Has Hunter Hall International lost its mojo?

With most fund managers putting in strong investment performances over the past year, the black sheep of the family is most definitely Hunter Hall International (ASX: HHL).

Hunter Hall manages one listed fund, Hunter Hall Global Value (ASX: HHV), and five unlisted funds, with the flagship being the Value Growth Fund. The Value Growth Fund (unlisted) has beaten the All Ords accumulation index comfortably over 15 and 10 years, however it’s a different story over the last five-, three- and one-year periods. On a comparative basis, results have been lacklustre. And the HHL share price has been dismal, falling over 50% in the past year alone. In short, Hunter Hall International appears to be heading for irrelevance and possibly redundancy. What are they doing about it? Let’s have a look.

Keep seeking value, not fashion

Hunter Hall is not a momentum or market orientated player; it is a focused, international value investor, and will usually hold investments over a number of years. This has led it into companies unfamiliar to the typical retail investor such as Sberbank (Russia’s dominant bank), Samchully (South Korea’s premier energy distributor) and Danieli (an Italian parts and equipment supplier to the metals industry). These three are well established companies with a long history of profitability and quality balance sheets.

Companies such as these are available at significantly lower comparative prices when compared to domestic equivalents. For example, Sberbank’s price earnings ratio is 6.3 and its history goes back to 1841 — not exactly a fly-by-nighter. Some better known names held in the international funds are Apple, Expedia and Sumitomo Electric.

There have been a few good performers across the funds – including Sirtex (ASX: SRX), M2 Telecommunications (ASX: MTU) and Resmed (ASX: RMD) (all Australian based). However the occasional birdsong doesn’t make a spring and a challenging international economic environment (especially in Europe) over the past three years has led to consistent fund outflows with investors going elsewhere. As far as many financial advisers are concerned, Hunter Hall has left the building.

Developing products

Hunter Hall has not done much in the way of adding depth to its offerings over its 19-year listed history. A couple of attempts have quietly been closed due to lack of interest. A very recent offering (July 16, 2013) is a wholesale fund with a management fee of 1%pa and no performance fees. The difficulty with Hunter Hall’s positioning is the present lack of investor demand for international shares (midcaps especially). However, with many favoured domestic shares (banks, supermarkets etc) looking fully valued, this situation is likely to change over the medium term.

Strengthening capabilities and reach

David Deverall (previously Perpetual’s CEO) was appointed as managing director of Hunter Hall in July 2012. A number of administrative and marketing changes have been implemented. Further structural moves are in progress and the benefits of these should be apparent by 2014.

Foolish takeaway

HHL has no debt, solid cashflow from base fees, and a market capitalisation of $50 million. Funds management companies have extreme leverage to fund flows, sentiment and the quality of stock selections. On the positive side, both investment performance and fund flows have improved in recent months, partly due to the weakening Aussie dollar. Looking to 2014, a rough but conservative estimate would be earnings of 20c per share and a partly franked dividend of 17c per share. At $1.80, this places HHL on a PE of 9, and a dividend yield of 9.4% — not unattractive. It’s near the top of this investor’s watchlist.

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Motley Fool contributor Peter Andersen does not own shares in any company mentioned in this article. 

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