Tower keeps building on its growing reputation

Tower Asset Management's forte in Australian equities has helped it win $715 million in new money to manage lately.

Tower Asset Management's forte in Australian equities has helped it win $715 million in new money to manage lately. Zilla Efrat examines the style that has helped this fund manager consistently turn in solid investment performances.

There's a lot happening at Tower Asset Management these days.

For one, it has a new name and logo, the result of a new corporate branding program ahead of its parent Tower Financial Services Group's demutualisation and listing later this year.

For another, it has won several new customers over the past 12 months, thanks to its strong investment performance.

In addition to the $2 billion it manages for the Tower group, it has attracted more than $700 million from external funds from the likes of IPAC Strategic Investment Trust and the Military Super and Bene-fits Board of Trustees, as well as the pension funds of Email, Good-man Fielder and Foster's.

Van Eyk Research senior analyst Angela Ashton says: "Tower has out-performed the market for a long time, but over the past three years, its style has particularly suited the market."

This style has also helped it become the most consistent fund manager over the seven years to April, according to the William M Mercer wholesale survey.

Chief executive Derek Goodyer says: "Those who like to put managers in a box may find us difficult. We change our composition from time to time, depending on how we see the market."

However, he adds: "We do not want to be classified as either a growth or value manager, but if you pushed me, I would say that we have a bit of a growth bias."

Unlike many of its rivals, Tower also adopts both a "top down" sector approach and "bottom-up" stock selection process.

"Others may buy a company because it looks cheap, but we put every-thing into perspective after examining the broader economic environ-ment and the prospects of the industry in which it operates," Goodyer says.

"Over the longer term, we add value through stock selection two thirds of the time and through sector selection one third of the time."

According to Ashton, Tower tends to have a "leader" approach to Aus-tralian equities, holding positions largely in the top 50 stocks.

"While it is active at the edges, the core position is held for a while. This means its turnover is low at about 30-40 per cent com-pared to the average for fund managers of about 65 per cent," she says.

A typical Tower portfolio contains 35-45 stocks. No more than 10 of these would be outside the top 100 companies and less than 10 per cent of the portfolio's market value would be in Small Caps.

"Portfolio risk is minimised by strictly observed investment guide-lines. In particular, a minimum of 15 stocks must be held and any stock holding is limited to 5 per cent above its index weight," Good-yer says.

"We take small positions rather than large bets. We believe that over time, we will do well if we get more than half the small bets right. If we get a large bet wrong, we can shoot ourselves in the foot."

Tower is always on the lookout for stocks with a clear earnings growth strategy and a strong market position in their businesses. Its ideal company would be one that has monopoly pricing power in a mar-ket with no competition, good management and no major threats.

Ashton says Tower does not do a lot of fundamental research or tyre kicking, which Van Eyk Research views negatively.

However, Goodyer says: "Our skills do not lie in doing in-depth work on individual companies. We would not visit, say, BHP and a do a 50-page document.

"We will attend brokers functions in the city but we will not walk around a mine in Western Australia in gum boots.

"Everyone does that. Given the large cap stocks we deal in, we would not be able to get additional information doing that. We know who the good analysts are and we call them up when we need to."

Goodyer adds: "Our investment process is quite clinical. It helps us to be ruthless and to get out quickly if something goes wrong.

"We don't have a lot of formal meetings with formal, typed out pres-entations.

"We do have a weekly sector meeting and a more detailed monthly meet-ing. The rest of the time, our people talk across the room or wheel their chairs around for informal meetings."

Tower's top stocks at the end of March included Telstra, News Corp, Brambles, Lend Lease, Westfield and the big four banks.

Last year, it was more defensive in the wake of the Asian crisis, in-vesting in blue chip stocks. This year, however, renewed confidence has helped it shift its portfolio a little more towards small cap and cyclical stocks, including Smorgan Steel, CSR and Amcor.

Believing that its competitive advantage lies in domestic equities, Tower outsources offshore equities to a range of specialist managers.

They choose stocks in each region while it allocates money to the re-gions based on its top down, macro-economic views of these.

Tower's property investments are in both listed securities and direct property, but Goodyer concedes that this has been a poorer performing area for the group in the past.

Nonetheless, he says things are on the up following a recent revamp of the property section. Steps taken include a management change, ap-plying similar disciplines to those on the equities side and reducing the number of stocks in the portfolio.

Tower has also sold some properties and will be replacing these with bigger parcel sizes.

When it comes to fixed interest investments, Tower adopts a top down approach, which involves sifting through the macroeconomic factors to arrive at a medium to long term view on interest rate directions.

It has the ability to take large sector bets, particularly between government and semi-government bonds, and it is always invested in high quality instruments rather than the junk bond part of the mar-ket.

Goodyer says that while it is benchmarked to the WDRA Composite Bond Index, Tower is not a "benchmark hugger". And, unlike many other fixed interest managers, Tower does not restrict investment to arbi-trage opportunities.

"Instead, sector and duration bets are taken based on the cyclical nature of the markets as well as on the occasional structural shifts in the market."

Tower appointed Fischer Francis Trees & Watts Inc. as its offshore bond managers in 1994 and it treats overseas fixed interest as a separate asset class.

This is because of distinct risk and return characteristics. "The correlation between the Australian and overseas fixed interest mar-kets has historically been low although it has increased in recent years," Goodyer says.

Tower sees this diversification benefit, plus the lower volatility of returns on overseas fixed interest, as a way to lower risk over the longer term.

According to Ashton, Tower makes use of more derivatives, especially options, than most other active managers.

Tower uses derivatives largely to protect investments during adverse market swings, but it will also use them to change its asset allocation quickly and effi-ciently, and to control cash flows and minimise transaction costs, Goodyer says.