John Sevior, David Paradice, Anton Tagliaferro, Kerr Neilson, Hamish Douglass. They are among the most feted moneymen in the country, having made or saved their clients billions of dollars by picking the right stocks at the right time. When they talk about sharemarkets, investors hang off their every word. And with good reason. Neilson, who set up Platinum Asset Management in 1994, famously sidestepped the 1987 share crash and ever since has produced market-beating returns. When Sevior was at the listed wealth manager Perpetual, his Concentrated Equity Fund outperformed the market by 3.8 percentage points a year for 12 years after fees.
Along the way, the market rock stars have lined their own pockets as well as those of their clients. Neilson, Tagliaferro, Paradice and Platinum Asset Management chief investment officer Andrew Clifford all feature in this year’s BRW Rich 200, as does Michael Hintze, a London-based Australian manager and founder of hedge fund CQS. Hintze also made The Sunday Times’s list of Britain’s 1000 richest people, clocking in at 92nd place with a fortune estimated at £1.06 billion ($1.9 billion). Neilson, meanwhile, is the 10th-richest individual in Australia with a fortune of $3.35 billion.
Achieving cult status in the investment universe requires hard yakka, nerves of steel, judgment and foresight. "You’ve got to be passionate," says Tagliaferro. "You’ve got to really understand how a company makes money. You’ve got to be able to assess a company’s vision and plans, and whether their assumptions are prudent."
So who among the younger crop of managers has these qualities? The AFR Magazine asked about a dozen research houses, managers and financial advisers to identify the most promising young guns across the country. It was a big task, given that most 30-something asset managers tend to be tucked away in their glass towers, still far from the public gaze.
Half a dozen names emerged from the pack. Despite Melbourne being home to many of the country’s biggest superannuation funds, all who made the final cut are based in Sydney. Sadly, the list includes no women. Young female managers are a rare commodity, for reasons that no one can explain. Perhaps, opines one industry veteran who asks not to be identified, it is because women still don’t match men in the chutzpah stakes. In asset management, you live and die by your monthly return figures. You have to back yourself. In addition, the pressure to improve gender diversity is far more prevalent among listed companies.
Five of the six talented stock pickers who made the list agreed to talk about their philosophies and track record. (Adam Harvey of Paradice Asset Management was unavailable for an interview; he is said to be intensely private.) All are still in their 30s and all are managing millions – in one case, billions – of dollars of other people’s money. It is a huge responsibility to rest on young shoulders, and they feel it. When the weight of the market is against them, they have to stand their ground and back their decisions. For this group of bright young things, winning is everything.
Chris Stott, Wilson Asset Management
Chris Stott’s first car, a $2000 second-hand Holden Torana, was largely financed by a teenage share trading habit. Growing up on Sydney’s North Shore, he used to set aside some of his weekly wage from a part-time job flipping burgers at McDonalds to punt on the market. His parents had no interest in markets but he was enjoying business studies at high school. Stott made good money on the likes of Telstra and Sonic Healthcare only to lose some of it on speculative mining companies.
His first big lesson in investing came some years later during the global financial crisis. By then he had worked at financial services firm Challenger for just over four years, writing reports and administering fund applications. Challenger famously owned 9 per cent of ABC Learning, once the world’s biggest provider of early childhood education services. Challenger did extremely well from its ABC shares at the start, but the childhood learning company collapsed in a heap during the GFC.
"When you’ve made so much money on a stock, it’s hard to let go. ABC taught me: don’t fall in love with stocks," Stott, now 33, says.
He joined Wilson Asset Management in 2006 as an analyst and three-and-a-half years ago was promoted to chief investment officer. He oversees three listed funds and one unlisted vehicle, with combined assets worth $830 million. Stott’s funds specialise in small and mid-sized companies with good growth prospects.
"We are all about finding undiscovered gems," he says, adding he looks for companies that are not analysed by stockbrokers and have no professional investors on their share register. The company’s flagship Capital fund has returned 14 per cent a year in the three years to March, against a 7.7 per cent annual gain by the S&P/ASX 200 index.
Asked what he likes about investing, Stott’s face lights up: "I like the constant decision-making. I’ve got a really competitive streak."
He says the hardest parts of being a professional investor are not knowing if the share price fully reflects various aspects of a company’s operations, and being lied to by management. Stott recalls a meeting in 2012 with executives of a company who painted a rosy future (he declines to name and shame). Five weeks later the firm posted a shock profit downgrade and Stott took a bath on the shares.
Married with a toddler and an 18-month-old, Stott doesn’t have much time for investment books. But he happily counts UniSuper chairman Chris Cuffe among his mentors. Of Stott, Cuffe says: "He’s a step ahead of others in joining the dots when it comes to figuring out if a company is really doing well. He’s way ahead of the game."
