The rules of share pick­ing ac­cord­ing to An­ton Tagli­a­ferro and Martin Roth

An­ton Tagli­a­ferro re­veals how IML sur­vived the tech-boom mad­ness to make a name for main­tain­ing dis­ci­pline dur­ing mar­ket ex­tremes


How did you get started in in­vest­ing?

Af­ter qual­i­fy­ing as a char­tered ac­coun­tant in Bri­tain, I im­mi­grated to Aus­tralia in 1984. I was in my mid-20s and the me­dia was full of sto­ries of Alan Bond, Larry Adler and Robert Holmes a Court and the boom­ing 1980s stock­mar­ket and it drew me in.

Why did you start In­vestors Mu­tual?

I started work­ing in funds man­age­ment at Pru­den­tial As­sur­ance in 1987, then a port­fo­lio man­ager at Per­pet­ual, County NatWest and then BNP. I got a bit tired of the bu­reau­cracy and pol­i­tics of work­ing for large or­gan­i­sa­tions, so I set up my own firm, In­vestors Mu­tual ( IML), in 1998. It was one of the ear­li­est bou­tique funds man­age­ment com­pa­nies in Aus­tralia. I had this dream of cre­at­ing a very re­search-driven, true-to-la­bel, value-based funds man­age­ment com­pany. We now have $ 5 bil­lion in funds un­der man­age­ment and a team of 11 in­vest­ment an­a­lysts and port­fo­lio man­agers con­stantly look­ing for the right op­por­tu­ni­ties.

What’s your in­vest­ment phi­los­o­phy?

It’s based on a strong be­lief that

while in the short term a com­pany’s share price re­flects what­ever emo­tional state the share­mar­ket is in, over the long term its share price will ul­ti­mately re­flect the un­der­ly­ing value of the com­pany.

Mar­kets are not fully ef­fi­cient and there are times when a com­pany’s share price will not re­flect what we be­lieve to be that com­pany’s true un­der­ly­ing value. Such sit­u­a­tions of­ten pro­vide the op­por­tu­nity to build long-term port­fo­lio po­si­tions in qual­ity com­pa­nies at at­trac­tive val­u­a­tions.

Some of your best in­vest­ment de­ci­sions?

In large-cap stocks, among the best de­ci­sions we made was con­tin­u­ing to buy Tel­stra shares in IML’s large­cap funds all the way down to $2.50 as the Fu­ture Fund sold its shares ag­gres­sively. We ended up with more than 7 per cent of our port­fo­lio in Tel­stra at that price — al­though at cur­rent prices of over $ 5 we have been tak­ing prof­its. An­other great de­ci­sion was hold­ing 6 per cent of our port­fo­lio in Am­cor through the GFC, par­tic­u­larly af­ter Am­cor bought the Al­can as­sets off Rio Tinto for an ex­cel­lent price. Both stocks have dou­bled in the past few years.

In the small-cap space, buy­ing shares in Tri­dent Cor­po­ra­tion at 30c, which mor­phed into Mac­quarie Good­man and which we ex­ited at close to $ 8, as well as Mo­bile Com­mu­ni­ca­tions (which owned a free car­ried in­ter­est of 5 per cent in Voda­fone), which we bought at about $1 and sold at close to $10.


Buy­ing into HIH [ In­sur­ance] on the ba­sis that it was “cheap”, paid a very good div­i­dend and was led by long­stand­ing man­age­ment headed by Ray Wil­liams, who had es­tab­lished the com­pany in the 1960s. Af­ter buy­ing the shares at over $1 and hold­ing them for a few years, we even­tu­ally sold out at 40c. This ac­tu­ally proved to be a good exit as the com­pany went into liq­ui­da­tion not long af­ter.

The se­cret be­hind the suc­cess of In­vestors Mu­tual?

Our con­stant fo­cus and dis­ci­pline in do­ing our own in-house re­search on com­pa­nies and form­ing our own opin­ions on what we be­lieve com­pa­nies are worth. It is also then cru­cially im­por­tant to main­tain this dis­ci­pline in all types of share­mar­kets, but es­pe­cially in mar­ket ex­tremes — such as the dot­com boom of 1999 to 2000 where we ig­nored the boom com­pa­nies of the time such as Ecorp, One.Tel and Davnet — as well as the pre-GFC pe­riod, where the likes of Cen­tro, Bab­cock & Brown and many other highly geared listed in­fra­struc­ture com­pa­nies made no sense to us at all.

Any in­ter­est­ing sto­ries along the way?

