MARKETS SPECTATOR: Tom Millner and his brilliant BKI

As soon as Tom Millner enters the lobby of Washington H. Soul Pattinson & Co he is surrounded by family. His great, great grandfather Lewy Pattinson helped the company list its stock on the Sydney Stock Exchange in 1903. His great uncle Jim Millner, who survived a Japanese World War II Prisoner of War camp, turned away from pharmacy and decided to diversify the family’s wealth into different investments that now include a coal company, New Hope Corporation, building material company Brickworks, TPG Telecom and boutique investment bank, Pitt Capital Partners.

Washington H. Soul Pattinson’s only investment in its original business is a store at 160 Pitt Street in Sydney whose yellow faded façade bears the date 1886, the year the business was founded. When the 35-year old Millner enters the elevator that takes him up above the Pitt Street pharmacy to his office he passes pictures and references to his forebears.

Millner runs the $730 million publicly traded investment fund BKI Investment Co. To May 31, its annual total return was 9.1 per cent per annum over nine years, after taxes and all expenses. The S&P/ASX300 Accumulation Index has gained 8.6 per cent a year over the same period. Like his investment hero Warren Buffett, Millner is content to buy and hold for a very long time.

Washington H. Soul Pattinson was National Australia Bank’s third ever customer. It is perhaps therefore not surprising the bank was the second biggest investment for the BKI fund as of May, comprising 9.1 per cent of the portfolio. New Hope was the third-biggest holding in the fund at 8.2 per cent of the portfolio as of May.

“There are lots of companies who like to see us on their register as we understand their business and are happy to invest through cycles,” says Millner. “We don’t pester CEOs or CFOs about 1 or 2 per cent swings in earnings. Half the time you’re better off buying when everyone else is selling.”

That’s what Millner did last year when Telstra stock was at $3. Telstra shares now comprise 5.1 per cent of BKI’s portfolio.

Millner works alone but is advised by three others who, like him, are part of the BKI investment committee: his father Robert, Brickworks Ltd’s CFO Alex Payne and Ian Huntley who used to publish Your Money Weekly.

“Alex and the old man know the core portfolio intimately as they started it in 1982,” says Millner.

The BKI board of Huntley, the two Millners, Payne as well as David Hall, together with the Millner family, collectively have $30 million invested in the BKI company.

The Cowra-born Millner is at times blunt and guarded about his family. He says he was never pressured to be part of the family business. But after graduating with a degree in industrial design in 1999 and scrambling to find work he “fell into it”.

Millner is close to his Dad. “We’re mates more than anything,” he says over coffee at the Imperial Arcade opposite his office. Both Millners were invited to the Berkshire Hathaway annual general meeting in Omaha, Nebraska last month. Together they dined at Warren Buffett’s favorite steak house, Gorat’s, and soaked up the wisdom from the sage of Omaha. “Going with Dad was pretty special,” Millner says.   

After listening to Buffett and his partner Charlie Munger for more than six hours Millner came away with a simple message: “don’t listen to the noise. Don’t panic”. Like Buffett, Millner says he invests in companies with “good long-term growth prospects, strong balance sheets, good cash flows, reliable dividends and good management”.

Millner turns over about 7 per cent of the BKI portfolio every year but he says he’s always conscious that it’s not his money but the money of the shareholders he’s investing. “We can’t play around with it,” he says.

On his desk Millner has an IRESS machine that he uses to check stock prices and news. He builds his own earnings models using consensus data from Bloomberg and then overlaying it with BKI’s own analysis.    

Three years ago BKI shares were trading at a 15 per cent discount to net tangible value. Now the discount is 2.5 per cent.

BKI shares have gained 23 per cent over the last 12 months compared with the S&P/ASX200 Index, up 15 per cent over the last year.

Millner would like to manage $1 billion. But he is not going to dilute existing shareholders by issuing new stock to get the funds. Instead he has been travelling more frequently to sell the fund.

Last week Millner’s Sydney bound red eye from Perth was diverted to Canberra. Millner had to sit at the airport of the nation’s capital between 600am and 1000am because thick fog prevented planes from landing at Sydney airport. He shrugs off the inconvenience with the patience of a man who has dealt with Mother Nature growing up on a farm in country New South Wales. “The fog didn’t bother me too much,” says Millner. “I had an unprotected upbringing. I know practical things. It was a no nonsense, no bullshit life.”