A small cap fund specialist

This week’s fund manager interview is with Ben Griffiths of Eley Griffiths Group, a boutique fund manager that was started about six years ago between Ben and Brian Eley. Brian has retired due to ill health - unfortunately he has motor neurone disease - but Ben has carried on and the equity now resides with him and his team.

They are an interesting outfit because the performance has been fantastic, particularly over the last twelve months. They've got two funds: the small companies fund and the emerging companies fund. The small companies fund performance over the past twelve months has been 33%, and the emerging companies fund has been even better at 42%.

It's really worth listening to Ben Griffiths - he’s got some interesting views about the future of the market and where it stands now.

Here's Ben Griffiths of Eley Griffiths Group.

Ben, perhaps some nuts and bolts to begin with about the fund.  You started in 2002, you’re an early boutique manager.  Where did you and your partner come from?  

Brian Eley and I first started managing small caps together as a double act in 2000.  We actually came together right at the time that the market went into its dot-com collapse internationally and of course that swept small caps and large alike into a terrible funk and it took all of 3 years for that exuberance to wash out.  So, we worked together at ING for 2 years and then briefly at BT just prior to the sale of BT from Principle to Westpac.  Then I guess fortuitously we struck out on our own in very late 2002, opening the doors to investors in January ’03. 

Completely unbeknown to us was the fact that that indeed was where the bull market that we’re in now was sort of measured from, it was January 2003 – it didn’t feel like it at the time. So we set course with plenty of experience investing in an institutional type way in small companies and I guess since then we’ve seen the market grow like topsy.

Well, as you say, it was a great time to start a new fund.  Your performance since inception according to your website was 11.94%, versus a benchmark of 6.73%.  What’s the benchmark?

The benchmark is the small ordinaries accumulation index.

11.94%, as you say, the beginning of the bull market, I suppose in some ways not too hard to achieve but your 1 year performance is 33.2%, that’s phenomenal.  I mean, it’s against the benchmark of 25%, but still, 33%, so tell us what’s in your fund?

The portfolio, as you can imagine, they’re all investment grade names and I’m talking about our small companies fund here, Alan.  We have two funds of course, we have an emerging company’s fund and a small company’s fund…

You only started the emerging company’s fund a year or so ago, didn’t you?

That’s correct.  But the small company’s fund.  We put in place a fairly sizeable rotation to the portfolio names back in around June Q 2016.  We put a more cyclical bias in the portfolio.  We moved into a number of resources names which we figured were due to run.

Such as what?

A number of Whitehaven Coal, Mineral Resources, Saracen Minerals, a couple of gold names.  We bought some Sandfire resources at the time.  So, we bought a bunch of industrial names and we bought up a hoard of mining service names as well to pick up on that theme of the recovering sector.  We funded it of course by selling a lot of our New Zealand exposure which had become a little expensive, as well as some quite expensive stocks in the portfolio.  That rotation into that style of stock served as well through the remainder of ’16. 

They’ve had a brief wobble in March Q CY17, but from that point onwards I guess our tilt tour to a sort of market waiting in resources versus the traditional way underweighting resources has looked after the portfolio quite nicely.  And of course along the way there are a number of individual stocks that have their own characteristics that sort of fall outside that broad cyclical versus defensive category.  The stocks like Afterpay Touch, Navigator Global Investors, Smartgroup, Xero… Those sorts of names, good quality, well managed investment grade small company industrial names that have performed particularly well in the last 12 months. 

I think from top-down it’s been a view of the investment committee at Eley Griffiths Group that we think equity markets are primed for upside.  They’ve certainly held that view for the last two years.  We think equities versus bonds are still the main game in town.  Small-caps within your broader equity class should continue to outperform.  We think they’ve had a great 12 months, we think that’s set to continue.  In fact, small companies versus mid-caps – and of course mid-caps has been that really, really sweet part of the market for the last two years.  Small-caps have now started to gain the ascendancy.

When you say you rotated last year, was that essentially a rotation out of value investing into growth stocks? 

