Australian Olympian Does Best With Cash: Riskless Return

Australia’s top-performing equity fund more than tripled investors’ money in the past five years by holding a small number of quality stocks and betting against others.

Now the managers of the A$185 million ($174 million) Smallco Investment Fund have put 25 percent of assets in cash, matching the highest level since the global financial crisis and more than twice the 12 percent average since 2008.

“We are finding it harder and harder to find good quality companies,” said Craig Miller, who played water polo for Australia at the Olympic Games in 2000 and 2004 and now runs the fund with three colleagues.

Focusing on a limited number of stocks and holding cash when they can’t find bargains helped Miller, 42, and co-managers Rob Hopkins, Bill Ryan and Andrew Hokin produce the best risk-adjusted performance among Australian stock funds since April 2009, according to the BLOOMBERG RISKLESS RETURN RANKING. The fund had the second-best total return and below-average volatility in a group of 84 peers with assets greater than $100 million.

Miller said he’s been purchasing shares of REA Group Ltd. and Commonwealth Bank of Australia while avoiding mining companies because forecasting the direction of commodity prices is “a toss of a coin.” Australian policy makers last year cut interest rates to a record low in a bid to maneuver the economy through a fading resource-investment boom that helped the nation avoid recession during the 2007-2009 global financial crisis.

Market Values

Smallco Investment Manager’s biggest fund puts as much as 20 percent of its money in the 100 largest listed Australia companies, with the bulk of the assets focused on stocks with market values of A$100 million to A$500 million, according to the firm’s investor presentation.

The fund, which typically owns about 25 to 35 equities, can also hold as much as 30 percent of assets in short positions. Short-sellers borrow shares in a bet they can sell the securities and replace them for less, profiting from a decline. Miller declined to comment on current short positions.

“A concentrated portfolio of good companies is better than a large number of mediocre holdings,” Miller said. “We hold cash when we can’t identify sufficiently attractive investment opportunities.”

Valuations for small-company shares in Australia, as measured by the S&P/ASX Small Ordinaries Index, last month reached the highest level in about a year.

Stashing Cash

The fund’s cash level can grow to a maximum of 50 percent, an amount not seen since the financial crisis that began in the U.S. in 2007, according to Miller. Staying in cash and incorporating short positions into the fund help temper the wider performance swings normally associated with holding fewer stocks, he said.

The Smallco Investment Fund had a risk-adjusted return of 21 percent in the five years ended April 11. It had a volatility of 13.2, compared with the average of 15.6.

Bloomberg’s risk-adjusted return is calculated by dividing total return by volatility, or the degree of daily price-swing variation, giving a measure of income per unit of risk. The returns aren’t annualized.

Smallco grew from two permanent staff managing A$30 million when it started in 2000 to five people running A$445 million for clients at the start of this year, Miller said. Hopkins owns almost 59 percent of the firm and Ryan the rest, the investor presentation showed, with Miller and Hokin sharing in profits.

‘Good Performance’

The Smallco Investment Fund gained an annualized 31 percent, unadjusted for risk, in the five years through the end of March, according to data compiled by Bloomberg.

“It’s had a good performance, particularly over the last five years,” said Chris Gosselin, the Sydney-based chief executive officer and founder at, which tracks more than 400 Australian funds. “They’ve done pretty well and Rob has been around a long time.”

Hopkins, 58, is a former civil engineer who founded the company with Ryan, 49, after leaving his post heading small-companies research at Macquarie Group Ltd., Australia’s largest investment bank. Miller came aboard in 2005 and Hokin, 42, joined in 2007 from a job as head of banks research at Macquarie.

“For someone who needed to be intellectually challenged, the banks are boring,” Miller said of Hokin. “He has a very quant-heavy background like most of us and that’s why he’s good.”

Meeting Management

Smallco’s strategy places meetings with management among the most important factors when analyzing a stock and employs a subjective ranking for a company based on its competitive advantages relative to its peers.

The managers look for strong cash flow, return on capital, earnings outlooks and leadership. One company that fit the bill was Magellan Financial Group Ltd., a fund-management firm whose shares they bought at about 80 Australian cents apiece four years ago and still own after its price rose to A$13.52 on March 28, Miller said. His team was confident in the company’s competitive position under the stewardship of Chief Executive Officer Hamish Douglass and remains so as operating profit and assets have surged.

“We tend to be very conservative with our quality ratings,” Miller said. “That means that your volatility is reduced, as you generally find it’s the lower-quality stocks that fall the most when markets fall.”

REA, OzForex

REA Group, which owns two of Australia’s most widely used residential and commercial property websites, in February reported profit for the first half that topped analysts’ estimates. The stock comprises about 6 percent of the fund, which typically seeks to pare holdings when they climb above 7 percent, according to Miller.

His team bought OzForex Group Ltd. at its initial public offering in October, when the online foreign-exchange company raised about A$440 million at A$2 per share. The shares closed April 11 at A$2.93, a 47 percent gain. Commonwealth Bank, the country’s largest bank, in February reported a record first-half profit.

Valuations on the S&P/ASX Small Ordinaries Index climbed to about 22 times estimated profits for the current year last April, a record high, according to data compiled by Bloomberg. The gauge now trades for a multiple of 17, still higher than the average price-earnings ratio since 2005, the data show. That compares with less than 16 for the Standard & Poor’s 500 Index, a benchmark for big U.S.-listed stocks.

Coinciding with the fund’s elevated cash level in February was an Australian economy with an unemployment rate at its highest mark since 2003. The central bank has kept its benchmark interest rate at a record low since August to shield growth.

“In the short term, we are cautious about the local economy and hence the equity market,” Miller said.

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