selling down large holdings such as Baycorp and Turners Auctions?
CF: We applied the same strategy with both of them. We don't actually sell very often and when we do sell, we typically sell the entire holding. When we sell, it's because our entire view has changed on the stock and we don't want to hold it anymore. Because of that view, we're not as price sensitive. If we've lost confidence in the company or the management, we don't want to be there. We don't want to be selling out of a stock over a six month period. We want to be out of it quickly. We will typically try and move the entire holding in one line. To do so, we would be prepared to accept a discount of even up to 10%. With Baycorp, the average discount on the selling was 3%, relative to where the share price was trading. With Turners Auctions, we didn't have to sell at a discount. We actually sold at a slight premium to the market. GPG was the buyer and they regarded it as a strategic stake. For all of our holdings, we have what we call a liquidity map. We're always talking to investment bankers to get a handle on who are the other major investors, who are the likely buyers. For each of our stocks, we have a broad idea of who might be a buyer if we decided to sell. I think we would have a problem if we sold over a six-month period. Word would get out. That's why we would look to do it quickly and get it over and done with. Even if the price falls on the day, it will quickly come back to equilibrium. That's much better than being an ongoing seller over a period of time.
SC: How great is the risk that you can't sell such holdings without accepting huge discounts?
CF: There is a risk that we will have to accept a discount. I don't know about a huge discount. Ten percent would be the biggest discount we've had to accept. I don't think that's huge in the scheme of things. Similarly, when we purchase stocks we've had to pay a premium. I don't think that's a huge issue. Because of the returns we expect to get from our stocks, a 5% or 10% premium or discount is neither here nor there.
SC: How will the new tax rules for offshore share investments affect the Barramundi fund?
CF: It will affect Barramundi - about 7% of Barramundi is invested in FDRs (the 5% "fair dividend rate" will be applied to international investments and some Australian stocks that lie outside the major share market indices will be subject to FDR just like international investments. Most mainstream Australian share market investments will be free of capital gains tax.) We don't think that's a big deal. We're not going to avoid FDR stocks. In fact, we might have more going forward. The total tax we're going to have to pay on the Barramundi portfolio is going to be marginal. We're investing for growth and we're going to carry on investing for growth rather than tax.
SC: Before you get to the stage of meeting a company's management, what steps will you have taken to assess whether to invest in that company? Where does most of your information come from?
CF: Before we invest in any company - it's a little bit different for New Zealand than Australia. In New Zealand, we're generally familiar with companies before we invest in them anyway. We keep research files on all the companies we would ever invest in. We've got quite a comprehensive library. Before we invest, we always insist on at least one company meeting. We would never invest befroe meeting the company's management. We would have a series of questions - we would never go along unprepared. There are lots of stories about American companies turning up to visit a company and they say, tell us what you do. Basically, they're here on a fishing holiday. We would never do that. In Australia, we do quite a lot more than that. We do a lot of research. Typically we will visit 20 companies in three days. Frank and (analyst) Terry Tollich will be well informed so they can get straight to the meet. Terry will have already built up his model so when they get to the company, they will get straight to the crunch. They will have looked at the competitors and done industry analysis and have a lot of information before they get in front of the chief executive. We get bits and pieces from share brokers, you start reading, you start Googling. It's really just wearing out shoe leather, talking to as many people as you can to get snippets of information about a company.
SC: Do you feel that the current level of annual growth of the funds you manage is sustainable? Why/why not?
CF: In terms of performance, we never predict future performance. If you had asked me five years ago whether I though that for the next five years we would be averaging a 20% (annual) return after tax, I would have said no, I think that's a little bit ambitious. But we have. Because we're investing in growth companies, if our companies can continue to grow their earnings at more or less the same rate as they have done over the last five years, there's no reason why we should keep performing. Share prices over time will always reflect the underlying performances of companies. As for annual growth in funds, in the last year we've doubled the size of the funds under management. The answer is no, we can't continue growth like that. We would end up owning too much of each of our companies and that would end up jeopardising our investment strategy. I think we have limited growth potential for New Zealand. We can't accept large inflows now into our New Zealand funds. We may have to close our New Zealand funds later this year. In Australia though, we still have plenty of scope to accept new funds.
SC: Does Fisher Funds play any role in the selection of directors of companies it invests in? If so, what qualities does it look for in a director?
CF: We sort of play a role - an indirect role. We have had some of our companies approach us and ask us for suggestions when they're looking at appointing or replacing directors and, of course, we vote. We would never put ourselves on a board or expect our nominee to be on a board. We do have a view which directors are good and which ones aren't. In terms of what qualities you want in a director, it depends on the company. It might be someone with international expertise or someone with legal expertise. We would look for the same things which we look for with our managing directors. People who are capable, who are passionate, who are consistent and believable - they're consistent in what they tell us. They actually deliver on what they tell us. Also that they're passionate and committed to the business.
SC: How did you get started in this industry? What tips do you have for someone wanting to follow in your footsteps?
CF: After completing my accounting degree, I then worked for a share broker in a junior role and worked my way up. I built up a client base. Then I moved into the research department of the broking firm and then moved into a research role with a fund manager that happened to be and insurance company. I think things have changed now. I think it's harder to get into the industry. When I look at the calibre of the CVs that come across my desk, I think it's very competitive. My advice to anyone who wants to get into the industry is to accept any junior role. So many people I see who decide they want to be in investment banking want to go for the glamorous roles immediately. I think you should get your feet in the door, develop a track record, develop some expertise and go from there.
SC: What was you best and your worst ever investment? Why?
CF: The best, I think, has been Ryman. The returns have just been mind blowing. It's been a wonderful company to research and be associated with. The management team have always been candid and believable. The company has just consistently delivered year in, year out with no major stuff-ups along the way, no inconsistencies, no lies, no exaggerations. Just an easy story to be involved with. We were able to get into Ryman relatively early before the share price took off. We had it to ourselves for quite a long time which was lovely. The worst probably would have to be Cadmus. The share price has been neutral. Relative to all the other stocks we've had, it's done nothing. There have been some changes but they haven't delivered on what they were going to do, although the last three months look more promising. It's a tiny holding. Often the small holdings get way more attention from investors than they should do. Others will have looked at what holdings we've got and bought in. They probably bought a lot more than 1% of their portfolios. We accept that responsibility because people will follow us.
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