Transcription of Finance News Network Interview with Fairview Equity Partners, Portfolio Manager and Executive Director, Chris AdamsDonna Sawyer: Hello I’m Donna Sawyer from the Finance News Network and joining me from Emerging Companies Fund Manager Fairview Equity Partners, is Portfolio Manager and Executive Director, Chris Adams. Chris welcome to FNN.
Chris Adams: Thanks for having me here.
Donna Sawyer: Earning season has delivered reasonable results from most companies. What have been the key drivers behind that in your opinion and how did small caps perform?
Chris Adams: Well there’ve been no obvious key drivers as such, there’s been no clear macro supports for the most small company sectors. So we’ve tried to concentrate mainly on those stocks and sectors, where you don’t need any free kicks from the economy. And there’s a range of industrials in the small companies will give you that. Overall though, it’s still pretty tough out there, there are no sort of major cyclical free kicks available. Things are getting tougher in the mining sector, as we know and we are only just starting to see maybe signs of life in the domestic cyclicals.
Donna Sawyer: You’ve reiterated your commitment to maintaining sufficient exposure to the resources sector. Why is that and what’s your strategy there?
Chris Adams: One of the key balances that we make sure we maintain in our Fund is to have a sufficient exposure to resources. Commodity prices, as you say, they have fallen but we don’t suggest they’re still falling, in fact many have bounced back. Take iron ore for example, that’s gone from $US100 a tonne back to $US130. Gold staged a 15 per cent recovery during the last couple of months. Even copper’s bounced back about 10 per cent. So we don’t necessarily see commodity prices still falling. They’re, as I said, inherently volatile – very hard to predict, it’s not something that we ever try to predict. And given resource companies are driven primarily by commodity prices, we always seek to maintain a healthy exposure to what we consider to be the better ones.
Now when I say the better ones, we make sure that we own the lower cost producing companies. We certainly are very reluctant to own any speculative or junior companies, which are yet to start producing. And we found those companies have continued to deliver good returns, even during difficult periods for resource companies. Some examples there are BCI
(ASX:BCI) which has actually been a very impressive performer over the last year, during a tough period for resources. And certainly our gold stocks bounced back quite impressively in the last couple of months, given that stronger gold price. So it’s a big macro call, the resources sort of split and it’s not our key competitive advantage to try and make that call. So there’ll always be a decent weight in to resource companies in our Fund.
Donna Sawyer: What are the key risks you’re considering at the moment?
Chris Adams: The key risks are probably more where we’re underweight at the moment. And that’s - we’ve been underweight domestic cyclical companies for quite some time now, at least the last two years. When I say domestic cyclicals, I’m referring to media companies, retail companies, IT services, banking and financials. They’re the key sort of domestic cyclical exposures that we’re having to consider.
Now we’ve actually started to peg some of those back in recent times. We’ve added Seven West Media
(ASX:SWM) into the Fund in recent periods and that’s primarily, a free to air television exposure now with some print assets. We acknowledge there’re structural challenges to this company, you know, as new media starts to take advertising dollars from traditional media. But the valuations are very attractive and we do see the advertising cycle starting to pick up.
In financials we’ve added IOOF
(ASX:IFL) to the Fund, which gives us a nice diversified exposure across a variety of financial sectors. We’ve actually maintained a reasonable retail exposure. The retail environment is still pretty tough, I mean employments a big driver of retail spend and that’s quite challenging at the moment. But we own what we consider to be a handful of very high quality retailers, including Flight Centre
(ASX:FLT) which reported a very strong result. Super Cheap Auto
(ASX:SUL) which also reported a good result and a couple of others in that sector.
Donna Sawyer: How critical is the election result for Fairview Equity Partners?
Chris Adams: The main sensitively is around McMillan Shakespeare
(ASX:MMS), where the Government have announced those changes to fringe benefits tax in relation to novated leases. If the Labour were to win and those changes were to go ahead, that would be quite adverse to McMillan Shakespeare, where a large part of their earnings are derived from novated leases. So the Coalition has suggested that they won’t be enacting those changes, so that will be very favourable for that company. Other than that, there’re some minor changes around the mining tax which will change under a Coalition Government, and private health insurance which will be more favourable for investors if those changes aren’t made.
Donna Sawyer: So have you added much to the portfolio over the last quarter?
Chris Adams: Yeah we certainly have. So we’ve – as I mentioned before, we decided to increase the cyclical exposure to the Fund a bit. And so I mentioned a couple of those companies including IOOF, Collection Houses of Stock
(ASX:CLH) we’ve just added, Seven West Media
(ASX:SWM). We’ve also added Reece Hardware
(ASX:REH) which has an exposure to the housing cycle, in terms of plumbing supplies. We’ve also added an interesting company called Neamap Technologies
(ASX:NEA), which is basically satellite photography and there’s been another few other companies added as well. And by definition, we’ve exited a few of our positions which we think have played out quite well for the Fund in recent periods.
Donna Sawyer: Which stocks have been the best performers over the last quarter?
Chris Adams: Well interestingly enough and as we referred to earlier, some of our resource positions have actually been the best stocks. And that’s been driven by a reban in some of the commodity prices, plus a bit of a bounce back in some oversold mining related stocks. So they include BCI which I mentioned, Decmil
(ASX:DCG) which imported a strong result and outlined a very healthy work program for the next 24 months. Papillon
(ASX:PIR) which is a goldmining company in West Africa, was punished along with a lot of gold stocks earlier in the year but made a strong bounce back. Breville
(ASX:BRG) which is a stock we’ve recently added back into the Fund, performed well. And they’ve been the strongest contributors in recent periods.
Donna Sawyer: Finally which stocks have been the worst performers over the last quarter, and do you still hold them?
Chris Adams: McMillan Shakespeare was clearly the worst performer and yes, we do hold it. We think the risk – a good outcome is still very favourable for that company under a Coalition victory. And given that scenario, it’s looking increasingly likely; we see that looking positive for the stock. Codan
(ASX:CDA) which is a mine detecting – sells mine detectors to African countries primarily, had a very disappointing finish to the year, after a very strong start to the year. We do own it, there’s a bit more volatility in sales than we would like, but we still see the long term outcome for that company as being favourable. Austin Engineering
(ASX:ANG) had a tough second half to the year, which was no surprise given their markets are primarily coal in eastern Australia and copper in South America.
So we still like the medium term prospects for that company and are still happy to own it. And finally, Charter Hall
(ASX:CHC) which is a property fund manager and a property trust, had a tough year – well as did the property sector. We think that was just bit more of a sector rotation issue, given the property sector had a strong start to the year. We’re still happy holders there, they had a strong result and everything’s going well for that company.
Donna Sawyer: Chris Adams thanks for the update on Fairview Equity Partners.
Chris Adams: My pleasure, thanks for having me.
Ends
