Mercantile Mutual sticks to its guns
The search for success in local funds management is naturally linked to success within the Australian equities sector. Mercantile Mutual believes the secret of its success lies in taking the road less travelled. Jason Spits reports.
The search for success in local funds management is naturally linked to success within the Australian equities sector. Mercantile Mutual believes the secret of its success lies in taking the road less travelled. Jason Spits reports.
While fund managers have seen success in recent years there has always been a split between value and growth managers, with each taking advantage of prevailing conditions in their own way.
This has worked short term but leaves managers stuck at either end of the man-agement spectrum. So when conditions become less favourable, rapid readjustment is necessary. This is not a route Mercantile Mutual’s Peter Mouatt is prepared to take.
Mouatt is executive director of Australian equities at Mercantile Mutual, a team which won the Australian equities category at the recent Money Management Fund Manager of the Year awards.
Mouatt says while they are pleased with the award, the twelve months to December 1999 will not be marked as a red letter year for the Australian equities team.
"It was not a great year but the small caps areas was good. We didn't get resources right last year, they had a strong year and we were underweight," Mouatt says.
"However we have easily picked that up this year as resources have been smashed. It goes back to just looking at long term as the main issue."
Mouatt says it’s all a matter of style. Not content to settle with a value or growth management style the Mercantile Mutual team took the middle ground and are content with that decision.
"We differ in our equity style in that for some time the Australian market has been split between growth and value managers. We see value by placing ourselves in the middle but not trying to achieve a blend of both approaches," he says.
"The reason for this decision is if we chose to be locked into either one of those styles we would become stuck with the cyclical nature of the markets and the see-sawing results which go with that."
The model Mercantile Mutual has chosen to adopt is a price for growth which Mouatt says allows for agile portfolios to make the best of changing conditions.
“Some fund managers have taken on the clothing of price for growth but don’t go about it in the same way we do. They are dressing up to be in the middle without a model which says they are a price for growth manager.
“We have adopted a quantitative model which looks at price for growth over a five year period compared with price to earnings. It is a tradeoff which allows the buy-ing of growth inexpensively.”
However this process is undergoing some readjustments at the moment with the addition of a scorecard for the qualitative dimensions of picking stocks.
“We felt the need to allow analysts to judge the state of management and its impact on prices and to make a more rigorous examination of the more subjective ele-ments present,” he says.
“We are certainly active managers with major deviations from the index at times, based on bottom-up stock selection.”
The quantitative model accounts for 60 per cent of the decisions made while the qualitative model brings clarity to those selections.
At the same time two sets of earnings figures are drawn out, the market consensus and those based on inhouse research, designed, according to Mouatt, to see if the Merc team adds value.
“Since the market consensus figures are general knowledge, the difference between the two sets show the measure of opportunity and potential,” he says.
“It is an intuitive process and we are always checking the consensus set to make sure our figures are right, whether we are on top and did we understand that stock and the company.”
This is an almost historical process, dating back to the sixties. It was first put into a form that is still recognisable today, by industry veteran Alan Geddes.
Five years ago the team added the quantitative model while 18 months ago the in-vestment time frame was extended from two years to five years to deal with the growing technical face of the index.
“At the heart of the market is change,” says Mouatt, “And the question is asked whether old valuation techniques are worth it. The answer is firm. There are no new paradigms.
"The philosophy is still unchanged since the start of Merc and stretches way back to Alan if not further. We don't want to be dinosaurs and so are continously updat-ing the processes but the fundamental philosophy is still unchanged.”
Another area of stability is the actual stock selection with over 250 stocks held in portfolios and over 400 company visits conducted by analysts to choose those stocks. These add up to $6 billion in Australian equities and over half a million in-vestors tapping into the work of Mouatt and his team.
“We use a program of company visits and respond to market movements with a re-vision of earnings in a continuous dynamic process, with controls to ensure a di-verse range of stock picks,” Mouatt says.
“These are discussed at daily and weekly meetings where analysts run through the stocks and at a monthly meeting which sets the model portfolio.”
While not unique Mouatt believes the difference between the Mercantile Mutual Australian equities team and other players lies in a mix of independence, account-ability and responsibility.
“We have a flat structure here and we need motivated people who want responsi-bility and accountability for a portfolio. It motivates professional people unlike some structures where the ownership of decisions is lost,” he says.
“I can point to any team member and say they are the person who made that deci-sion. The attachment to the portfolio is higher but it provides a good balance be-tween a team performance and individual accountability.”
In fact Mouatt says the team is in recruitment mode at the moment due to normal turnover and is always on the look out for those with strong analytical capabilities and similar investment philosophy.
“We want diverse opinion and an intensity of debate but no clones. We take a par-liamentary view but in the end it still reflects the house view of coherent perform-ance and style with individual responsibility,” Mouatt says.
At the same time he is happy to admit that other changes are planned for this year with growth occurring organically. It is an evolutionary process, he says, in line with what has already been achieved.
Part of this includes re-jigging the portfolio management unit to ensure comfort-able growth with resources as well as pooling the small caps into larger discrete accounts for improved management.
“These are all internal housekeeping issues We are looking further out with ideas but it is one step at a time. The crucial thing is the long term performance stakes,” he says.
He also says while there are no specific targets for funds under management within the Australian equities area the prospect of growth would be well-received.
“Over the past three years growth has been strong. We do expect a slowdown but with the combination of people, philosophy and process we still expect growth.”
And it is this growth he hopes will lead to a repeat performance at next year’s awards.
“It was a great honour to win. We’d love to do it again, especially as we had some very worthy competitors,” he says.
“It is good for business creation, it is good for investors and it is good for our staff because people like to work for winners.”
Team Members:
Peter Mouatt - executive director — 5 years with Mercantile Mutual
John Morgan - deputy director - 14 years with Mercantile Mutual - large cap and industrial stocks
Victor Pitrans - 6 years - resources.
Ben Griffiths - 6 years - small caps
Brian Eley - recent recruit from Patterson Ord Minnett - small caps
Jeremy Cox and Michael Courtney - research and deal execution.
Stock Selection:
In picking stocks in the Australian equities asset class Mouatt says the team are not index followers but tend to deviate on a regular basis.
This can sometimes lead to unusual choices which usually t
AUTHOR
Jason Spits
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