What it was, for us it was a rotation back in ’16, so it was middle of CY16 where we sold a number of expensive defensives at the time and then bought some of these somewhat burnt out cyclical names.  If you look at mining services, by way of example, that’s a sector of the economy or sector of the market that had performed very strongly for a number of years into late 2012. 

Of course, with the subsequent retreat and commodity prices, the collapse in mining investment and the fact that there’s no new supply coming on, basically the resources sector went into a major retreat and there was no sign of a pulse across the resources or the mining services names really until that sort of March Q 2016.  So, it was a good part of 3.5 years of basically torturous price action, torturous results if memory services me correctly for these businesses.  But of course, as we know from investing, you need to identify where value is and then you’ve got to wait until value presents itself.  That’s what we saw in that 2016 period. 

Our portfolio hasn’t changed a heck of a lot since that sort of mid to late ’16.  The sectoral bets and positionings in favour of cyclicals, in favour or resource names, hasn’t taken a huge amount.  We’re taken profits where profits ought to be taken, we’ve added energy as a sector of the market which we didn’t own as a part of that re-rate.  I often tell the guys here in the office that a small-cap manager earns his bones on his rotations.  Thankfully, you’re not doing a major portfolio rotation every 12 months, so you tend to have to do them every 3-4 years and there’s nothing prescriptive about that it seems to work out that way.  You’ve just got to make sure that when you do the rotation you’ve got it right and you basically put the positions in place and then you need to have that next layer of discipline which is holding the stocks.  Not just jumping off when you think you’ve made an adequate return.  You need to be able to hold them to really maximise what we think will be the ultimate returns. 

Well, obviously you guys got that 2016 rotation right.  I’m very interested in the fact that you’re still bullish and you think there’s some upside room left in the market, particularly for small-caps.  Because there’s a lot of commentary now that the bull market’s run its course and there are too many headwinds.  Tell us why you disagree with that? 

It’s interesting.  I mean, I’m not going to for one second stand here and tell you that small-caps are cheap and I’m not going to tell you that equities as a class are cheap.  But they’re also a fair way from being expensive or excessively priced.  I guess my confidence boils down to the fact that small-caps versus big-caps, why don’t we start with a broader discussion of the Australian share market and we’ll get into small caps.  Essentially, the Australian share market has performed very well in the last couple of months.  The Australian share market has been by global standards, somewhat of a laggard.  If you look at the ASX200 it has consistently failed to trade through 6,000 for probably eight or nine years. 

About two weeks ago we saw the ASX200 clear the 6,000 level and go straight to 6,200.  I saw that, I saw the repeated failures of that benchmark over the last eight or nine years as basically indication that international investors are not ready to buy this market.  We broke out the other day without the help of the banks.  As you know, the banks are under all sorts of selling pressure, as is Telstra.  I think investors themselves have either had enough of their bank holdings or they’ve got enough bank share holdings, it’s time to dial the risk appetite up a bit. 

We’ve certainly seen, I think a return from the retail investor and increasingly in the last two or three months, a return of the international investor to the Australian share market.  Hence, the break through 6,000 on the ASX200 and ultimately the move to 6,200.  That is an important foundation step for the Australian share market to go back to the old highs at 6,800.  Why am I thinking this way.  I mean, essentially the Australian economy is ticking along okay.  If I take the reporting season we had in February as somewhat of a yard stick, that reporting season that the Australian share market enjoyed in February, was probably one of the better reporting seasons we’d seen in the last five or six years. 

We’re in the teeth of the full year reporting season, Alan, that starts in August.  Normally by now we’ve had a lot of confessions from companies that have fessed up and said that they’re not going to do the numbers that they’ve previously suggested.  That situation is, I think the confession season, as we like to call it, has been pretty benign.  There’s been a few companies that have indicated that their numbers would be softer, but generally speaking the back drop is constructive on an earnings front.

