Keeping it fresh
The fund’s process has been in place for many years but Whitmore says he and Murphy have been doing a lot of work on the portfolio construction element.
“Within the investment return you have your buy decision and we focus a lot on that, but you also have sizing and selling. Evidence shows we are OK on the buying front but there is room for improvement on the sizing and selling side of things, so we are contemplating what changes we could make.
“They would be incremental changes but, broadly, it is about ensuring we buy up our positions quicker and don’t let winners stay in the portfolio for too long.”
Much of this work has been driven by Murphy, who joined the team three years ago and who Whitmore says has been “an absolutely fantastic addition” to the fund.
“There is always a danger of resting on your laurels but Dermott is young and wants to push things forward, and that is a very helpful dynamic.
“We have pushed ahead in a lot of areas, especially in the past year on screening and portfolio construction, and have really tried to improve ourselves.”
While a healthy slug of objectivity is important, the investment process involves many subjective assessments of why each company in question is undervalued. But, says Whitmore, while such judgements are important, he and Murphy try to keep that fight out of the difficult areas, instead focusing on finding businesses or sectors that are out of favour.
Mining, for example, was very much in favour five years ago but has had a very difficult period in recent years. The pair looked at the long term P/Es about two and a half years ago, and the numbers were not great.
But, given the length and force of the supercycle the mining sector had undergone during that time, Whitmore believed 10 years was not long enough. The pair looked further extending the analysis out to 20 years and, on that metric, the price/earnings ratios were very low.
“We are not trying to be heroic and assume everything will just get better, because it won’t. But we are trying to buy businesses where they have had an up and a down. There is nothing much more to it than that,” says Whitmore.
At present, the stocks most frequently getting through the screens are to be found in mining and financials.
Asked if he is more optimistic or pessimistic when it comes to the more subjective measures, Whitmore says he prefers to see the glass as half empty. “There is too much focus on trying to find companies that do very well and not enough on ensuring the downside of what you are investing in is reasonably limited.”
