Ask A Fund Manager
The Motley Fool chats with fund managers so that you can get an insight into how the professionals think. In this edition, Leithner & Co joint managing director Chris Leithner tells how if the investments make no money, his management team doesn't eat.
The Motley Fool: You manage an investment company, rather than a fund. How would you describe it to a potential client?
Chris Leithner: As you've said, it's a corporation. It's not even a trust, it's not a managed fund.
We're unlisted. We think we've got some advantages in that respect compared to listed investment companies (LICs). There's a share buyback mechanism in place. Shares are redeemed [on] their after-tax NTA (net tangible assets) — people can do them in one fell swoop, no brokerage.
We have shareholders rather than clients. And it's sort of a [Warren] Buffett and Berkshire Hathaway Inc (NYSE: BRK.A) sort of arrangement, in the sense that… we share the risks and rewards.
Except for the chairman who gets a small stipend, none of the directors get a salary — no directors' fees. Our returns come from our ownership of the ordinary shares so that if there's no banquet, we don't get a feed either.
In other words, our own incentives are not just aligned with shareholders but, it seems to us, both of them [have] very long-term sorts of incentives.
The company has two classes of shares: investors own the redeemable preference shares (RPSs) and management holds the ordinary shares (as well as a large number of RPSs). Leithner & Co charges no administration, management or other fees.
These arrangements, which we think are unique in Australia, attract shareholders who appreciate our conservative-contrarian, low-cost and long-term nature. Once they invest with us, they seldom leave.
Our conservative approach hasn't diminished our results. Since formation in 1999, RPS returns have generally matched the All Ordinaries Accumulation Index (ASX: AXJOA) — and, over extended stretches, have outperformed it.
Over that 22-year period, we've never failed to pay a half-yearly franked dividend. Very importantly in our view, we've produced returns in a much steadier (and we think safer) manner than the index.
In particular, although it's varied considerably, on average we've held approximately 50% cash over the years (which we've used to collateralise the ETOs [exchange-traded options] we write, etc.). As a result, during the latter stages of booms, we've tended to underperform. However, and much more significantly for long-term returns, we lost much less than most others during the dot-com bust, global financial crisis and global virus crash (GVC).
And because we put cash to use during those crises, we recouped these small losses relatively quickly.
Arguably our returns could've been higher if we'd been more fully invested. Equally, as management, we receive no salary or directors' fees, we would've benefited as well by reducing cash holdings. But we've always been mindful that our shareholders trust us to not lose their money. If that means our returns are a little lower than they could be – in order to avoid being a lot lower than they should be – then our shareholders are paying a small price to sleep well at night.
MF: So originally was the incentive for that company structure that the investment managers' skin is very much in the game?
CL: Yes, very much so. This is going back 20 odd years, back in 1999, when we set things up. The basic ethos was to set up something, given Australian [tax] law, akin to Berkshire Hathaway.
Obviously given tax laws, corporations law, and so on, we can't do a carbon copy. But I think we've done a reasonable facsimile.
The notion of skin in the game, it seems to me, was a critical cut-through concept.