Small-caps don’t normally trade at a premium to big-caps.  Small-cap investors demand a discount normally and that’s how the space has been for years.  But from time to time when confidence moves to a new level, you start to see a PE rating versus big caps, you start to see it open up.  We’ve got one at the moment, it’s around a 9% premium for small-caps versus big-caps.  That indicates to me that animal spirits are alive and that risk appetite has returned to the market.  I also like the look of primary and secondary deals that are happening right now, in a market that feels a bit wobbly where people are getting a bit anxious, you don’t see Reliance Corp raise $1.1b to buy a US business, nor do you see Reece raise $560m to go to the States, and we’re going to see just how strong this market is by the reception that Viva Energy receives, which is basically the floating of the Shell refinery and Coles express business.  That’s going to be quite a chunky raising Alan, probably set to raise anywhere between $2.5-3b.  Early indications are that there’s a lot of interest in that deal, so interest in transactions is high and the final thing I’ll say to answer your question – and I apologise, this has been a long-winded answer – we’ve seen merger and acquisition activity return to the market.  That’s been absent for quite some time. 

In the good old days we used to get 50-55 takeover bids a year in our neck of the woods.  We’ve started to see the momentum from corporates gain and gained quite substantially in the last 3-4 months.  There’s a number of bids have occurred in the resources sector and we’ve seen a number of industrial bids as well.  Not the least of which was JC Decaux bidding for APN Outdoor and Hometown of the US bidding for Gateway.  A bunch of resource bids also have been tabled.

I see corporates are getting a little more confident about the way forward and see valuations as not too bad.  International investors have already shown their colours and they’re putting money to work in the Australian share market, also sensing that we’ve probably seen the worst of the underperformance as Australia as a market.  And retail investors as well, who I mentioned, who are full of banks and Telstra and getting a little bit cranky and really looking for the next leg of the market, which of course has come from small-caps.

That 9% premium for small-caps that you mentioned, how are you measuring that, is that simply on PE?

Yeah, that’s basically taking the FY19 PE ratio and for the small ordinaries that’s about 16.8 times and for the ASX100 it’s about 15.5 times in round numbers.  It’s interesting, you look at the smalls so you pay 16.8 times for EPS growth of about 14% and that’s not too bad.  The market’s happy to pay a 9% premium but it’s getting a premium outcome in terms of its earnings per share growth.  That is, 14% growth per share versus the ASX100 which looks like, according to Bloomberg consensus, the top 100 will give you about a 2% earnings per share growth.  So, on a simple PEG discussion, the small ordinaries even at the 9% premium, represent much better value by my reckoning.

That’s fascinating.  If you were betting, when do you think the next rotation’s going to have to be and what do you think you’ll have to rotate into?

That’s a good question and we wouldn’t be a professional and investment team here if we didn’t ask ourselves that question every other week.  In terms of when do we rotate away from resources and cyclical type names and as I said, we’ve had lengthy deliberations about this, it feels to us very much like moving away from resource stocks.  It won’t be due to the underlying fundamentals of commodity markets because many of the commodity markets, in particular, some of the leveraged metal markets such as nickel and copper. 

Their demand and supply fundamentals are nice and strong, so it’s not like there’s any great discover of copper about the flood the market and ruin the party.  It’s really going to be one’s view on the economic outlook and economic performance of the developed world and China.  So we’re watching pretty closely how we see the – I guess Europe has slowed a little around the edges, there’s no denying that.  There’s a lot of attention being paid to how China’s economic momentum is going and whether we see that extend.

So, I suppose we need to be satisfied that, I guess, global economic momentum has slowed, we need to be convinced that the US Dollar has in fact commenced a new bull market.  US Dollar’s had a revival of sorts.  Last time I looked at it last night, the USD index, the DSY, had stalled at around sort of 95.5.  We’re looking for evidence, if we got the USD call wrong and the USD is going to push higher and if global economic momentum is starting to stall, then maybe that’s cause for us to revisit our resources positioning and that cyclical positioning.  

Do you invest according to themes?  In particular, I’m wondering about disruption, technology, lithium, those sort of things?

