The singular Robert Millner

Robert Millner is the kingpin at fund manager Soul Pattinson. He's a member of the BRW Rich 200, controls a coal mine and runs a private equity group. He's a big investor in banks and he's not buying any more media stocks.

Robert Millner’s Washington H Soul Pattinson & Company still lives over the shop. The no-nonsense headquarters of the conglomerate is over the Soul Pattinson pharmacy in Pitt Street, Sydney. The day Eureka Report called, we had to climb a steep, narrow flight of stairs to get to the office because the lift was broken.

The prize possession in the room is a photograph of Don Bradman, the first chairman of Adelaide-based Argo Investments. Millner loves to tell the story that Soul Pattinson was one of the first shares Bradman bought when he became chairman.

A fourth-generation member of his family in the business, Millner describes himself as a company director and grazier in his entry in Who’s Who in Business.

His empire includes the three listed investment companies '” Brickworks Investment Company, Milton Corporation and Choiseul Investments. The parent company also owns Souls Funds Management, which was bought in September 2003 when it was operating under the name of Veritas Investment Management Limited. Souls Fund Management operates the Australian Small Companies Fund, the Australian Equity Fund and the Select Australian Share Fund

With its funds and listed investment companies focusing solely on Australian shares, Millner has a no-nonsense approach to investing; as he calls it, “old-fashioned, blue-chip”.

Millner has done well out of banks and the financial services sector and, despite the current high price levels, sees no reason to change his mind. He sees banks and other financials as a key sector going forward. Banks, he points out, can actually do well in a rising interest rate environment, which can translate into higher margins. He’s also keen on those financial companies that will benefit from the huge flow of funds into superannuation.

He begins by describing the Washington H Soul Pattinson funds management empire.

The interview

Robert Millner: I’m chairman of Milton, Choiseul and also Brickworks Investments. They are purely investment companies, which are listed and they invest in Australian equities. Milton’s a bit over $1 billion, Choiseul’s about half that and Brickworks is about $300 million.

They’re sort of old-fashioned, blue-chip; a lot of banks and so on.

Soul Pattinson itself has about $600 million in Australian equities. We have the funds management business, which we bought from a company called Veritas. When we bought it, it had about $20 million in funds under management. Now it has close to about $700 million.

It’s a good start but we’re certainly looking to grow that to a higher level.

Glenda Korporaal: What are the major investments of each fund?

Most of Milton’s larger investments are bank stocks. Its top 20 investments, in order of size, are Westpac, National Australia Bank, Commonwealth Bank, Bank of Queensland, Choiseul Investments, St George Bank, Wesfarmers, Perpetual Trustees, Bendigo Bank, Washington H Soul Pattinson, Suncorp-Metway, ANZ, Woolworths, Campbell Brothers, Trust Company of Australia, BHP Billiton, Macquarie Bank, Brickworks, Adelaide Bank and QBE Insurance.

Choiseul’s top 20 stocks are: NAB, Washington H Soul Pattinson, Milton Corporation, QBE, Commonwealth Bank, St George, BHP Billiton, Brickworks, Bank of Queensland, Perpetual Trustees, Wesfarmers, Westpac, Macquarie Bank, Stockland Trust, Bendigo Bank, Suncorp-Metway, Trust Company of Australia, Woolworths, Campbell Brothers, Sims Group.

The top 10 investments for Brickworks Investment are NAB, Commonwealth Bank, BHP Billiton, New Hope Corporation, St George Bank, Woolworths, Woodside, Wesfarmers, Macquarie Bank, Choiseul Investments.

Over the past 15 or 20 years, investing in the banks has certainly been a great asset to these companies because they’ve outperformed the All Ordinaries index by some percentage.

You’ve done very well out of the banks but can you keep doing it? You’ve got rising interest rates, a slowing economy '¦

We’ve been through those cycles before and we’ve still performed well. When the Labor Government was in power we had interest rates of 16–17%. Banks actually tend to make a little bit more money with higher interest rates because they get bigger margins.

They’re still great investments. Just using National Bank and Commonwealth Bank as an example, they have paid 6, 7, 8% fully franked dividends. If anyone had any surplus money sitting around they were better off buying some bank stocks and getting fully franked dividend plus the growth out of the stocks.

But can they keep paying out these big dividends?

They’re monopolies. I can’t see anybody starting up against them. You’ve got things like Aussie Home Loans that tinker around the sides, but at the end of the day the banks are monopolies. It’s going to be very difficult for anybody to start up against them.

You not only have the big four, the investment companies have also got large holdings of the second grade banks '” Bank of Queensland, Bendigo Bank, Bank of Adelaide. They’ve all performed very well.

Are you still keen on insurance as well?

Yes, particularly QBE. They’ve been very good investments.

