Fund management isn't rocket science, it's just hard work
Dougal Maple-Brown is Head of Australian Equities for Maple-Brown Abbott
When the resources sector fell to 1 times book in early 2016 it took fortitude to keep buying as the stock prices kept coming down. That conviction paid off for Dougal Maple-Brown and his Australian Share fund when the sector started rising in the second half of the year.
Dougal says what they do isn't a rare skill, but what sets Maple-Brown Abbott apart having the strength to keep emotion out of the equation and stick to your process.
Dougal tells James Brandis that the fund he manages was established by his late father in 1986 in this boutique privately owned business.
Full Transcript
James Brandis: Dougal the Maple-Brown share fund has had a great 3 months to January. It has ended up number 2 on Mercer’s list for that period. Can you tell us a little bit about the fund?
Dougal Maple-Brown: Thanks James. The Maple-Brown Abbott Australian share fund is actually a very old fund, it was started in 1986 and was originally known as the Advanced Imputation Fund. It has been managed by Maple-Brown Abbott solely and continually since 1986, originally by my late father until early 2000 and then I personally have been managing it since 2006. It is a pretty vanilla old school Australian Equity fund, probably the only thing different from the look of the fund from most other funds out there is that we can have a bit more cash than other funds, so the current liquidity range for the fund is 0-15% that gives us a bit more room to move. There have been occasions in time that we have taken that cash up quite high, but apart from that it is a long only Australian value share fund.
JB: That is extraordinary, I didn’t realise that you’d taken it over from your father. It must have been a nervous moment when you stepped in to his shoes to continue that step forward. What was that like?
DMB: I didn’t take over directly from him, there was another chap here for a couple of years in between, but yes, he and I have managed it 95% of the time between us. Big shoes to fill, clearly.
JB: I imagine it is quite a proud thing for you to be able to do as well.
DMB: In terms of the genesis of mutual funds in this country, this would have to be one of the oldest. Perpetual’s Industrials fund was 1968 but this is almost as old and I can promise you that there are very few funds in this country that have effectively been managed by one family for that entire time.
JB: Your overweight resources and related stocks, which must have helped you in that 3 month period leading up to January, but it seems to have hurt you a bit in February, according to your fund update. Does that up and down frustrate you as a fund manager?
DMB: James, no, that is the world that I live in and even 3 month time periods we rarely look at. As I say , this fund has been going for over 30 something years and I don’t know what the exact growth number is, but it is about 2.5% above the index for 50 something years growth so still an incredible effort. Yes, big numbers. To 30 June 16 we were pretty much stone motherless last on the tables and that has turned around incredibly sharply, even for someone like me that has spent 21 years in the markets. We had our worst 12 months to 30 June 16 as yield and the growth stocks went to the moon and then that turned around as bond yields backed up and of course resources did quite nicely. It wasn’t just resources to be fair, producing the exceptional 6 months or so to January, yes February was a bit softer, but gee, I am not going to get hung up about a month or to or even a month’s performance.
JB: The funds aim is to outperform the S&P 200. Does that tie you down to the benchmark of that index when you are choosing your investments?
DMB: Effectively we are big cap stock pickers, James. The maximum cash we can hold is 15%, so effectively we have to be 85% invested. Within the fund we do have a small internal allocation, it is currently around 4% to what we call small caps. There is no additional fees or anything, it is just a pooling device that we use for all our institutional clients. So we do have some exposure outside of the top 100, indeed there would be some outside the top 200 even, but it is tiny in the scheme of things. Effectively we are big cap fund managers.
JB: You are focusing on Australian shares, and Alan Kohler pointed out on theconstantinvestor.com recently that there are 2 broad investment risks in Australia, political failures, particularly energy policy, and the enthusiasm for housing and debt. So how do you work around risks like that with your portfolio?
DMB: I think he is right, the housing risk is the cleanest one and banks are again back at about 30% of our index and if you add in a few of the developers and a few of the consumer stocks you would get a much higher number. So essentially a third of the index is related to housing and we are cautious on that. We have a small underweight to the banks. The way that we are looking at the market today, in broad terms, is that we still favour the resources stocks the most, the banks we are a little bit underweight and the industrials section mark we are particularly concerned about. The second risk that Alan referred to is energy risk. I agree, political risk for a simple fund manager or for anyone for that matter whether you be a business man or a fund manager is always hard. We have a political system that is …. Western Australia swung on the weekend, a massive swing. We have a senate that is controlled by a bunch of…. take your own view… bunch of independents. It is hard. We look at a stock like AGL which we own which has done incredibly well on the back of rising power prices, but the articles on the front pages of the newspapers these days must suggest that the political risk in that sector is elevated. But it is hard to price.