Yeah, we have an eye to themes and as a active manager we need to be cognisant of themes, we need to be responsive to themes.  But we need to marry themes into old fashioned analysis.  We need to be able to model up as best we can and often it’s hard when you’re talking about exotic minerals like lithium or disruptive industries or disruptive companies or technologies, you need to be a little creative there.  We do think about themes. 

Afterpay Touch is a good example of a disruptor which has worked well on our portfolios since we bought the stock.  Clearly, it’s disrupting how retail trade is conducted.  You can do valuation work on Afterpay Touch to try and work out what is a fair price for it.  A lot of our work is centred around the legitimacy of what they’re doing.  Is this a new way to shop?  Is this actually going to be the Millennials’ currency going forward.  I know my 19 year old daughter was aghast that I, her father, had even heard of Afterpay.  She said, ‘All my friends use Afterpay, Dad, what are you looking at it for?  It’s not designed for you.’ 

Well of course it is designed for everyone, but it’s extraordinary how a piece of this disruptive technology and a disruptive concept such as Afterpay, which of course is online layby, by another term, has taken hold.  I think part of our assessment of themes is looking for third party validation.  Again, on the Afterpay Touch example, it’s talking to bricks and mortar retailers, it’s talking to Just Jeans, it’s talking to accent group and the like, and just ask them, ‘Are you using Afterpay Touch and is it working?  It’s extraordinary how it’s taken hold.  We do a variety of – even getting down to following Instagram feeds and seeing what people are saying in the case of Afterpay which of course has gone to the states and looking to roll out it’s model there. 

Even just reading the Instagram comments and feedback is self-instructive as to whether some of these technologies are taking hold.  At the end of the day, you mentioned lithium, lithium would be the growing proliferation of battery powered motor vehicles.  It’s not going away, clearly it’s got a long way to run and we need to be cognisant of that.  So, yes, we do look at themes, we do try and ascribe valuations to these things and it can be hard.  We need to be focused on some old fashion measures too just in terms of valuation at some point in the future, can we get our mind around that. 

How about management, how about integrity of your body, how about integrity of the ultimate customer?  How about competing supply sources…?  There’s all those sorts of things that come into us forming up an opinion on whether they’re going to embrace a commodity like lithium and we are going to believe it?

Well, what’s the answer?

The answer is, it’s real.  The answer is it’s not a fad, it’s not just going to go away.  Clearly, electric vehicles are here to stay and clearly they’ll become more and more reliable, there’ll be longer battery life lengths.  The answer is, it’s real and Australia’s in a great position to supply that market.  There are as usual a lot of moving parts in these things, but if we’re seeing a genuine industrial revolution, which I think we are seeing, we’ll all have time.  We don’t need to have to be on the next one.  We can place bets but we can also take our time.  The industry is not going away, the industry is just taking shape and I guess proving itself up as more and more auto manufacturers embrace the technology. 

Clearly, as you and I both know, things happen faster these days, it’s a flat world we live in, developments in the US are reflected here very quickly.  Developments in China we’re right across.  Things happen faster, they happen with greater purpose…  But I don’t know, it’s a bit like cryptocurrencies, it’s the same sort of thing.  There’s been an enormous objection to them through the official channels, but the concept, again it’s another industrial revolution in the making.  What form does it take, how quickly?  Central banks or the world are grappling with them.  The concept’s not going away. 

Do you ever invest in a company that’s still burning cash or do you only invest in companies that are making a profit?

Look, we have an internal bias to invest in companies that are cash flow positive, companies that have tangible earnings, that have earnings you can believe in and touch.  We often say around here, if we can’t draw it with a crayon, we won’t invest in it.  At times, we will invest in businesses that aren’t yet cash flow positive, but we need to be very satisfied that we’re dealing with a management team that are well credentialled.  Hopefully, it’s a management team that we’ve seen before or that we can also validate.  We can, we do it sparingly and carefully.  We’ll invest in companies that aren’t yet cash flow positive that will be coming back to the market in 6 or 12 months’ time.  We’ll do it, we sure will do it.