In the dot­com boom pe­riod, all the “new econ­omy” com­pa­nies that were mak­ing no money what­so­ever — such as Ecorp, So­lu­tion 6, Davnet and many oth­ers — were ris­ing ex­po­nen­tially in value by the week, while many of the long-es­tab­lished qual­ity in­dus­trial com­pa­nies shares that we favoured — dubbed “old-econ­omy” com­pa­nies — such as Wool­worths, AGL and Bram­bles were be­ing sold down ev­ery day, de­spite post­ing record prof­its and div­i­dends! We kept buy­ing all our favoured “old-econ­omy” stocks as they got cheaper and bet­ter value ev­ery day but our per­for­mance looked ab­so­lutely ter­ri­ble and kept get­ting worse as the boom reached new ex­tremes. It was a nightmare!

IML had only been open just over a year and many clients, who took a risk ap­point­ing us, were not happy as the boom pro­gressed and our per­for­mance looked dread­ful. Some abused us and many lost pa­tience and pulled their money out.

I was very wor­ried and feared that IML would go out of busi­ness if the tech-boom mad­ness went on for many years. I bought an an­nual pass to the Syd­ney Aquar­ium and at lunchtime I would go to the aquar­ium, look at the fish and clear my head!

The tech boom ended with a bang in Septem­ber of 2000— and all the “new-econ­omy” stocks crashed — many evap­o­rated to noth­ing — while all the stal­warts such as Wool­worths, Bram­bles, TAB came roar­ing back into favour. Our per­for­mance was sud­denly bril­liant and as a re­sult we were awarded the Fund Man­ager of the Year for 2001 and 2002 by Money

Man­age­ment. It was a har­row­ing ex­pe­ri­ence but it proved to be the mak­ing of IML. We went from about $ 250 mil­lion un­der man­age­ment to over $ 5bn in four years.

Your view of the mar­kets for 2014?

Given the sig­nif­i­cant re-rat­ings that share­mar­kets both here and over­seas have had, I would ex­pect 2014 to be a much more chal­leng­ing and volatile year. While there is no doubt that many of the larger economies over­seas, such as the US and Europe, seem to have sta­bilised, this has only oc­curred thanks to the zero in­ter­est rate pol­icy of cen­tral banks as well as through the print­ing of money — other­wise known as quan­ti­ta­tive eas­ing. While this very ac­com­moda­tive mon­e­tary eas­ing has helped lift in­vestor con­fi­dence and seem­ingly sta­bilise things, it has also led to the prices of many as­sets, in­clud­ing many shares, be­ing buoyed to per­haps

lev­els higher than their nat­u­ral lev­els.

Your favourite stocks?

We have been pretty cau­tious on the over­all share­mar­ket for a lit­tle while now, given quite high val­u­a­tions and a con­tin­ued mixed macroe­co­nomic en­vi­ron­ment. We are very cau­tious about do­mes­tic cycli­cal stocks as we be­lieve any eco­nomic re­cov­ery here in Aus­tralia is likely to be pretty in­sipid.

We al­ways pre­fer stocks that fit our qual­ity cri­te­ria of com­pet­i­tive ad­van­tage, recurring earn­ings and sound man­age­ment that can grow as long as their price is rea­son­able. Stocks that fit the bill in­clude Wool­worths, Shop­ping Cen­tres Aus­trala­sia and SkyCity.

Your view of in­vest­ment op­por­tu­ni­ties in Aus­tralia ver­sus over­seas?

The Aus­tralian share­mar­ket is fairly limited as we do not have a great va­ri­ety of stocks in many sec­tors. In ad­di­tion, in many sec­tors such as tech­nol­ogy and health­care, there are much big­ger and bet­ter com­pa­nies over­seas — such as Google and John­son & John­son — and we have noth­ing much like them listed here. Hav­ing said this, more and more Aus­tralian com­pa­nies are be­com­ing global lead­ers in their fields, see­ing a grow­ing pro­por­tion of their prof­its be­ing earned off­shore. Am­cor is one of the largest pack­ag­ing com­pa­nies in the world, Orica is the largest ex­plo­sives com­pany in the world and CSL is one of the largest in­tra­venous im­munoglob­u­lin pro­duc­ers in the world.

In ad­di­tion, the long-term out­look and growth of the Aus­tralian econ­omy re­main pos­i­tive thanks to con­tin­ued pop­u­la­tion growth. There­fore, for most Aus­tralian in­vestors, a de­cent ex­po­sure to a port­fo­lio of good-qual­ity Aus­tralian shares as well as se­lec­tive ex­po­sure over­seas re­mains a good mix that should yield rea­son­able re­turns over time.


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