They are more diversified than IAG. Is that the attraction there?

Yes. They have more overseas exposure, which I guess in some ways is good and some ways is bad because they got knocked around a little bit when September 11 happened whereas with someone like IAG, they’re virtually a car and home insurer so you have less risks with them.

So you basically stick to the Australian blue chips?

Basically, because at the end of the day investment companies need to pay dividends to their shareholders. We pay somewhere between 85% and 95% payout ratios so we need to invest in good companies that pay fully franked dividends because we need to pass those dividends on to our shareholders.

So that’s why you wouldn’t look at any stocks offshore?

[With companies with offshore operations] you have challenges. If you look at BHP Billiton, for example, they’ve probably got about a 2.5% fully franked yield and we try and average about a 4% fully franked yield. If you’re buying something, with BHP with 2.5% obviously need to try and work at something at 5–5.5% to make up the difference.

So just on BHP then, what do you see on future of commodities? You’re actually in coal anyway through New Hope, which has mines in Queensland. So you would be more informed than other investors?

I do a lot of travelling. I go to places like China and I think people that haven’t been to China don’t quite appreciate the scale and size of the country '¦ the population. It’s just frightening. We come from a 20 million population. You’ve got these various provinces in China with 40 or 50 million people in a province which is the size of France and England in one province. You can understand why things are booming ahead over there.

They’ve had a lot of people there for a long time. The question is: what’s new?

When someone comes in from the rural areas into the cities who has lived in subsistence farming, for example, they move into an apartment. You look at the apartment '” they’ve got electricity, a fridge, a washing machine, air-conditioning '¦ all these things that need commodities from Australia. There’s a billion people. As these people become more and more Westernised and affluent, you’re going to see these commodities continuing to tick along.

But there’s a view that the commodity cycle might have peaked already?

Commodity prices have come off. But nickel is still $30,000 a ton. Not so long ago it was $7000–8000. It’s still a huge premium to what it was. I know through our personal experience in mining it’s difficult to get equipment. There’s at least a 12 month delay getting Komatsu and Caterpillar equipment. Tyres are the same. Tyres that were costing us $US35,000 for 300–400 ton trucks are now costing us over $US100,000. If you can get them.

So you’re saying that could help keep up commodity prices?

Well I think that’s going to hold it up for a while because it’s difficult getting plant, difficult getting people. It’s taking longer for the authorities to approve mining leases, etc, so if you’ve got a whole bottleneck of things that are constraining it.

What’s your view on the outlook for Australian stocks? Over the last two years, people have looked forward to the next year and said it can’t go on. What’s your feeling?

You’ve seen these big increases in prices but also people have forgotten that the profits from these companies have gone up substantially as well. In a lot of cases, some of the stocks, on a price/earnings basis, are actually a little bit cheaper than they were two or three years ago.

Financial services is an area that has certainly got a lot of growth. When I talk about that I talk about AMP, Challenger '” those types of companies that are in the field of handling people’s money. There’s 9% of everybody’s superannuation has got to go somewhere so I think those are growth areas. There are more than a handful of those types of companies in the market that are in that field. IOOF is another one.

What about the retailers? You’ve got Woolworths but not much in Coles.

We do own them but we don’t have as big [an investment in Coles]. Choiseul has got about $3 million holding in Coles whereas Woolworths has about $5.5 million. But the Milton Corporation’s got a very large holding; it’s got $14 million in Coles and $31 million in Woolworths. I think you have to bear in mind that up until 12 months ago, probably a bit longer, than that when John Fletcher came on board, Coles was in a bit of a hole. It wasn’t terribly well managed. The share price was pretty depressed so there wasn’t a lot of confidence to invest in Coles.

Do you think they should have accepted the private equity offer or allowed it to happen?

It’s a difficult one. Purely as a shareholder, I think boards have to be very conscious of shareholder value. When you look at the offer of over $15 a share and the shares are now $13-something there’s $2 that the shareholders are behind there. But then again we’re long-term investors. You take a long-term view, they probably did the right thing but it’s very difficult. We have the same problem here on boards. You have to be very careful. It’s shareholders’ money at the end of the day that owns your company. It’s not your money. So they’re very delicate decisions to make.

But what happens if a private equity bidder doesn’t come back to Coles?

Well that’s right. If their shares go back to $10 or something, they’ve got a lot of explaining to do.

Do you think the private equity bids seem to be getting a bit out of hand '” that some of the prices they’re paying are a bit over the top?

We’ve got a small private equity company. I don’t think there’s many bargains around at the moment. Everybody’s paying fairly full tote odds for businesses. There’s not that many bargains. The private equity companies have probably dropped their percentages a little bit. They used to work on a bit higher margins; they’ve had to drop their margins to meet these higher prices that they need to pay.