Nathan Parkin, Perpetual
Nathan Parkin, 39, is responsible for more than a fifth of the $23 billion in Australian equities managed by Perpetual, one of the country’s biggest and most successful listed asset managers.
It was three years ago when he became the latest of the group’s bright young things to be handed the stock-picking baton, one that has been passed down a long line of pre-eminent fund managers, several of whom are household names: Tagliaferro of Investors Mutual fame; Peter Morgan, who established 452 Capital; John Murray, managing director of Perennial Value; and Sevior, the sharemarket brains behind Airlie Funds Management.
If Parkin is daunted by the pedigree of his forebears, he doesn’t show it. His response has been to outperform the outperformers. The $800 million Ethical Fund, which he has managed since 2011, was the best-performing Australian share scheme in the three years to March, according to investment consultancy Mercer.
Last year Perpetual gave him responsibility for half of its $7.2 billion flagship Industrial Share Fund.
Parkin is married to his high school sweetheart, with whom he has two teenage sons. It was when he was a teenager himself in Sydney’s north-west that he thought he might like to work in finance. The decision was prompted by a visit to an investor seminar with his parents, who had some money with BT Funds.
Initially, he couldn’t find a way in. "I couldn’t get work experience to save my life. I applied to lots of stockbrokers, but every day I would get another rejection letter."
Eventually he landed a marketing job with Perpetual, but his first real taste at investing was thanks to a raffle ticket. In 2002, his mother won a $20,000 share portfolio, which the young Parkin promptly asked if he could oversee.
It was well before he had moved into professional asset management, but it was clear he had a knack, even with the market winds on his side. By 2007, $20,000 had become $55,000.
"Mum was very happy and I loved running it," Parkin reflects.
He lists the sharemarket as one of his main hobbies, along with trying to keep up with his sons on the soccer field, and describes himself as a conservative investor. "I look at how much money I could lose before I invest. I think about the potential downside more than the upside. The upside will take care of itself."
He thrives on the prospect of finding unappreciated companies. "I have a lot of companies tucked away that I want to own at the right price. If you’ve done your homework, it always amazes me that opportunities do come up if you are prepared to go against the grain and jump in."
What does he find difficult? "It is a bit of a lonely game at times. Mentally it’s tough. I am always going home moaning about some stock position that has gone against me."
Steve Johnson, Forager Funds Management
Growing up on a farm near Wellington in central NSW prepared Steve Johnson for life as a professional investor. Dealing with volatile stock markets, Johnson argues, is much like dealing with volatile weather. The only way to survive mentally is to remain cool. "My wife thinks I am emotionally devoid," he says matter-of-factly. "I could teach anyone the process of valuing a company but psychology is the part that you can’t teach. You need to remain calm when everyone else is panicking and not get greedy when everyone else is greedy."
Another big lesson came when he worked in the project finance team at Macquarie Group in Sydney in the early 2000s, a time when the bank was dubbed the Millionaire Factory.
"They believed they could do anything. And they did," he reflects. "They showed me that anything was possible."
Johnson, 36, is now chief investment officer and major shareholder of boutique firm Intelligent Investor Funds (to be renamed Forager Funds Management on July 1).
It runs a local and international share fund, overseeing $140 million of client money.
Johnson’s investment style requires him to draw constantly on those zen and can-do lessons.
He likes to buy shares of small companies that have either lost their way, or have valuable assets which are not profitable. It is a high-risk strategy; he warns investors that returns will be fickle.
So far the risks are paying off. Between November 2009 and April 2014 the Australian share fund has returned an average of 12.9 per cent a year, against an 8.2 per cent annual gain for the All Ordinaries Accumulation Index. The international vehicle has posted average annual gains of 28.9 per cent since February last year, against 26.8 per cent for the underlying index.
Veteran investor Matthew Kidman says of Johnson: "Steve will run counter to the market. Most don’t do it. They say they do, but they don’t."
Johnson first became interested in investing when he and high school chum (and now business partner) Gregg Hoffman came third in a sharemarket competition organised by the Australian Stock Exchange. Later he read Roger Lowenstein’s Buffett: The Making of an American Capitalist.
The then teenager was struck by the notion that investors were buying companies not shares, and that patience would be rewarded. He was given no encouragement from his parents: Johnson’s father, a keen racegoer, has a decidedly low opinion of people working in the stockmarket.
Johnson himself is wary of the hero-worship afforded to the likes of Buffett. Ultimately, he says, investors need to find their own style.
Marcus Hughes, LHC Capital
By the time Marcus Hughes was a teenager, it was a fair bet he would end up in funds management.
At the age of 10, he was the top-ranked chess player in NSW for his age group. Not yet out of primary school, he loved the strategic battle. Better still, the game was brutal: there was always a winner and a loser.
