The Non-Conformist

Peter Hall, the co-founder and managing director of the Hunter Hall group, is a curiosity among local fund managers: he's a value investor who takes big bets; an Australian fund manager who's based in London; moreover, he's an exceptionally outspoken managing director of a $1.5 billion enterprise in a business notorious for conformity.

As global equity markets '” especially in Europe '” waken from a five-year slumber, many analysts believe global stock pickers are heading towards good times in the next few years. Although some experienced investors will be willing to buy foreign stocks directly '” especially in the US '” for most Australian retail investors overseas, managed funds such as Hunter Hall's Global Ethical Trust are the sole route into foreign markets.

Hall started his professional life as a journalist on the Canberra Times, later becoming a fund manager at Mercantile Mutual. He co-founded Hunter Hall in 1993. (There is nobody called Hunter in the group, it comes from the group's first office in Hunter Street, Sydney.)

As an independent fund manager, Hall made his reputation early with some very plucky calls on stocks that required substantial fortitude, an early investment in hair products company Sabre International paid off handsomely and Hall has not looked back.

More recently, he made an even bigger impact in the fund management business when he did the unthinkable and actually confessed to a series of errors that combined to create a poor performance for one of his funds, the ASX-listed Australian Value Fund. After poor returns in 2004-05, Hall wrote to unit holders, spelling out the reasons the fund had underperformed. It was an expensive confession: the total value of the Australian value fund was halved in the following months but Hall had cemented his reputation as a uniquely frank operator in the funds management industry.

Hunter Hall's main business is value-based funds. All of the Hunter Hall funds are “long” only, there is no shorting of stock or trading in derivatives. The funds are designed for retail investors with about 30% of the inflows coming through investment platforms.

With a team of eight portfolio managers and a well-regarded managing director in David Buckland, Hall has built a substantial company that is global in reach and local in appeal. He has also tried to deflect attention from himself to reduce what he calls the “one-man risk”. However, Hall is just 45, so it is likely Hunter Hall will continue to reflect his personality and continue taking big bets on value stocks all over the globe for years to come.

Eureka Report caught up with Hall on his most recent visit to Sydney:

James Kirby: How do you go about choosing stock?

Peter Hall: We try and find companies that are selling at low multiples of their free cash flow, and that tends to focus us on particular markets and in the smaller to medium-sized industrial companies sector. We look at industrial companies rather than resource or finance stocks.

Isn’t that a notoriously wide and diffuse sector?

It’s a pretty big sector, absolutely. We generally invest in manufacturing service or distribution businesses we don’t have to understand, and look at everything in the whole world. We just look at segments of the market, a particular market. So for example, the Global Ethical Trust is largely invested in South Korea, Japan and Europe, and we’ve only got a few small holdings in the United States. Even in Europe we're just talking about Germany and Scandinavia. We’re very much the rifle-shooting rather than the shotgun approach.

Your Global Ethical Trust is an interesting concept, and I know you describe your ethical investing style as “light green”. I have very little confidence in the ability of fund managers to successfully define success stocks on an ethical basis. Do you think you’ve got the answer?

Well apart from simply screening companies, we also try and do something positive, which is that Hunter Hall, the management company, gives 5% of its profits to charities each year, so this year we’ve given about $750,000 to charity and I think we’ve given something over $2.5 million since the company listed. I think that's a really big distinguishing feature between ourselves and a lot of other ethical managers.

And do you think your retail investors clearly understand what you're doing there?

I don’t know. It’s not something we make a song and dance about. It’s something that we do. We do it because we think it’s the right thing and if people pick up on it, that’s great.

Do you think on balance this charity idea wins or loses you investors?

It probably loses us investors. It certainly loses us money because we’re paying money out of our own pockets and, you know, the more hardened cynical people say, 'I don’t want my fund managers worrying about these other issues, they just should be focusing on investing money’, but I find that we need to do it. Well, I need to do it for my own sanity’s sake.

As an “ethical investor” will you invest in uranium companies?

At this stage we won’t invest in uranium, but we have to think about nuclear energy again. Given what’s happening with global warming, it may be that nuclear energy is a solution to the problem of global warming '” or one of the solutions to global warming '” so we really have to be open-minded about it.

How has this Global Ethical Trust performed?

The Global Ethical Fund is up 25.5% from June 2005.

HOW HUNTER HALL HAS PERFORMED
Returns to February 28, 2006	1 Year (%)	3 Years (%)	5 Years (%)	Net Assets ($Am)	MER^ (%)
Value Growth Trust	23.80	27.20	15.60	915	1.97
Global Ethical Trust	27.90	25.80	n/a	275	2.30
Australian Value Trust	8.90	18.40	n/a	123	2.01
Global Value Limited#	21.10	n/a	n/a	276
International Ethical Fund*	12.50	25.80	n/a	15
Total				1604
* To 31 January 2006 # Investment performance of GVL pre-tax net assets ^ Unaudited to 31 December 2005, excludes performance fee

That's a good result, but am I right in saying that between 2001 and 2006 the Global Ethical Fund did not perform particularly well '” in the five years it only moved from $1.00 to $1.46?

I think that is right.

So the past 12 months have been the best 12 months this fund has ever seen?

Yes it is. But I think it’s outperformed (its benchmark) in all periods because the international market has not been doing very well.