JB: So what about international risks like Trump that has everybody on their toes at the moment. Is that a step removed for you focusing on Australian funds, or are you keeping a close eye on those situations as well.
DMB: I think it is fair to say that we keep an eye on it, but I get a disproportionate number of questions on it to the actual impact in my personal view. I remember seeing advisors 3 or 4 years ago and getting every second question about Greece. I am not sure what impact Greece ultimately had on the Australian stock market but I suspect that it was pretty small even with the benefit of hindsight. Mr Trump clearly has the potential to have a bigger impact, but whether he actually does, I am not sure. Again, from the big picture we are a very trade exposed economy and to me the biggest risk is that he ends up in a trade war, particularly with China. At first blush that would not be good for Australia but the second point that I normally make is that if that happened, my bet would be that China would be further stimulating internally which would probably be good for the Australian commodities we sell them and the ones that we are most exposed particularly iron ore and coke and coal actually might do quite well in that scenario. So it is not immediately clear to me that the Australian stock market would suffer generally, but if a trade war erupted and all world equity markets went down then of course Australia is going to be tarred with the same brush.
JB: Can you tell us about a couple of stocks that you hold in the fund and how they are performing?
DMB: As I alluded to earlier on, we have been overweight in resources, for a couple of years now to be fair, which is responsible for some of the poor performance in 15 and early 16. The view we took on resources, we are a value house, so we are bottom up valuation. Big numbers resource earnings move around a lot with spot commodity prices so we tend to look at price to book and we have been carrying a chart of price to book for the resource sector over the last 15 or so years. It has averaged about 2 times book over that time period, the long time period of 15-20 years. In the peak of the madness when China was inflating in 09, 10, 11 the stocks got to about 4 times book. At that stage we were about 50% underweight in the resources sector, so 4 times book 50% underweight, then the next 4 or 5 years, as the stocks came down we have been gradually buying. It peaked, I can tell you when it peaked, it was January 16, I think I lost the last of my hair, and the resource sector as a whole bottomed a 1 times book, which on the chart that I am carrying, that was an all-time low, on the 15 to 20 year chart that I am carrying, and we were about 60% overweight resources at that time, January 16 at 1 times book. Since then they have obviously had a good 12 months, big numbers this sector has rallied from about one times book to one and a half times book, so it is still below the historical average of about 2. I do worry that that historical average is probably a wee bit high, a bit like the historical average on the banks. In the case of the resources companies, it was clearly inflated when it got to 4 times book. I don’t believe it is likely to go back there and therefore the average is probably a bit high. My simple point with the stocks at about 1.5 times book on average there is still some valuation upside which we struggle to find in almost every other part of the market today. So we are still overweight resources. Throughout that time we have limited ourselves to the big ones, the ones that your readers would know. So that is BHP, Rio, Woodside, Origin, a little bit of South 32 that we inherited and a little bit of AWC. We didn’t go down the line to the second and third tier miners because we didn’t know how long the cycle was going to go and having seen a few cycles where stocks can stay cheap and stay expensive for a lot longer than you think. So we limited ourselves to the big diversified ones that we can, generally with the better balance sheets. So still 50% overweight on the resources, we have taken some money off the table as you would expect when the sector has outperformed substantially over the last 12 months.
JB: And what about you personally, what is your background in finance. You mentioned that you took over the fund that your father started, so where did your career in investment begin?
DMB: I did economics law as a student. I worked at a law firm for a few years, not particularly long. I then went to an investment bank, a mob called Barings, the one that blew up when Nick Leeson blew it up in Singapore many moons ago. Then studied various things, a securities institute course and CFA course, then came to Maple and Abbott in 2001. I think as a young lad, everyone said that you would join your father’s business, and nobody wants to be told what they are going to do in life, so I made a point of not doing it. I am pleased that I did something myself as well. Having worked in a few other shops, a few other big shops, when I came here to Maple and Abbott in 2001 I think we had about 30 people, maybe slightly less, whereas today we are a reasonable sized business, we have 53 people and we have got a listed infrastructure business that is going gangbusters, we have got an Asian equity business that is going very strongly as well as our existing Australian equities business. So it is a medium sized business these days, quite different from when my father started with literally himself and an assistant.