While Hughes was honing his board skills at home on Sydney’s North Shore, his grandfather, a retired butcher, used to talk to the young boy about shares he had bought and sold. Hughes was fascinated by the idea that you could invest in something and make a profit.
He was also astute enough to learn a key lesson from his first mentor. "My grandfather would only buy good companies with something unique about them," Hughes recalls.
He used pocket money to buy his first stock at the age of 15 (Advance Bank, since absorbed by Westpac) and then proceeded to buy stakes in a raft of companies that were being sold off by the government, among them three state-owned gaming companies and telecoms behemoth Telstra. He made money on all of them. There was another valuable lesson in that: "You always want to buy off the government."
These days Hughes, 35, is a portfolio manager at LHC Capital, a firm he co-founded with Stephen Aboud in July 2012. Their hedge fund has assets of $130 million, mostly managed on behalf of family offices and "ultra high net worth individuals".
Since inception, it has returned 26.4 per cent a year, net of fees, against an 8.9 per cent annual gain in the S&P/ASX 200.
Hughes looks for companies that are forecast to generate strong cash flows over the next three to five years, which suggests management is both disciplined and has a sound strategy for future growth.
The young manager will frequently talk to a company’s competitors and suppliers to obtain a 360-degree view.
As long as the forecast for free cash flows looks robust, he is less worried about the price of a stock today. He likes managers who think and act like they are owners of the business and put shareholders’ interests ahead of their own.
Hughes is what is commonly referred to in the trade as a high-conviction investor. He believes the number of promising investment opportunities is small – and he backs them big time.
"He’s a good thinker," says a former colleague who prefers not to be named. "He asks the right questions."
Holding your nerve is key to investing, says Hughes. Watching share prices go the wrong way can be the cruelest of sports.
"The hardest thing is maintaining conviction in an investment that has gone against you in the short term; you have to stand against the noise of the market and hold the hands of your investors."
And the upside to the job? "I’m a market animal. I love what I do. I love ripping companies apart."
Clay Smolinski, Platinum Asset Management
Clay Smolinski started borrowing investment books from the local library when he was still at high school in Perth. By then he had already spent years listening eagerly to anecdotes about how his grandfather had retired at the age of 45 and dabbled in the property market, at one stage buying an egg farm after forecasting it would generate a handsome income.
The young Smolinski was equally fixated by the nightly finance bulletin on the television news. Why, he used to think, would the share price of a company fall after it had just unveiled bumper earnings?
"I got every book I could on value investing," says Smolinski, quite believably. The 30-year-old’s bookish looks belie his youth. The reading list included every tome penned by Warren Buffett, later expanding into the esoteric field of behavioural psychology.
After graduating as dux of finance from Murdoch University in 2005, Smolinski knew he wanted to invest professionally. Scoring a job at Platinum gave him the chance to work alongside some of the greatest minds in the local funds business.
Kerr Neilson, who rose to stock fame when he avoided the 1987 stock market crash, taught Smolinski the need to test every investment case before buying shares. Not prone to histrionics, Neilson says simply of Smolinski: "He’s good. What was unusual about him was his maturity."
From Andrew Clifford, Platinum’s chief investment officer, Smolinski learned the importance of distilling a company down to a handful of key features that will determine whether it is a good or a bad investment. That ensures that you are always looking in the right place, he notes.
Smolinski has been running the firm’s European share fund since April 2009. The vehicle has $290 million in assets and has posted a 20 per cent annual compound return in the five years to March 30, against an 11 per cent annual return in the benchmark MSCI index.
When selecting stocks, Smolinski tries to remember two things: stocks can remain out of favour for months so don’t expect quick results; and picking the bottom of the market is impossible. "Stocks can always fall another 15 per cent after you buy them. You need to be comfortable about having the weight of opinion against you."
Married with a baby, and a regular at the basketball court, pool and gym, Smolinski maintains self-discipline by keeping a list of common investor mistakes at his desk. The top no-nos are seeking more information about a company as an excuse to defer making a decision; believing that markets won’t recover when gloom is pervasive; and doubting your own opinion.
One of Smolinski’s best calls was buying Italian bank Intesa Sanpaolo. He did the sums and figured that the Italian government’s debt profile, which was dragging down bank share prices, was not as dire as everyone thought. He started buying the shares at €1.10 a share in mid-2012; they now trade at €2.40.
One of the worst decisions was failing to buy shares of online fashion retailer ASOS. By the end of 2011 the stock price had fallen 50 per cent. Smolinski was convinced it was a good buy but wanted more information from the company before taking the plunge. No meeting was forthcoming and he sat on his hands. "The stock went up five-fold. In hindsight we had all the information we needed."
