Tim Blue | July 08, 2009 Article from: The Australian KIERAN Kelly set up Sirius Fund Management in 2003 as a manager of portfolios for high net worth clients and corporations. Its first client was Hillross Financial Group, a wholly owned subsidiary of the AMP Group. Sirius is not a fund manager in the usual sense but an investment manager that aims to exploit a gap in the market to allow affluent individuals to sidestep stockbrokers or financial planners in the management of equity portfolios. This allows investors an option in addition to managed funds, which have inherent disadvantages for making equity investments.
How would you describe Sirius?
A single-purpose business specialising in share portfolios tailored to the needs of clients. It has about $200 million in funds under advice. We are not a fund as there is no pooling of clients' assets. Each client's portfolio is developed from an exhaustive examination of risk preferences and unique financial circumstances.
What are your fees?
Subject to negotiation, but broadly 1 per cent of funds under management for the first $1 million and 0.7 per cent from $1m to $3m. Sirius does not accept any commissions or product incentives from mutual fund managers or other financial intermediaries.
What do you see as the main themes that will dominate the market in the next 12 months?
First, earnings disappointment. Corporate results in the June and December half-years in 2009 may disappoint, causing re-evaluation of price-to-earnings ratios of individual stocks with the potential for sharp selected falls. Conversely, there may be some pleasant surprise pockets in the market such as energy stocks and possibly retail and health care.
Second, yield will emerge as a theme. Given the extremely low levels of short rates and the large amounts of cash parked in term deposits, there may be some pressure from investors who need higher yield and the fully franked dividend yield on offer above 6 per cent may see some demand in areas such as banks. Selected resetting hybrids and listed corporate debt will attract investor interest.
Third, there will be continued capital raisings. The stock market has had record levels of capital raisings in the past year as companies sought to repair balance sheets. In addition the massive capital raisings by governments through the bond market will also start to be felt in earnest. There is a risk that there will just not be enough capital to go around, that private capital will be crowded out by government raisings and the stock market will develop symptoms of fatigue.
Where do you see the market heading in the next 12 months?
It will have trouble getting through 4500 in any committed way in the next 12 months. Earnings sluggishness, slow economic growth (and) huge budget deficits crowding out capital markets will all contribute to this lethargy.
Conversely, there is probably not enormous downside risk in share prices at these levels.
How do you value companies?
Valuation is based on two principles: first, a valuation range is struck for each stock using a price-to-growth ratio template.
The template projects profit over the longer term, comparing two years' actual and one year's projected growth with the price via the ratio. Second, investments are scrutinised for yield, in particular the company's ability to continue paying and growing dividends without crimping capital expenditure.
We believe the ratio of free cashflow to dividend payout and capital expenditure is one of the most difficult tasks for company's management. Yield is compared with comparable returns in government bonds.
Are you increasing or decreasing your cash position?
Body: We had been decreasing it between March 2009 and early June 2009, but we have stopped due to the strong rally in the markets. We do not intend any further decreases in cash in the short term.
Is this climate good for your type of fund?
The March quarter 2009 was the busiest for the company in terms of new business inquiry since we opened the doors six years ago. There seems to be a swing away from mutual funds and a preference for direct holding of shares. The reasons for this are an ease of management of capital gains issues with direct share portfolios compared with mutual funds and the greater transparency of a direct share portfolio, so investors can see what they own.
There's greater disclosure requirements in shares compared with mutual funds and an ability to question boards at annual meetings, which is not available to the owner of mutual fund portfolios. There have been significant blow-ups with mutual fund operators such as the agricultural schemes and there seems to be a growing demand for simplicity in investment.
How has the fund performed since its debut?
Performance of individual portfolios depends on the specific mandate given to us by clients. This can vary between a portfolio of 45 per cent growth assets and 100 per cent growth assets. However, as an example, our average balanced portfolio over the 12 months to 31 March was down 11 per cent compared with a negative 28 per cent for the All Ordinaries Accumulation Index and a negative 60 per cent for the S/P ASX 200 Property Trust Index.
Sirius does not aim to outperform any set benchmark and believes portfolio construction and asset allocation including stock picking is the most important goal in good funds management. We are both index and benchmark unaware.
You usually have 25 stocks in your portfolio. Have you rejigged it recently?
During 2009, we have reduced holdings in regional banks, Brambles, Wesfarmers and increased holdings in healthcare stocks, the big four banks and energy stocks. Sirius is prepared to take significant tilts away from the index, for example, it owns no media stocks, neither print nor electronic. It has never invested in News Limited, Ten Network, PBL, Allco Finance, ABC Learning, Centro Group or Macquarie Bank. Consequently we have never lost a client.
In Australia, what sectors and stocks do you like most?
In health care, Ramsay, CSL and Invocare; energy, AGL, Woodside, Origin and the banks CBA, Westpac and ANZ, and in non-discretionary retail, Metcash and Woolworths.
What do you think of the banks and financial services sector?
We like the big four banks as we believe an unintended consequence of the recession and federal government policy is to enshrine the four pillars policy. It has also wiped out non-bank financial competition and delivered unprecedented pricing power to the majors. In a strange irony, we believe Australia's big four banks will emerge from the financial crisis much stronger.
Do you hold any miners?
We do, but only in the majors, BHP and Rio Tinto, as we believe the most value in share investing is derived from dividends. Overall mining stocks are poor dividend payers and we are reluctant to rely purely on capital gain for return.
Do you hold any small caps?
Yes, but only in the industrials, what we call green chips. These have high yield, simple business models and unstressed balance sheets. We hold numerous high-quality small-cap stocks including Invocare, Ramsay Health Care, Fleetwood, Blackmores, Bradken and Walter Diversified Services.
What stocks have been the best performers for you so far?
Ramsay Health Care, Metcash, Blackmores and Woolworths. Various stocks have taken a beating in recent months.
Has that enticed you to buy up?
Not necessarily. Just because a stock has fallen is not an automatic buy signal. Many stocks, for example Babcock&Brown, Allco and ABC Learning fell and never recovered.
To buy into them simply because they had halved is lazy investment practice and potentially disastrous for clients.
FIVE HOT TIPS
AT least half of all investment return comes from the dividend.
YOU can't have too much patience or too much discipline.
EVEN the best investors have only a few great ideas every year. No one has a great idea every day.
INVEST because opportunity exists, not because cash is available.
IF an asset pays a dividend, it's an investment; if it doesn't, it's a speculation. Know the difference.
