The following interview with John Abernethy featured in the The Australian, Wealth on Wednesday 7 September 2011.

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Clime Investment Management’s John Abernethy. Picture: Jeremy Piper  Source: The Australian

 

OLDER fund managers don’t fade away: they set up smaller outfits in which they have equity.

John Abernethy is a veteran of the Australian sharemarket with a blue-chip reputation and a distinct liking for companies that don’t surprise on the downside. His Clime Capital fund is topped by BHP Billiton and Telstra but it also has holdings in lesser-known stocks such as McMillan Shakespeare and Ethane Pipeline, which have been very good to investors.

How long have you and your organisation been in funds management?
Clime Investment Management Limited (Clime) has been managing funds for the past six years. However, as its chief investment officer, I have experience as a fund manager with NRMA between 1983 and 1994. Thus, I have about 28 years of capital markets experience.

Who owns Clime?
Clime is a listed public company with about 500 shareholders. More than 15 per cent of the company is owned by staff and directors. Funds under management are about $240 million with the bulk of the funds represented by the discrete equity portfolios of individual self-managed super funds. Clime also has a balance sheet of more than $20m in tangible equity. About $10m of Clime’s capital is invested alongside of its clients. Thus Clime has “real skin in the game”.

Which sectors does Clime Investment Management invest in?
Clime is an Australian equity manager and is focused on the listed securities of Australian companies. Securities include equities, property trusts, converting notes or preference shares and hybrid securities.

Clime manages funds across its portfolios towards a model portfolio of between 20 and 25 securities. The approach is to focus on companies with high and maintainable return on equity or that have the potential to achieve high returns. The portfolio at present has a bias towards yield investments. This is because Clime identified a very slow growth outlook for the world following the debt binge of the years preceding 2007-08. The benefit of a growing yield is that it can be compounded by Clime across time through reinvestment. This aspect of investment was forgotten by the mainstream of market participants who became hostages to debt funded growth.

Clime has no particular bias to industries or sectors, but it does have a macro-economic overlay that determines its investment themes.

What’s your outlook on major market sectors?
First, Clime believes that the strong resources cycle will be maintained for many more years. Whether commodity prices stay at record prices is a moot point but volumes will stay high for quite a period. This is because of the massive emerging economic cycle of China. In some respects the Australian resource exporters will be sheltered from a decline in prices as this will lead to a weakening Australian dollar. Thus, current profitability of Australian major resource companies appears sustainable. Thus, major resource producers and service companies continue to be an attractive place to invest.

Second, the concerns over world growth and the recent market volatility have caused excessive market myopia. This short-sightedness was a feature of markets in 2008 and Clime portfolios benefited from this (see below). The belief that the world will fall into some deep recession is promulgated by the misconception that governments and central banks will do nothing. There is no historic precedent for there to be no actions and thus investors should look through the current poor world economic outlook. Obviously those companies that are trading well through difficult times should be an investor’s focus and they are where Clime is positioned.
Based on its macro-economic overlay in 2008, Clime made two strategic decisions on behalf of its investment portfolios and these have resulted in the excellent three-year returns for its investors. First, in early 2008 Clime took its portfolios to a substantial cash position of about 60 per cent. This decision was based on Clime’s perception of serious difficulties in the subprime mortgage market in the US. Subsequently, from about September 2008, Clime re-entered markets on behalf of clients and slowly accumulated stocks.

This slow acquisition continued through until March 2009, when markets took off following the G20 communique.

What have been your best investments?
During late 2008 there were many investment opportunities presented through capital raisings by listed companies. However, the real bargains were offered in the stockmarket, which was caught by negative sentiment. In particular massive gains were made for our clients on listed hybrid and debt securities, which were offered at a fraction of face value. Indeed, Clime’s best investment decisions involved acquiring the perpetual debt securities of Australand and Multiplex at below 35 per cent of issue price, giving returns to investors of nearly 200 per cent in three years.

How many staff do you have?
I lead a team of five analysts, with a total number of staff equalling 20.

What’s the minimum investment you accept?
Clime has recently launched its retail investment fund on various platforms. This will allow retail investors to invest as little as $10,000 to be managed by us. The discrete portfolio service is offered only to sophisticated investors and is highly attractive to self-funded retirees.

Clime takes the maintenance of its clients’ capital very seriously. This has been shown in the past by its reluctance to speculate with clients’ capital and its decision to move to cash if the economic outlook becomes seriously unpredictable.

Are you an activist fund manager in terms of getting involved with underperforming companies?

We will seek redress should an investment turn sour through the actions of an investee. For the past few years Clime Capital Limited had sought redress from a listed company over statements made to the market. This action recently settled, and a recovery of some of the loss is anticipated.

FIVE TOP TIPS

• Profitability (the return on equity) is more important than reported profit.
• Financial history is important but a realistic perception of the future is critical.
• When a company raises more capital to repay debt, then question management’s ability to manage capital.
• Compounding returns is an investor’s most powerful long-term wealth creation tool.
• Remember that cycles are just that, cycles, which will come to an end.