What’s your view of the coming year for this fund.

We’re rather positive on some of our markets. We think that Korea should continue to do well. Japan should continue to do well

We’ve got a big holding in a company called Pfizer, a US pharmaceutical company. We bought that at about six times enterprise value to EBIDTA. In [peak] valuations, these companies sold at 20 or 30 times so, you know, if pharmaceuticals came back into favour in the US that stock could go up a lot.

Do you think the return on the international funds will outpace the return on the Australian funds this coming year?

Yes, I believe they will because Australia has had such a hell of a run and the valuations of stocks are so high in Australia.

Are Australian valuations so high or is it just that international valuations are relatively low after a few flat years in major overseas equity markets?

There must be a ceiling somewhere, where (the ASX) can’t go up any more. In contrast, in the US back in 2001, the market peaked at EV (enterprise value) to EBIT (earnings before interest and tax) of 24.4 and today it’s about 14.3, so it’s well below its peak.

Apart from the Global Ethical Trust, what else do you have on the books?

We have three trusts and two (listed investment) companies. The three trusts are the Corporate Value Growth Trust, which was established in 1994 and which is a blend of international and Australian equities; the Australian Value Trust, which is Australian-only equities; and the Global Ethical Trust, which is international equities. Then we have two listed companies '” one is on the Dublin Stock Exchange. The other one is called Hunter Hall Global Value; it's a listed investment company, and that is listed on the Australian Stock Exchange.

How big is the Hunter Hall operation?

Our flagship fund is the Corporate Value Growth Trust it has about $920 million in it. The Australian Value Trust '” the Australian only fund '” has about $123 million. Global Ethical is the international only trust, which has about $257 million. Global Value, the ASX-listed investment company has about $251 million in it, and the International Ethical Fund is the Dublin fund and that’s got about $15 million in it.

Is the Australian LIC '” Hunter Hall Global Value '” selling at a discount or a premium to NAV?

It’s selling at about a 10% discount to its after-tax, fully diluted price.

Looking at the broader momentum in equity markets, there’s a global theory forming now that recovering economies in Japan and Europe will trigger rising bond yields, which will then trigger weaker equity performance in all markets.

Yes, well I just think that if you can buy good companies at very good multiples, in the long run that is the best asset class; that will outperform any other asset class. When interest rates were falling, that was fantastic for bonds. But I just think that equity '” productive assets '” are going to outperform property and cash or money over the long term, and I think that if you can identify good companies at low valuations you are going to do better than other asset classes.

Where are your biggest regional holdings now in terms of weighting.

Well the biggest regional holding is in North Asia; for example, we’ve got about 30% of the Global Ethical Fund in Korea and about 8% of the fund in Japan.

That’s a big bet isn’t it '” 30% of the entire fund in Korea.

There are some big stock bets. We just have found some tremendous bargains in South Korea so our biggest individual holding is about 5.8% in a company called Woongjin Thinkbig.

Since that's your big bet could you explain that investment?

Well Woongjin Thinkbig is really a homework company; they provide educational services to help Korean kids with their homework. They basically give them homework kits and then counsellors go around and help the kids with the homework.

And why are you so keen on this?

Well the stock when we first bought it was incredibly cheap and it’s gone up about 150% since we bought. So we liked the fact that the stock was extremely cheap and I think that, long term, the Chinese will be very focused on improving their educational outcomes and therefore I think this company has an incredible opportunity.

Is this the biggest bet you've ever taken?

No, we’ve had situations where we’ve had up to 20% of the market value of the portfolio in one particular stock.

What are some of the other big bets you’ve taken in the past?

We took a very big bet on the London Stock Exchange; at one stage Hunter Hall was the sixth biggest shareholder in the London Stock Exchange. We had about 20% there. We had a very big bet on a company called Cussons, which was the British soap manufacturing company. When we were a very small company we had a very big bet on a hair care company called Sabre Corporation, which makes Joyco and Fudge.

What's your rationale behind taking these big positions?

When we bought Cussons, it was selling at 1.6 times cash flow and we put 15% of our fund into that, and the stock’s gone from £2.60 to £15. If you find something really cheap it makes sense to buy as much of it as you can.

That's the good news; now just to look at the other side of the coin: It was only a year ago when you took that unusual step of writing to unit holders to explain what was then the poor performance of the Australian Value Trust. How did that pan out? Did you pay a price for your frankness there?

I think that we owe it to our investors to be absolutely frank with them about where we are, where we’ve gone wrong as well as where we’ve gone right. Everyone likes to trumpet the successes but few trumpet the failures.

The Australian Value Fund was $200 million at its peak and it’s gone down to $123 million, so the intermediaries hate hearing bad news. The research houses hate hearing any admissions of failure. They would much rather just hear that, 'Everything’s nice and we’re very professional and we never make mistakes’. Still, since June 2005 that same fund has increased its net assets by about 22.5%, so it’s actually bounced back very strongly and its unit price is near an all time high.

But you know it’s very hard for fund managers to invest when their support is so fragile, and what we’re trying to do '” we’re trying to educate people into saying the way to get high returns from the stockmarket over the long run is to be contrarian and that requires bulk-buying in panics and so on. If you follow that strategy, you will get much higher return than if you’re just reactive.