What got you interested in investing?
“I made my first share market investment when I was 11 years old. I asked my father, who had never invested in shares, to take me to see a stock broker where I made my first investment of $200 in a company called Transport Nelson Limited.
“I studied the weekend newspaper to keep tabs on my investments and I was lucky enough to sell some of my holdings prior to the 1987 share market crash – not because of any great insight but because I needed the money for university studies! It was these years that really built up my early investing experience and set me on the path to become a professional investor.”
Tell us a bit about managing the Australian Shares Fund at Australian Ethical.
“I joined Australian Ethical in 2004 initially as an investment analyst based in Canberra before taking over portfolio management responsibilities for the Australian Shares Fund [referred to in this article as the ‘Fund’] in 2008.
“This was also around the same time my eldest daughter Lizzy was born. A lot has happened since then – I now have two girls, aged 9 and 10, who advise me on most aspects of life. Meanwhile, I’ve seen how Australian Ethical has also grown and flourished as a company.
“The Fund invests in a portfolio of 65 companies predominantly listed on the ASX, which are selected on the basis of their social, environmental and financial credentials in combination with having favourable investment fundamentals.
“All of our funds comply with the Ethical Charter – including the Australian Shares Fund, which has remained unchanged since the Fund’s inception back in 1994. The Charter screens out investments that cause unnecessary harm to people, animals, society and the environment and proactively seeks investments that have positive impacts.
“The obvious exclusions are gaming, oil and gas, coal, weapons and tobacco while the positives include companies that promote efficiencies or bring human happiness with information technology and healthcare investments generally satisfying these tenets of the Charter. We attribute the long term success of the Fund to the consistent application of ethics in combination with successful small cap stock picking.”
How is the fund managed?
“It has a 60/40 split with 60% invested into small companies, which are defined as companies outside the ASX 100 Index which generally offer investors superior capital growth potential. The remaining 40% of the portfolio generally focuses on the ASX Top 100 companies which provide a stronger dividend yield and better capital security to the overall portfolio.
“The Fund invests in companies that make a positive and measurable impact in society – for example Cochlear who supply hearing devices and Resmed who develop devices and software to help treat and manage sleep apnoea.
“But we also invest in new emerging technologies like immunotherapy drug developer Immutep which hasn’t changed the world yet, but if things go to plan they will make a positive influence on the world in the treatment of cancers.
“It’s the smaller company investments where we’ve added value for investors historically and where we expect this to continue into the future. We particularly like companies that have strong intellectual property and global growth ambitions. After all, some of our ASX 100 companies were smaller companies at one stage, so investing at the right point of the company’s growth cycle will be more profitable when it comes to capital growth.”
How do you manage to balance consistent good returns and low volatility?
“We’re disciplined investment managers and not afraid to back our judgement on the buy and sell decisions. Our portfolios are strongly represented in healthcare and infrastructure which are typically more defensive businesses and in-part explains some of the lower volatility measures exhibited by the Fund. It’s also important to note that the majority of our out-performance comes from successful small company stock selection.
“The Fund is underweight in consumer discretionary and consumer non-discretionary sector investment – largely due to concerns about alcohol supply and supply chain transparency. We’re also zero weighted in mining and mining services based on fossil fuel exclusions and environmental sustainability concerns and our portfolios are overweight in service orientated companies, with a focus on more intellectual property orientated industries which by nature are usually internationally focused companies.
“It’s the exclusion of certain sectors, our overweight position in healthcare, IT and utility sectors combined with a strong emphasis on stock selection which really gives our portfolios unique risk characteristics when compared with the market and other funds.”
How has the universe of ethical shares changed?
“In the last ten years, there’s been a growth in new economy sectors which has created a real opportunity set for Australian Ethical. We’ve seen intellectual property related stocks in software, medical devices, pharmaceuticals and internet companies assume much greater relative capitalisations in equity markets globally, while some manufacturing, industrial and commodity related companies are commanding less importance in market indices.
“These days, consumers and businesses are very well informed and actively differentiate products and services based upon key feature sets with intellectual property or smarts gaining more importance in decision making. For example, with software running many facets of our lives today, buzz words such as SaaS [i.e, software as a service], big data, machine learning and artificial intelligence have made their way into the modern vernacular.”
How do you stay on top of small cap opportunities?
“We’ve got a strong and experienced team of investment analysts who focus their attention on information technology, healthcare, utilities and financial sectors. I work closely with our sector specialist analysts attending a large number of face to face company meetings each year.
“We also foster close relationships with our investee companies, which means we’re not only learning about the company and industry, but also gaining insights to important information on competitors, suppliers and industry conditions. Our domestic equities teams are very experienced and we really pride ourselves on fundamental analysis and active stock selection.”
What are your thoughts on the concentrated Australian market in terms of the big banks and resources and how is Australian Ethical different?
“The Australian market has long been dominated by resource and banking stocks and this broadly remains the case today. We screen out two of the big four banks and we don’t currently invest in any mining or mining services companies and as I’ve mentioned, we also hold limited exposure to consumer discretionary and non-discretionary stocks.
“Our core differentiator is definitely our ethical screening process and this helps us stand out from the broader market. We’re really proud to be different from other managers and broader market indices with our unique focus on healthcare, information technology and renewable energy investments.”
August 2017 marked another 10 year anniversary, the start of the global financial crisis. How did the Fund maintain its strong performance throughout this period?
“Our Ethical Charter’s positive and negative screens provided a shield from the brunt of the GFC’s sell-off. This was largely due to the Charter’s guidance towards defensive sectors like healthcare and utilities and restricted exposure to cyclical industries. In addition we also benefited greatly from favourable stock selection throughout the period.
“Ten years on, we’re incredibly proud that the Fund has consistently delivered strong performance across all market conditions. We think that the Fund remains highly relevant for investors seeking capital growth through an exposure to Australian shares with a longer time frame and a higher risk tolerance.”