MARKETS SPECTATOR: Perpetual ethical performance

In 2003 Nathan Parkin was unemployed, 28 years of age and married with two children when he met the founder of 452 Capital, Peter Morgan, at the corner of Pitt and Hunter Streets in Sydney. The two men had worked together at fund manager Perpetual. Morgan, then running his own asset management company, asked Parkin what he was doing. “I’m looking for a job,” the younger man replied. “Come along and have a talk to us,” replied Morgan. About a month later Parkin was hired as 452 Capital’s equities dealer.

Parkin had quit Perpetual, with his wife’s blessing, to pursue his dream of managing money. After six years at Perpetual, Parkin had risen to head of institutional marketing. He had 40 clients, mostly superannuation funds, after starting with two.

Ironically, Parkin is back at Perpetual. He is the investment manager of the firm’s $500 million ethical fund. It is the number-one large-cap Australian stock fund over the last five, three and one years, according to Mercer. Its annual five-year return in the period to March 31 has been 13 per cent. Over three years it has been 15 per cent and over 12 months 38 per cent.

Parkin is modest. He is quick to point out he has only been in charge of the fund for the last two years following the departure of Simon Bridger. The fund’s investment criteria are set by an outside consultant. Stocks with five per cent or more of their revenue from gambling, alcohol, tobacco, uranium, weapons, armaments and coal seam gas are excluded from the fund. Consultants, Corporate Analysis Social Responsibility, also assess the environmental, human and animal rights of companies as well as criteria such as ‘genetically modified organisms.” Out of about 450 stocks, about 150 stocks meet the fund’s ethical requirements. None are mining stocks.  

“I’ve got a lot of flexibility in my investing,” says Parkin. “About 40 per cent of the stocks in the portfolio are outside the S&P/ASX 300 Index.” Like each Perpetual fund manager, Parkin manages the fund by himself but has access, alongside other Perpetual managers, to the investment research and ideas of the firm’s analysts. During his one hour bus commute to work Parkin reads broker reports and news before arriving at Perpetual’s headquarters on Sydney’s Pitt Street at 730 am. Parkin’s days are filled with company meetings, conference calls and 10 kilometer runs three times a week. “I like to run with people better than me just like I like to work with investors better than me,” he says.  

Parkin, now 38, says working with Morgan gave him a “great feel for the market.” He still likes to do his own trades at times. Morgan, Parkin says, taught him never to be afraid to “take the market on if you thought the market was wrong.” Morgan also told him not to be shy to pull the trigger on a position. “Be brave enough to risk being wrong,” Morgan once said, recalls Parkin.

452 Capital is where results mattered. That’s why Parkin likes working at Perpetual, because “performance is king,” he says. By 2010 Parkin was back at Perpetual as a small caps analyst. In May 2011, John Sevior appointed him the fund manager of the ethical fund. One of Sevior’s favourite sayings was: “don’t cut the flowers to water the weeds.”

But Parkin admits his natural inclination is to buy a stock in a business  - he thinks is good, has intelligent management and a balance sheet unencumbered by debt - too early and then sell it too early. In November 2011 he quickly built up a position in auto accessory retailer Supercheap Auto to about 3 per cent of the fund’s holding after buying shares in an institutional placement at $5.34 and steadily accumulating the stock between $5.50 and $6. Last year he sold all his shares in the company after the stock reached $10.  

Home ware goods company Breville Group once accounted for 6 per cent of the fund’s holdings. Parkin bought the stock between $2.50 and $3. Breville was then trading at 10 times price earnings, had net cash and earnings per share growth of 20 per cent a year, according to Parkin’s calculations. Perpetual funds once held 14 per cent of Breville’s shares. Parkin sold out of Breville when the stock was trading between $6 and $7.

Part of Parkin’s charm is that he admits his failures readily. He bought stock in building material company Alesco because he thought it was cheap and the building market would recover. But the company went through a series of earnings downgrades after Parkin bought the stock at $2. The debt on Alesco was beginning to worry Perpetual. Parkin sold his position at $1.30 a share. Dulux then made a $2 takeover offer for the company.  

Parkin’s fund is now “underweight’ the banks as he thinks the yield trade is “stale.” But as of March 31, Parkin had 5.8 per cent of the fund, the biggest percentage of the fund in a single stock, in Westpac. ANZ, Commonwealth Bank and National Australia Bank together with Westpac made up 20.5 per cent of the fund. Telstra made up 4.4 per cent. Software maker Reckon and Prime Minister Julia Gillard’s former law firm Slater & Gordon each made up 3.9 per cent and 3.7 per cent of the fund’s holdings respectively.