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, Investors Mutual Limited senior portfolio manager Simon Conn tells how his fund seeks both dividends and long-term capital growth.
Investment style
The Motley Fool: How would you describe your fund to a potential client?
Simon Conn: It's our mid and small cap fund — so we invest in stocks outside the top 50, and the investment approach has been consistent for over 20 years with Investors Mutual. We look for companies that have got a good competitive advantage, recurring income streams, are well-managed, and we spend a lot of time talking to management of the companies we own and then looking for new opportunities, and importantly, trading at a reasonable price.
We're disciplined around the valuations and look to buy stocks when they're cheap and out of favour, and then, obviously, if stock prices rally and exceed their valuation targets for us, we'll exit that position.
We're sort of a quality but value manager.
Our big aim is to try and deliver some reasonable capital growth through time. We do take a long-term approach to investing, as you need to in this sector of the market, and try to generate income, as well. We've got to focus on generating income from the portfolio, as well as capital gain.
MF: Despite all the chaos going on in the world currently, it's a pretty good time for dividend-paying stocks, isn't it?
SC: Yeah, I think so.
The last few years, with interest rates being so low, people and the market have obviously been focused purely on capital growth, and yeah, we've had a bit of a reality check in the last 4 or 5 months with interest rates going up and more concerns about potential capital growth going forward.
Look, income is one of those, the part of the market, part of your return that you should always be able to bank. It should be a consistent part of the return, whereas share prices can move up and down — in recent times, quite a bit over the short term.
I think if you hold good-quality companies through the long term, you'll generate some income through a dividend, and then hopefully if you buy at the right price, you can generate some good capital growth over time.
Biggest convictions
MF: What are your two biggest holdings?
SC: Well, actually, two of the biggest holdings in the fund are Crown Resorts Ltd (ASX: CWN) and Australian Pharmaceutical Industries Ltd (ASX: API), which are both under takeover.
We've had quite a few takeovers in the last 12 months. That's a feature we've found over the years. When good-quality companies are out of favour, you do find M&A becomes a feature, because the stock market's not treating these companies or rating them appropriately, so you see corporates or other parties bidding for them because they think they're worth more. And that's been a feature the last 12 months.
We've had API be bought by Wesfarmers Ltd (ASX: WES), which the transaction's coming to an end, and then obviously, Crown is one we've known for some time. We bought more when it was out of favour. Pretty strong asset backing, and we've got the bid now from Blackstone, so I would imagine that will go through in time.
They're the two biggest holdings at the moment.