JB: did you have a mentor in those early days. Was it just your father or were you working against that front finding somebody else’s advice.
DMB: No, and my father passed away 4 years ago now. That is what I miss most, we would have lunch at least once a week, I mean it was almost every second day. The downside of not coming earlier is that I didn’t spend enough time working next to him as I would have, but that is the trade off, and as I say, I don’t regret working at other places. I think it would have been wrong to come here 17 or 18 or 21 after uni. Apart from that I would be thinking “I wonder what is on the outside” at least this way I had a look on the outside first. This is a great place to work. Family owned – my mother now owns about three quarters of our business. It is a family environment, even though we have got 50 people we are all on the same floor of a building here in Sydney. I think that is the best form of funds management, a boutique which is privately owned. We’re not listed, we don’t have shareholders, we don’t have an outside foreign investment bank or an insurance company stake, it is all owned internally.
JB: That sounds like a nice place to work, Dougal.
DMB: Yes, it is. Sometimes we worry that it is too nice, if that is possible. We treat our people so well, but as I say I have been here over 15 years and there are many people that have been here over 20 years and that is not unusual around here.
JB: What about books, do you have something that you recommend to young investors or something that you’ve read that stayed with you?
DMB: In terms of investing books or general books?
JB: Either way.
DMB: Any book that features my father is on my bookshelf and there are a couple of those floating around, with various chapters in them, but that is personal. That’s pride as much as anything else. Outside of that I think that the investing that makes us different is not rocket science, we don’t have a bigger brain than anyone else, we have a well tried and tested process and most importantly and we stick to it. That is the hard bit frankly in investing, sticking to your process. Go back to that resource story, everyone could see that the stocks were on 1 times book, that didn’t take exceptional mathematical models to work that out. It was the fortitude to keep buying them. We would come in to work a year ago and BHP had fallen another 50c from 20 bucks to 19 bucks to 18 bucks. You know it was hard. And that is what makes a good investor, the ability to stick to a tried and trusted process and see it through. That is the key in my view to investing, rather than some beautiful model or algorithm.
JB: There are a lot of people that keep mentioning that, and I think that the challenge is to remove the emotion and stick to your process - stick to what you know is going to work in the long run.
DMB: I think when you are looking for a fund or when you are looking for an advisor, I think it is someone that has a tried and tested process. Again I have made the point that we have been around for 30 something years. The quant model that we use was set up by my late father, we have 6 value factors, again you can see on our website, they are pretty much public, they are not rocket science. Price to earnings, price to cash, price to MTA, dividends including franking, our measure of gearing and then one measure of EPS growth, roughly equally weighted, so again they are not radical factors and roughly equally weighted that gives us our quant and we pick stocks on the top end of the quant, the cheaper ones, the value ones, the lower PE’s, the higher dividend yields and that is all well and good but you have got to have the discipline to go and do it and that is what is hard sometimes.
JB: And what about you personally, Dougal. Do you have any passions outside of finance?
DMB: Yep, I have five children so that keeps me relatively busy and I like old stuff, particularly old maritime stuff, so we spend a bit of time at the Maritime Museum, got a little old boat that we tool around with on Sydney Harbour
JB: That sounds nice
DMB: When we can and I am not driving children to sport on weekends. It is not very fancy, but it is oldy-worldy and simple. We live in a very complicated world, but to go back to basics whether it be in investing or on a Saturday afternoon is what I enjoy the most.
JB: And do you have many opportunities to get out on the water there?
DMB: Not as many as I’d like but that is the story of life. My kids are growing up and hopefully as they get a bit older then you’ll have more time, but maybe that is illusionary, I am not sure.
JB: As long as you can get out there occasionally, that is a beautiful place to be. Well Dougal, thanks for introducing us to yourself and the Maple-Brown Abbott Australian Share Fund.
DMB: Pleasure James and to all your listeners, please make sure that you understand what your fund manager is doing and that your fund manager has got the wherewithal to stick with it because that is what differentiates us.
JB: Thanks Dougal, that is great advice.