Fairview focussing on secular growth

Interviews

Transcription of Finance News Network Interview with Fairview Equity Partners Portfolio Manager, Michael Glenane

Lelde Smits: Hello I’m Lelde Smits for the Finance News Network and joining me today from Emerging Companies Fund Manager, Fairview Equity Partners is Portfolio Manager, Michael Glenane. Michael welcome.

Michael Glenane: My pleasure.

Lelde Smits: As a Fund Manager speaking to small to mid-cap companies on a regular basis, how are they feeling about the sector?

Michael Glenane: At Fairview we conduct a lot of company visits each year, between 500 and 600 and we’re stock pickers. So most of the time, we’ll go straight to the micro factors with regard to the companies. However, you do pick up macro factors as well and I would conclude it’s probably not travelling particularly well at the moment, especially with regard to the manufacturing sector in our country.

Lelde Smits: And have you identified any warning indicators in the sector?

Michael Glenane: We track the warnings that are sent to the ASX by small industrial companies; we’ve been doing this for a number of years. In FY10 there were 85 warnings sent to the ASX, FY11 it went up to 97. This year, year ending June just passed, 115 companies warned. However, we still find there are great opportunities out there. There’re a lot of under covered companies which we can explore when we look for secular growth.

Lelde Smits: In the mining sector a report recently forecast the mining boom is coming to an end. What’s your assessment?

Michael Glenane: We’re probably a bit more circumspect than that. One of my colleagues, Leigh Cronin has just been at Diggers and Dealers;
it’s a bit calmer this year than last year where there was some exuberance from some of the mining executives. What we’re seeing is a more normal environment, high levels at M&A [mergers & acquisitions], but always the market will fund good projects.

Lelde Smits: Now to the small cap sector. How does it differ to the large cap sector?

Michael Glenane: There’s a lot more companies for a start, we look at 700 companies. Generally they’re less liquid with regard to their trading, as well as there is a lot less broker coverage. Typically for the top 50 companies, there’re nine broker analysts covering the stock. In the Small Ordinaries the average is four and in some of the stocks, it’s actually zero broker coverage. Another key factor with regard to the Small Ordinaries Index is there’s a lot higher resource component.

Lelde Smits: And how has the sector performed over the last quarter?

Michael Glenane: It’s been a tough quarter. The sector itself which we define as a Small Ordinaries Accumulation Index is down 15 per cent.

Lelde Smits: More than ever investors appear to be focused on yield. How much does the small cap sector currently yield?

Michael Glenane: 4.1 per cent. Bit of a cautionary note about yield – always make sure the company can afford to pay the dividend. A lot of stocks and the Babcocks & Browns of the world in the last decade were sprayed at the market, which didn’t end well for everyone with regard to a lot of those actually went bankrupt. Always make sure there’re earnings behind the yield.

Lelde Smits: Now Michael to your Fund. How did it perform over the last quarter?

Michael Glenane: Alas we’re also down 10 per cent; we beat our index by five per cent.

Lelde Smits: And what about the past six months?

Michael Glenane: A better picture over the past six months. We are – our unit price increased by six per cent over that period versus the market
down about three per cent.

Lelde Smits: And has the Fund’s composition changed much since we last spoke?

Michael Glenane: A slight de-emphasis with regard to coal stocks, we had a couple of those actually taken out. Also a slight de-emphasis with regard to mining services and much more looking at secular growth. There’re some great stories out there at the moment which are under research by the broking community.

Lelde Smits: So to recap Michael, what are your largest positions?

Michael Glenane: Our largest position is Regis Resources Limited (ASX:RRL) - recently made an acquisition which we think is very positive. Our second largest position is McMillan Shakespeare Limited (ASX:MMS) which is the market leader in salary sacrifice in Australia. Our third largest position is REA Group Limited (ASX:REA) which is the dominant player with regard to real estate listings in Australia, and also now in Italy.

Lelde Smits: And have you added to them?

Michael Glenane: Because all of them have had relatively good performance, one of them we’ve actually had to sell because we’re heading close to our limits. We’re very happy to make those sale decisions.

Lelde Smits: Which three stocks added most to your performance in the June quarter?

Michael Glenane: Our biggest contributor to positive performance was McMillan Shakespeare Limited (ASX:MMS). Second largest positive contributor was Carsales.com Limited (ASX:CRZ) and the third largest was a biotech company which sells testosterone in the US market, called Acrux Limited (ASX:ACR).

Lelde Smits: And which three detracted?

Michael Glenane: Alas you don’t get them all right. Forge Group Limited (ASX:FGE) was our largest attractor in the period. It’s been a really good stock for us so we didn’t probably sell it as well as we could, but it’s been more than a doubler for us. We are now out of that company. Seymour Whyte Limited (ASX:SWL) was our second largest negative contributor, there’s corporate governance issues there.  As soon as that happens with regard to Fairview, we sell out if our thesis erodes and it certainly eroded there. And the third largest negative contributor was SP Ausnet (ASX:SPN), we don’t hold that stock.

Lelde Smits: Now your Fund has returned more than 18 per cent per annum since inception in October 2008. What have you learnt as Fund Managers from Fairview over this period and how has this fed into your processes?

Michael Glenane: 2008 for us was a year of great discomfort and I think we’re not alone there with regard to the financial markets. 2009 was the most exciting year of our career. From the start of January to the end of December of 2009, our Fund was up 72 per cent. As one of my competitors described it, the greatest Easter egg hunt of our life – unfortunately the Easter Bunny was there as well and he had a shotgun. But in spite of that what’s really very interesting - the thing we learnt the most was what we’d hoped to learn, is stick to your process.

Lelde Smits: Michael Glenane thank you for your time today.

Michael Glenane: My pleasure.

Ends