A position like that in our portfolios will never be as substantial opposition as you would expect from a company that has demonstrable earnings, that has a track record of consistent earnings growth, that has a balance sheet that we can touch and feel and has a management team we like.  We have an inbuilt bias around here to investing in companies that have positive earnings momentum, but that doesn’t rule out companies of course that in the short to medium term might be burning cash.  But as long as we can see a realistic path to monetisation or commercialisation, we’ll follow them.  But you’re never going to see those positions prominent in the portfolio, I think is how I’d sum that question up. 

Just back to a more sort of fundamental issue.  You mentioned before that you think the equities versus bonds theme is the key one and I just wonder how important do you think it is that the US 10-year bond rate did not stay above 3% and is still below it?

Yeah, I thought that was fascinating and I think any number of commentators, some good technical guys that we follow here were saying that the one-way bet, that US 10-year bond, had reached extreme positioning.  Long bonds bottomed as you might recall at about June 2016 at around 1.35% and they seem to have run through the other day to about 3.13%, I think that was the high.  The positioning was so extreme and by that I mean traders were basically long expecting yields to go up and of course we think when positioning becomes extreme, very, very extreme, then clearly you run out of buyers basically and I think that’s what happened in that bond market.  

I’m not surprised that the 10 year bond has shifted back below 3% in the states, around 2.85%.  It’s the weight of money argument and the facts that when markets are too set in one particular way, I guess the line of least resistance when you run out of buyers becomes downwards.  I do an analysis each month, I look at the equity risk premium of the Australian share market and of the US share market, I look at that each month.  The Australian share market has an equity risk premium in rough numbers around 6.3%, something like that, and in the US I had a look at it on Friday night.  It was around 4.7%, that’s actually a number the US equity risk premium as calculated by Goldman Sachs.

We’ve done quite a bit of work on the equity risk premium and noted that major turning points in equity markets, you often see the equity risk premium – and I’ll reference the United States here at this point – you normally see market turning points when the equity risk premium pinches into around 2.5-2.6% and many of our major turning points in equity markets have coincided with an equity risk premium as tight as that.  At 4.7% that makes me think that there’s quite a buffer in US valuations and I guess at the end of the day, we are beholden to what they call tactical allocators in that US stock market.  These are the individuals, the professionals that sit atop investment committees and some of the biggest investors in the world and they just decide, are we in bonds or are we in equities.  On that sort of margin you can see the switch to bonds is not going to happen. 

We always look at bonds not in isolation, we look at them as to how they compare in an equity risk premium sense.  I think just on that yardstick alone, whether you’re going to cash or not I think you’re not going to cash because the equity risk premium suggests that you’re being paid to place a better equity market both here and the US, and in fact more so here than in the US just on that simple measure.  But certainly, equities are where investors should be. 

Can you just tell us how you calculate that equity risk premium?

It’s quite a formula, but essentially it’s – I take the PE and I invert it, so I get an earnings yield.  I then multiply what the typical payout ratio is.  I’m assuming the payout ratio for an Australian company is about 65-70% and then that becomes the dividend yield.  I then add – I need to say, well how is all this going to grow and it’s going to grow with GDP growth clearly, that’s how the Australian economy will move, so I add up an assumption on how GDP will grow.  I add a bit of inflation to the mix and that becomes my equity return, then I deduct what the current bond return is.  It’s that sort of formula which is trying to capture the return, plus how I expect equity earnings to grow and then I deduct a 10 year bond from it.

But you use the dividend yield rather than the earnings yield?

That’s right, because that’s actually what’s coming the investors way.  As much as it’s all about earnings growth, if you’re going to do an investors assessment of, am I buying equities, am I buying bonds, I need to be assessing what’s coming into the assessor’s pocket.  So, I do the earnings yield times the payout will give me the dividend yield.  And that’s it, there’s nothing especially clever or new about that.  I don’t see a lot of reference to that calculation these days.  When I first started managing money in the mid-90s, every broker report you picked up, every strategy piece you picked up.  Equity risk premium was front of mind.