How big is your private equity fund?

We started a small fund, Soul’s Private Equity. We have some $130 million, purely concentrating on smaller sort of $2 million to $25–30 million deals. We’ve only been going about 18 months. We made good profits last year but again we’re in the same boat: we’re getting a lot of people coming to us with proposals but there’s not a lot of bargains out there.

We’ve got some very good businesses within the private equity group but, there are some very good businesses we’ve passed up because we probably thought they were a bit overpriced.

So when you look at the market overall, you think there is still some room for more upside?

If you look at the broking forecast the banks are still have increased profits. The financial sector’s going to go ahead. With insurance companies you’re going to still see good profits coming forward but maybe not to the same extent of what we’ve seen over the past couple of years. Some of the mining companies’ profits will be lower purely and simply because their cost base has gone up dramatically. As I mentioned before about tyres, your staff costs have gone up a lot, your fuel prices are obviously a lot higher. Explosives costs are a lot higher.

Do you go into anything like small gold mining stocks?

No, we only have small trading portfolio. I’m a bit of a chicken on punting.

What about property stocks?

We have quite a few property trusts. Maybe not mentioned in our top 20 stocks. Milton’s got about $40 million worth of property trusts. Choiseul’s got quite a large holding of Stockland.

You like Stockland?

Well it’s been a good. Westfield, Stockland '¦ they’ve all done very, very well.

Are you planning to launch any new funds?

Souls Fund Management now has about $700 million. We have predominantly been in small caps and we’re just in the process of launching a large-cap fund.

What do you see as the outlook for small caps?

Small caps have suffered in the past 12–15 months because of the smaller mining stocks, the Paladins and Fortescue Minerals and Zinifex '” those types of companies who, in normal circumstances, conservative investors wouldn’t invest in. Unfortunately in the fund management industry, you get judged on a performance basis on a three monthly, six monthly, nine monthly and 12 monthly basis.

The way those little mining stocks have really performed has made it very difficult for somebody in value investing to compete because the way the mining stocks have pushed the index. Unless you had those stocks you haven’t been able to maintain the performance so a lot of the old value investors in the small caps have struggled.

It’s been very difficult for small caps to compete. They’ve still done very well but they haven’t met the market performers because they haven’t. In your wildest dreams you wouldn’t have owned those stocks.

But does that mean that maybe there are some bargains out there in the small-cap stocks?

Well fortunately we’ve turned it around and we are now bettering the market performance. But it’s obviously been difficult times for us to meet that performance hurdle. Your rate of money intake is dependent, particularly in wholesale, on your performance. So all the old established small-cap guys who buy value and think long term have been struggling. A lot of them have lost money.

So this is why you are setting up the large-cap fund?.

You still have to pick the right stocks. Obviously in a large cap portfolio you would be more comfortable owning BHP and Rio and Woodside than you would in a small-cap portfolio of owning Paladin and Fortescue. No one in their wildest dreams would have thought nickel would have gone up from about $7000 to $30,000 a ton.

Choiseul owns the Sims Group. What’s the attraction there?

Sims Metal. They’re benefiting at the moment from the scrap market because all the commodities have gone up the scrap market’s gone up.

And you still like Wesfarmers?

Everybody seems to knock Wesfarmers at the moment. The stockmarket is at record levels and Wesfarmers’ share price has come back.

Do you think it was maybe that there was a Michael Chaney premium or something?

The market’s going through a period where it’s very hard on various sectors. They don’t like conglomerates. They don’t like telcos. It’s just one of those areas '” and you’ve seen it when companies come out with good or bad performances '” that if performance doesn’t meet market expectations, the stock gets slammed. And if it betters expectations everybody buys it up.

What about your own company, Washington H Soul Pattinson? You’re a conglomerate.

Our profit was up for 12 months but our share price is lower than what it was. Again, I think it’s in the sector because it’s a bit unloved and, with our cross share-owning with Brickworks, I think makes it difficult for people to understand.

They’re two completely different companies. But they’ve both been great investments for each other. Because the investment each company has had with each other has been better than what you would have got out of the market.

Our investment in Brickworks has a market valuation of just under $800 million at the moment. If we’d had that $800 million invested in other stocks in the All Ordinaries, it wasn’t as good an investment. By having our investment in Brickworks it’s outperformed the All Ordinaries.

Do your different listed investment companies have pretty well the same investment philosophy? If you were looking at buying them why would you choose one over another?

That’s the beauty of all the investment companies: they’ve all got a bit different portfolios. If you just look at Choiseul and Milton, you’ll see that Choiseul has probably got a few more growth stocks.

Soul Patt has media investments of its own. Do you see any opportunities in the media now with the new legislation coming in?

I think everything’s pretty fully priced.