Peter Hall could be Australia's most unlikely CEO
Peter Hall is hunting stocks trading at a 50 per cent discount to their intrinsic value. This week he took significant stakes in gold exploration company, Doray Minerals, and mineral sand company, Base Resources.
Peter Hall is totally at odds with the risk constraints of the organisation he is leading.
by Matthew Smith
Peter Hall can't keep his frustration hidden.
Last month the renowned ethical investor took charge of Hunter Hall International, the listed boutique funds manager he founded 23 years ago. He stepped into the interim CEO role when David Deverall – the former Perpetual CEO, now CEO of NSW Treasury Corporation – left after 3 1/2 years.
What makes Hall's position unique is that he's totally at odds with the risk constraints of the organisation he is leading. Over the years he has had countless run-ins with the structure that's been built around him.
"I feel very constrained and often annoyed by our risk limits," he says.
Hunter Hall, the listed investment firm with more than $1 billion funds under management, is structured so a subsidiary company – called Hunter Hall Investment Management Limited – holds the financial services license.
The subsidiary's board sets the investment parameters of the trust structures to appease the many gate keepers who then make the firm's products available to individual investors.
The 55-year-old is not on the board of the subsidiary company. And that board's decisions often run at odds with his own personal journey, which is to essentially make outsized returns investing money into companies he finds hidden within plain view on the stock market.
"I missed out on $330 million in profits because of the constraints put on me. I made strong recommendations to the board [of the Hunter Hall subsidiary] but they ignored me," he says.
Hall's biggesinvestment bet – possibly the most successful of his career – has been an early stage ASX-listed global life-sciences company named Sirtex Medical which he first bought at $3.64 a share and which now trades above $35 a share.
A confluence of new risk measures, combined with some money leaving the fund, resulted in the organisation forcing Hall's hand to sell some of his beloved Sirtex stake in 2013.
Hall sold 11 million shares at around $10 a share, he recalls, in order to meet with firm's portfolio diversification controls.
Hunter Hall adjusted its risk rules so its funds could own no more than 15 per cent of a single company's issued capital, down from 30 per cent. It also limited its global funds from taking more than a 32.5 per cent exposure to the Australian sharemarket and restricted one single stock from making up more than 15 per cent of a portfolio.
Watching in frustration
But Hall had to watch in frustration as Sirtex shares climbed to reach $40 a share at the end of last year.
"I would not have sold a single share but I was forced to by risk controls," he says defiantly in an accent marked by two decades in London.
Hall has returned home to be the least likely CEO in corporate Australia.
At the Hunter Hall International board meetings, where he is also chairman and chief investment officer, Hall plays the provocateur. He's the person who kicks holes in peoples' ideas, taunting and toying with them to dig deeper and push their views further.
Hall also has no interest in conformity or structure; in fact he's repelled by the concept. It's an approach that has thrown up some of the most left-of-field ideas and the highest individual stock returns seen in the increasingly constrained and institutionalised funds management industry.
His bet on gold exploration company St Barbara has yielded a more than 93 per cent return since mid-2014. The St Barbara bet played out quickly, he admits, compared with the original Sirtex investment which he made almost nine years ago.
The types of stocks he's looking for are usually nowhere near the radar of most conventional investment managers.
Investment firms tend to make bets according to the benchmark composition or a within a well picked over segment of the sharemarket to meet liquidity requirements so they can trade in and out of positions easily.
"Sometimes there are stocks in the world that are above average, they might have technological innovations, like a Google or an Amazon back in the day. They do actually exist. If you're lucky enough to get onto them you shouldn't sell because they can go well beyond what your expectations are," he says.
In the last week Hall has taken a 15 per cent stake (the most he's allowed) in two separate companies: Doray Minerals, a gold exploration company with mines in South Australia and Western Australia; and Base Resources, a mineral sands, ilmenite, rutile and zircon miner.
Resources too compelling to ignore
He's never even looked at, let alone invested in the resources sector in his entire career, but the segment is too compelling to ignore following the commodities sell-off and sharemarket rout, he says.
"Resources is the most unpopular area, that's why I'm interested in it. I like the hated. Base resource companies are the hated – brokers have stopped covering it, institutional investors are not there … I'm always looking for stocks that are going to go up by a big factor. I'm not interested in the middle ground," he said.
A combination of Hall's sway – he manages 50 per cent of the firm's funds under management – and his agitating internally has led to Hunter Hall starting a new high conviction fund in December 2014 which Hall has sole responsibility for managing.
The fund has only one constraint imposed on it – no more than 15 per cent in any one stock by cost of the fund, meaning a position doesn't need to be trimmed if it grows and becomes a proportionately larger stake.
Currently that fund is 25 per cent invested in cash and has a 60 per cent exposure to gold stocks.
Hall's theory on gold is not necessarily that the price of the precious metal will go up, but that Australian gold miners are cheap mainly because investors don't understand the technical complexity involved in gold exploration.
He's paying three times price/earnings for Doray. This compares with the 33.2 times forward PE the ASX's bellwether gold stock, Newcrest Mining, is currently trading at.
"I think what a lot of people do is play a relative game. They say, 'This is a popular stock and it's down a bit, the market has the over-acted', and then they buy it. I'm playing a different game," he describes.
Hall's problem with the "relative game" is he says it doesn't pay attention to intrinsic value. He describes intrinsic value as the utility value of the company which is measured by the cash flow generated by the company.
His goal is to invest in companies at a 50 per cent discount to intrinsic value which have the potential to deliver a 20 per cent return over five years. Those companies are unloved, off the radar and probably have a lot of debt.
"People think big means quality and safe. Bigger feels psychologically safer, but it's not ... That's fine if a lot of people feel the same way because the sharemarket will reward it, and that's what's been happening, but its like the Emperors' New Clothes – when the balloon is pricked it will completely collapse and people will look back and say, 'why did we do that?'"
Hall is in the market for a new CEO. He's in the process of relocating from his base in London to Sydney to spend some time working from the company's global headquarters.
Because he says he employs a lot of females who work short weeks he muses a "high calibre female" CEO who's in the office three days a week might suit the business.
"Most of all I want someone who can really understand and is sympathetic to my mentality. To work with me – interpose between me and the market. That's what David [Deverall] tried to do and that's the real role," he says.
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