These days, if it appears in reports, it’s in the back end the report.  For me, it’s a yardstick that I calculate every month and it drives my – it basically sets the temperature for the market. 

Because it tells you what you’re being paid to invest in equities, right?

Correct.  At some point you’ll be paid to not invest in equities, you’ll be paid to go to cash.  My point is, that’s no time soon from what I can see from my fundamental research work.  

It seems to me that the one thing that’s different this time is the amount of debt both in Australia and globally, and the fact that interest rates are now in an upcycle.  Does that give you any pause at all, to think that maybe those old formulas that you use are not quite as usable this time as they have been in the past?

Yeah, well you know the secret with debt, Alan, is not necessarily absolutes, it’s the ability to service debt, but that’s a critical importance when you’re talking at household, enterprise or government level.  Clearly, debt levels are elevated, but so is the ability to service.  For as long as the world is in recovery mode which I look at a number of measures and I look at the purchasing manager’s indices that each central bank or each country publish, they are still from my reckoning – and I try to cover a lot of ground, I won’t tell you I look at every PMI, but the main ones I do and most of them are all still printing above 50, which in layman’s speak means expansion, and if the PMI Index (Purchasing Manager’s Index) prints below 50, that indicates contraction.  As long the print is expansionary, and I look under my chart and it’s got a sea of green which suggests it is expansionary, then the ability to service debt is still strong.

I’m always concerned about absolute debt levels and share markets when the mood turns will start fretting about levels of debt.  If I could just mention that corporately the Australian debt position across corporate Australia is very manageable.  I haven’t got the precise numbers with me but it was a feature of the interim reporting season, how companies had continued to de-lever quite nicely and I’ll be surprised if we don’t see further de-levering through the FY18 reporting season.  So it was somewhat of a feature, the ongoing de-levering process. 

Longwinded answer to your question, but I am less anxious about the debt position.  The market from time to time will fret about the level of indebtedness of the Chinese state owned enterprises.  I believe the Chinese also would have an eye to that and are most likely addressing that as we speak.  But I’m more anxious, as always, about the ability to service rather than absolutes.  I’m aware of absolutes but I’m a little more relaxed than you might be by the sound of it, Alan. 

[Laughs] Possibly.  Perhaps we could just finish with some more nuts and bolts on your funds.  I note that the minimum investment in a small company’s fund is $25,000 and the emerging company’s fund, $10,000.  Perhaps you better just tell us briefly the difference between the two, how the investment philosophy differs?

Sure, Alan.  Look, the investment philosophy really doesn’t differ.  I guess the point of the new fund was with our small company fund we tended to invest in the bigger end of the small company landscape and I must tell you with that sort of rule in place, and we wouldn’t really invest in companies with market capitalisations below $200-250m, that was a bit of a rule for us, and the number of transactions and deals and new companies come into market who we would see those market caps were below that, was quite staggering. 

That, in part, informed us that we should be thinking about an emerging company business or an emerging company fund.  Essentially, both funds are measured against the small ordinaries, accumulation index.  The small ordinaries at the small cap fund is what they call an ex-100 fund.  It invests in companies that are outside the ASX100.  Our emerging company fund is looking to invest in companies that live outside the ASX200.  There’s quite a difference there.  The two funds are designed to complement each other rather than compete so we have certain controls over how much overlap we want to see across the portfolios. 

I guess we tend to – the whole idea of the emerging company fund is to – and the point I should make too, Alan, is we’re already taking a lot of meetings with tremendous businesses that were born our industrial Brisbane or industrial Sydney.  We just couldn’t invest in them given the size of the companies and we needed to do something like that.  I think being able to invest in companies like that is not only stimulating, but we’re doing the work anyway, we’re already meeting these management teams which previously we treated as intel gathering. 

