Low risk, high rewards

Greg Matthews is back on top of the funds management performance tables. His Independent Asset Management boutique topped Intech’s list of 64 Australian equities specialists for 2005 with a 31.83% return and he’s running second over three years, averaging 26.62%.

What’s perhaps surprising is that he’s recording those results with relatively little risk. Normally that sort of one-year return comes from making big bets '” taking bigger risks '” but Matthews refuses to stray more than 6% from the benchmark ASX 200 weighting.

He tells how he does it in our exclusive interview, in today’s edited video and full audio interview and transcript later this week.

The core of his system is GARP. No, it’s not related to John Irving's bestseller The World According to Garp, but Growth At a Reasonable Price, the same system he developed as head of equities at Mercantile Mutual in the mid-1990s that won that institution Funds Manager of the Year awards.

But it’s also the system that didn’t seem to work when Macquarie Bank poached him to become its chief investment officer and head of equities in 1997. There were internal corporate politics involved when Matthews “departed” Macquarie in November 2000, but the general impression in the market was that going sharply underweight News Corp had cost him the job.

The combination of the dot-com bubble and News’ very heavy weighting in the index meant Macquarie had been underperforming '” yet the 20/20 vision of hindsight shows News Corp was already on the slide back to stockmarket mediocrity (and worse) when Macquarie and Matthews parted company. His analysis of News Corp has been proven correct, but Macquarie didn’t stay the course to find out.

Now Matthews seems to be revelling in being his own boss, free of corporate politics. Yet he’s learned from his Macquarie experience; he's limiting his risk profile and appreciating the freedom to admit he’s wrong.

“The ability to say 'maybe I’m wrong’ on a stock is very important,” Matthews tells Eureka Report. “I think a very good funds manager will get about 60% of his calls right and 40% wrong. It’s very hard within a big political organisation to admit that you’re getting 40% of what you doing wrong. But if you don’t ever admit that, you can’t fix it, you can’t get rid of those stocks that are the mistakes.”

Independent Asset Management is managing $900 million for just five large clients. The firm is purely wholesale; you can’t give your money directly to Matthews to invest, but you can learn from his methods and experience.

Among his thoughts:

• While he’s ridden mining stocks long and hard, there’s a bubble in the “rubbish” end of resources sector that will end in tears for small companies without real prospects.
• He’s keeping some powder dry to take advantage of an expected resources pull back.
• He’s overweight funds management companies.
• Event-driven hedge funds are exaggerating and speeding up share price falls after bad news, sometimes creating good value for knowledgeable buyers in the process.

Another freedom he’s enjoying with his own boutique wholesale operation is not having to speak to the media. Google “Greg Matthews funds manager” and you won’t find anything since he left Macquarie. Even the Independent Asset Management name doesn’t turn up on any share registers; the firm manages individual mandates for each of its clients through their custodians.

Fortunately, Matthews has made an exception for us at Eureka Report, but otherwise he’s declined all interview requests and lets his performance and investment style do the talking in the more rarefied world of asset consultants and wholesale mandates. Check the video today and the full interview later this week for some of what they’re hearing, even if your portfolio isn’t measured in hundreds of millions.