MARKETS SPECTATOR: BT's successful odd couple

BT's Paul Hannan and Noel Webster run the most successful small cap fund in Australia, and they pick stocks based on well run businesses not the macro cycle.

BT fund manager Paul Hannan and Noel Webster are different but perhaps that’s why their fund is successful.

They are - in the vein of Neil Simon's fictional characters - like fund management’s Felix Unger and Oscar Madison; investing’s odd couple.

One is voluble, interpreting his partner, excited when talking about his work. The other is wary, almost taciturn, willing to take a back seat to his sometimes more garrulous colleague.

Nevertheless Paul Hannan, the quiet one, and Noel Webster, the talkative one, have steered the $170 million BT Wholesale Microcap Opportunities Fund to the number one position among small-cap funds in Australia. The BT fund has had an annual return over five years of 22 per cent as of March 31, according to Mercer.

The pair of “closer-to-50-rather-than-40” fund managers have been together, as investing colleagues, nine years. They put their success down to the help of two analysts, a dedicated dealer and constant travel. While on the road both men say they are never afraid to buy or sell a stock after meeting a chief executive.

In the last 30 days they have travelled to several Australian states and territories to meet with chief executives and chief financial officers. Webster then took off to China to inspect Supercheap Auto’s sourcing operations and heavy engineering firm Bradken’s factory in the middle kingdom.

“We try to focus on finding a good business rather than the big macro picture,” says Webster. “We focus on cash flow, the different comparative advantages a company may have and its management team,” says Hannan.     

The BT fund has about 600 stocks to choose from outside the S&P/ASX 100 Index. To get the stocks they want, Hannan and Webster will run a set of preliminary investment criteria on the Bloomberg, pick up tips from brokers or hear about interesting companies from competitors they visit or by attending conferences.

Hannan says the fund is “reluctant” to sell “high-quality companies”.

“We’re more tolerant as those companies,” he says. “Experience tells you they are number one or number two for a reason.”

The fund has held some stocks for six years, such as Supercheap. It has holds the shares of travel companies Webjet and Flight Centre as well as New Zealand Internet site Trade Me and Halcygen Pharmecuticals.

“People want to spend their money on cars and holidays, not go to a department store and spend $50 on a dress,” says Webster.

He says Halcygen was a “no brainer” stock to invest in as it had “high-growth, zero-debt, single digit PE and a person with pedigree who knew with clarity where to take the business”.

At the beginning of this year, Webster says, the two men bet that mining would weaken and interest rate cuts would re-stimulate housing and retail sales.

“We just have to get through an election and a change in government,” he says.

Hannan and Webster are men who closely follow politics, but Hannan won’t discuss the conversations they have had with politicians on the record. However both are confident that if there is a change of government at the federal level it won’t spook the market, unlike Campbell Newman’s Queensland administration.

“A new federal government will take a more subtle approach,” says Hannam, before checking with this reporter to make sure, once again, his pointed remarks on politics were “off the record”.

But the federal Labor government has “created a lot of uncertainty” in business due essentially to an eight month election campaign by deciding on a September vote in January, says Hannan.    

“Into elections businesses are myopic,” he says.

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