Taking a meeting with the small retailer and finding out what’s going on at the bigger end of the scheme.  That’s highly value-adding, but the real value clearly comes from being able to actually invest in these businesses.  The two funds – the emerging company fund, clearly it’s investing in the slightly smaller end of the market so we won’t be able to grow to a substantial size.  It will grow to sort of $250-350m as far as the fund goes, that sort of size.  Whereas, the other portfolio is over $500m in size.  Really, the two products, as I said, are designed to coexist, targeting different ends of the market.  We have strict rules when an emerging company stock goes into the ASX200, we give ourselves three months to quit it.  When our small company fund shareholding for a company goes into the ASX100 it’s got up to two years to quite it. 

There’s a few operating features and a few difference there.  In this fund, in the emerging company fund, because we’re aware that we haven’t got a lot of capacity, that the fund could close reasonably promptly.  We’ve kept it to retail investors only, so we’re not looking to encourage institutions out there to put money with the fund.  We want the pot to fill slowly and it’s a classic long duration type investment.  It’ll take time for these businesses to thrive.  One thing I want to do just as we close, I want to make the point, Alan, I look at the ASX 100 today and if you can believe that 40% of the constituent companies in the ASX100 started life as a small company under my watch – that’s going back to when I first started in the market in the mid-90s. 

Where we invest, the part of the market that we play in and spend so much time on is a tremendous nursery for what ultimately become ASX100 names.  You’re looking at my experience which goes back, as I say, to the mid-90s and managing money.  40% of the ASX 100 actually started off at the small end of town which I think is an extraordinary endorsement. 

That’s amazing, I didn’t know that!

Extraordinary stuff!

I mentioned the performance of your small company’s fund before 11.9% since inception, 33% past 12 months.  I couldn’t find the performance of your emerging company’s fund, what is it?

It was at the end of May and for the one year end of May, after all fees the emerging company fund has done 42.1% versus the small ordinaries accumulation benchmark of 25.4%, but it’s up 42%.

That’s not very shabby, is it?

No, we’re obviously impressed with the performance of the fund.  A lot of work goes into it, Alan, I’m not going to beat around the bush.  There’s a lot of meeting time, there’s a lot of triangulating stories to make sure we’re on the right track here.  There’s a lot of thematic discussion which feeds into bottom-up stock assessment and modelling.  So a lot of work goes into it and it’s especially heartening to see that sort of number, that sort of performance.  I will add, the final point I’ll make on both of the funds are that as a group, as a professional team of investment managers each of us are invested personally in both funds and I know when we launched the emerging company fund of March last year, we made a point that the team of five up here had to be investors, 1, 2, 3, 4 and 5 – well, who would listen to us if we weren’t going to put our money where our mouths are? 

So it was quite a meaningful investment placed on launch of the fund and each of us are still there as investors and each of us are going nowhere.   I just figure if we expect it to be good enough for the investing public, we need to invest ourselves, which is what we’ve done.  And I can make a reasonable prediction and say that over time the absolute levels of investment from each of our team will only increase in the new fund.  It’s very exciting, it’s been well received, it’s had quite a bit of airtime and as a manager I can say, ‘We really, really enjoy the business of getting in there and managing the portfolio and seeing what we can do.’  It’s been a bit of fun.  

Just finally, what are your fees?

The fees are around the same for both products.  We charge 1.25% plus a 15% performance fee.

That’s 15% above the benchmark of the small ordinaries accumulation?

That’s correct.  It’s actually, on the emerging company fund it’s 15.375 but that’s adjusting for GST.  But the fees are – we would say they’re reasonable but I guess this end of the market, it is a labour intensive part of the market, an enormous amount of work is done before we invest in any business.  I guess it in many times involves covering ground, travelling, setting up multiple meetings of managers, and in so many cases, Alan, it’s not investing the first time you meet them, it’s seeing the business come on, watch the stock trade on the market and just increasingly wait, get yourself comfortable and choose a level. 

In some cases the stock might be higher than when it IPO’d at, but I can say hand on heart our confidence and conviction is a heck of a lot higher, therefore we’re happy to pay a higher price.  It’s those sorts of principles, that’s how we’ve always done things around here, Alan.  

Great to talk to you, Ben, I appreciate your time, thanks.

No problems at all, Alan, all the best.

That was Ben Griffiths, one of the founders of Eley Griffiths Group.