Strategy: Greg Hoffman
Just two ASX-listed stocks can cover a lot of overseas territory
Shares are my bag. I love researching them, finding under-priced opportunities and combining them thoughtfully into a portfolio. But there’s an international sharesshaped hole in the portfolios I run. In more than 30 years of investing, I’ve never bought a share listed on an overseas exchange. It’s just been a bridge too far in terms of complexity and administration. It’s true that some stocks in my family portfolios have direct or indirect exposure to international markets (holdings such as Computershare, BHP Billiton, Virtus, Enero and Platinum Asset Management) but it’s only a by-product of my research and ad-hoc opportunities. When it comes to international shares, I’m happy to outsource.
When assessing prospective investment funds or companies, many investors zone in on past performance, even though we’ve all read the disclaimers about past performance being no guarantee of future returns. My approach is different.
I start with the individuals and teams involved. I want fund managers who I respect, with a philosophy and approach that resonates with me, who have a fair fee structure and a track record of showing independence of thought. I also like them to have some skin in the game, being money invested in their own company or fund, as the case may be.
In this article I’ll highlight two listed investment companies that fit the bill for me.
MFF Capital Investments
In October I attended the annual general meeting of MFF Capital (ASX: MFF). It’s run by Chris Mackay, who I first met more than a decade ago at the AGM of Warren Buffett’s Berkshire
Hathaway in Omaha, Nebraska. It was instantly clear that his mind resembled a shining steel trap and that he thoroughly understood the value investing philosophy. After an impressive career in investment banking and co-founding the giant Magellan Financial Group, he now spends his time managing MFF Capital’s portfolio, in which he primarily focuses on companies with “attractive business characteristics”, adding them when they’re available at a discount to his view of their underlying value.
I’ve only spoken with Chris a handful of times over the years but there are a couple of things I find extraordinary about him. First, it’s rare for someone with such an active and curious mind to be so patient with their investments. This has many rewards for MFF Capital’s shareholders including, importantly, delaying the payment of taxes on investment gains.
There is a significant gap between MFF Capital’s net asset value per share before tax ($2.84 at October 31) and after tax ($2.34 at October 31). That 50¢ per share difference represents money that would go to the tax office if the underlying shares were sold. While MFF Capital patiently holds on, that money continues to work for shareholders (you can almost think of it as an interest-free loan to shareholders from the tax office).
The second extraordinary thing is that he continues to resist complexity. On the surface, MFF Capital’s portfolio seems simple (the table shows its top 10 holdings at October 31) but that belies deep and consistent research efforts, which were well on display at the company’s AGM.
Smart people often get themselves into hot water by over-complicating things (When Genius Failed by Roger Lowenstein is one of my favourite books on that subject). Chris continues to avoid that pitfall. He is also the company’s largest shareholder and his stake of more than $160 million provides plenty of incentive to think about risk.
On the important topic of costs, MFF Capital is a standout. In the year to June 30, its entire expense base totalled $7.8 million, or about 0.63% of its shareholders’ capital of more than $1.2 billion at June 30 (and only 0.52% of the total portfolio value of almost $1.5 billion).
At the time of writing, MFF Capital shares were trading in between their pre-tax and after-tax value per share. Without boring you with the details, I believe this is a fair price to pay for a well-managed, albeit concentrated, portfolio of many of the world’s greatest businesses.
The company does come with key-person risk but if Chris were to become unavailable the simplicity of the portfolio would again come to the fore. MFF Capital’s directors would almost certainly be able to deal with the portfolio in a sensible, timely manner.
Ellerston Global Investments
With a market value of around $110 million at the time of writing, Ellerston Global Investments (EGI) is much smaller than MFF Capital. It also has much higher expenses than MFF Capital on a percentage basis – more than double, in fact. For the year to June 30, Ellerston Global had expenses of more than $1.8 million, or 1.45% of shareholders’ assets at June 30 (or 1.3% of the total portfolio value).
To top it off, past performance has been roughly in line with the index (over in some time periods and under in others). So what is there to like about this one?
Ellerston is led by respected investor Ashok Jacob, who has previously managed investments for some of Australia’s wealthiest families in the Pratts and the Packers. He also has more than $3 million worth of shares in Ellerston Global Investments.
Ellerston is searching for value in all kinds of nooks and crannies and is not afraid to invest relatively heavily in smaller companies. Unlike MFF Capital’s portfolio, I reckon most Aussie investors would struggle to recognise more than one or two of Ellerston Global’s top 10 holdings (see table).
The company publishes quarterly reports that showcase its research and thinking. I’ve been impressed by what I’ve read, and while the strategy and efforts haven’t paid off spectacularly in the four years that the company has been listed I think it has every chance of doing so in future.
Another thing to like is the price, with the stock recently trading at a discount of between 5% and 10% to the portfolio’s net value.
In my view, MFF Capital and Ellerston Global might sit nicely side by side in an Aussie investor’s portfolio, providing good international exposure. Ellerston’s focus on smaller stocks offers a useful counterpoint to the larger stocks held by MFF Capital. For those of us keen to let others handle our international investments, these are two candidates worthy of consideration.
Greg Hoffman is an independent financial educator, commentator and investor. He is also non-executive chairman of Forager Funds Management (not involved in Forager’s investment process).
The company delays the payment of tax on capital gains, so that money continues to work for shareholders