A mandate to invest globally

This week’s Fund Manger Fireside Chat is with Tim Samway, Managing Director of Hyperion Asset Management. 

Tim, let’s talk about your Global Growth Companies Fund, what’s its mandate?

Its mandate is to invest globally.  It does so without reference to the contents of benchmark, so it’s benchmark insensitive.  We’re just going to invest in the highest quality businesses we can find around the world and not many of them actually.  We’ve got about 20 in the portfolio so it’s a very concentrated portfolio of the highest quality businesses we can find.

What does high quality mean for you guys?

Yeah, that’s a good question.  We’re looking exclusively for businesses that have structural tailwinds that can drive years of revenue growth.  We want them to have low levels of debt and some sort of a competitive advantage, so usually in the form of a demonstrably superior customer value proposition, something that can drive high returns on equity for many years to come.  Often these sort of businesses look a bit expensive if measured in the short term, so sort of a short term focussed rule of thumb like a PE ratio.  But, our experience over 21 years of managing equities is that they turn out to be cheap in the long term.

How big is the fund?

At this very minute it’s about 29 million but we manage about a billion dollars in global portfolios for institutional clients and about 6 billion in total across Australian equities as well, and once again mostly institutional clients.  But, I mean increasingly growing part of that out with direct investors.

Will you let it keep growing or will you cap it?

Well, we’ll cap it.  Our competitors often go to numbers of 20, 30 or 40 billion dollars, but this fund we will cap at around 10 billion.  That’s across institutional investors as well.  We want to stay nimble, that’s really what investing in concentrated equities is all about, is making sure you don’t own too much of something.

What’s the fund’s fee structure?

Good question.  The fees are 70 basis points or 0.7% per annum with a 20% performance fee based on our performance over the MSCI World Index and with no performance fee paid if the performance is negative.

Right.  I’m looking now at your monthly fund update.  The performance has been very good, the one year net return of about 30% is basically double what you’ve benchmarked against.  I know you said you’re benchmark agnostic but that’s exceptional, what do you attribute that performance to, which sectors and stocks specifically?

Yes, so one year is good but we’ve always thought in sort of rolling five and ten year numbers.  We’ve been around for a long time now so we know that our clients are invested for a long term not for a one year return.  But, having said that the big exposures that have paid off in the last year are some of the big tech stocks like Amazon and PayPal, Facebook, Google which is Alphabet, Mastercard, they’ve done very well for us over the last year.  We’ve got about 40% of the fund in infotech at today’s date, that includes companies like Microsoft, Medidata, Intuit, Google, PayPal and Facebook, and about 30% in consumer discretionary so there’s stocks like Wayfair and Costco, Dominoes US, Amazon and some really high quality names in terms of the products they produce such as Hermes, Moncler and Ferrari.  There you go, that’s not all of them but a fair number of them.

So, you mentioned the FANG stocks which you’re clearly a fan of.  Have you bought these kinds of companies on a fundamental case by case basis or are you more buying into what you see as a shifting commerce landscape to a winner takes all situation where only a few companies dominate?  You mentioned just before that you buy into companies with structural tailwinds, so those FANG stocks, are those exposures part of a bigger picture?

Yeah, well we’ve been in them a while so we bought them a long time ago at much lower prices than they are now and in fact we’ve held them at much higher weights than we’ve had now so we have paired them back a bit in recent times.  But we buy on a bottom up basis so every stock has basically got to pass through our tests that I talked to you before about but what it tends to throw up is that those themes, as you mentioned there, there are some substantial themes that run through our portfolio so things like cash to card to online.  The increasing usage of cards and online, so Visa, MasterCard and PayPal.  Sort of that bricks and mortar to online, so Amazon and the effect of its Prime system and how it just creates this flywheel of use.  Things like the rich that are getting richer and the gap getting larger, so those sort of high end names like Ferrari, Hermes and Moncler.  They tend to pop out of a bottom up process.

You mention your investing style is obviously bottom up and very fundamental but with being a global fund with exposure to big tech stocks it’s hard to ignore some of the news at the moment with the Facebook data scandal, the possible trade war between the US and China among other things.  How much attention do you give to these kind of things?  Facebook lost like about $50 billion of its market cap because of the Cambridge Analytica thing.  Is it white noise to you or you do take notice?

Well, it’s not just noise.  We’re clearly interested in what this means for its long term ability to continue increasing its revenue.  We think that these sort of things were already priced in.  That is there was Facebook with very substantial earnings growth.  I mean, this is a company that while its revenue growth is slowing it’s still producing 20% plus earnings per share growth on a PE of early 20s.  Clearly, we think it’s a much better deal than the rest of the market which is on near term PEs of high teens with growth of 4%, 5%, 6% or 7%.  So, we think there’s a real argument for why these things have already been priced into the value of Facebook.  I think everybody expects them to be regulated in some way.  We still think they’re cheap on a five year basis. 

Looking at your top five holdings you’re heavily invested in the FANG stocks but at least in terms of your top five holdings with the notable exception of Apple.  Have you got any exposure to Apple?

No, we don’t. 

And why is that?

That’s not to say we never will have.  Well, it’s increasingly a product driven business and they’ve got to keep coming up with those products.  They don’t have the sort of tailwind that we look at some of these platform businesses having.  Yeah, I mean I could go into the excruciating detail of it all but we just don’t feel it fits through our filter of having a structural tailwind.

That’s fair enough.  Tim, I think we’ll leave it there, thanks very much for taking the time to have a quick chat with us, we appreciate it.

Absolute pleasure, thank you very much.