Bringing back that ole boutique magic

Since its start-up in Melbourne as a boutique fund manager in 1994,Portfolio Partnershas always been a specialist manager with a strong focus on Australian equities and fixed interest.

Founded by Keith Ince and David Slack, it was bought byNorwich Unionin 1998, and eventually — as so often happens when boutiques get snapped up — the founders left.

What was, however, a little unusual was that the founders stayed for more than the handover period. Ince left in January 2001, three years after the acquisition, and Slack retired only last year.

Portfolio Partners grew over those years into a significant mid-sized fund manager, losing its boutique status on the way.

Interestingly, the current managing director, Craig Bingham, appointed in 2001, still sees the company as a boutique manager and has brought back some of the small and nimble spirit with some innovative products.

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The fund manager recently launched a small equity fund that has a cap on the funds raised and uses very different investment styles. The Elite Opportunities fund invests in companies about to be listed, or just listed on theAustralian Stock Exchange. The cap will be set at about $5 million of funds under management (FUM).

Bingham describes this fund as a satellite to the traditional small cap fund that the company operates.

“It has given us the opportunity to run a boutique fund manager within a traditional fund manager operation,” he says.

There are plans for more satellite funds covering some different approaches to building a group of stocks into a fund.

In December last year there was a further change to Portfolio Partners ownership. The fund manager now reports to UK-based Aviva’s fund management’s arm, Morley Fund Management.

The Australian operation will still keep its local brand, Bingham says, but the company’s strategy now has to be approved by Morley.

“We run the operation here and develop the strategies for growing Portfolio Partners, but that has to be approved by London,” he says.

“The investment team is still based here in Australia, so there is no real change.”

Reporting to a UK fund manager fits in with Portfolio Partners’ desire to be a specialist manager in Australian assets.

Bingham says the new ownership structure will open up the possibility of sourcing product from Morley, as well as working together on research and investment processes.

However, Portfolio Partners is specialising in offering products for Australian equities, fixed interest and listed property trusts.

The company’s approach into investing in Australian equities can be described as GARP (growth at reasonable price).

But Bingham says the investment style also takes in some other factors, so it is not true to label in a traditional sense.

The style is a bottom up, research-focused process in a risk-controlled framework.

“We are looking for jewels in that core process that will generate a return of 15 per cent plus,” he says.

“These will be companies where the longer-term earnings capability is not reflected in the current share price.

“Our valuation discipline aims to ensure we invest in these companies when the market is overly pessimistic and sell when it is overly optimistic.”

The research process has given the fund manager a good insight into good corporate governance.

A few months ago, Portfolio Partners released its corporate governance policy guidelines, which defines how the fund manager will vote on issues such as director remuneration. The policy states clearly if the proposals do not meet the guidelines, then Portfolio Partners will vote against the motion.

Bingham says the move shouldn’t be seen as a threat to boards, but as a way of moving towards acceptable goals.

The fund manager’s approach to researching companies has also got tougher. It recently hired the people who teach interrogation techniques to the Federal police to talk to the research analysts.

“It has given us insights into managements that other fund managers haven’t found,” Bingham says.

“We try to do things outside the norm to make some difference.”

The fixed income team focuses its research on understanding Australian and global economic trends, and the views of central banks.

“We are traditionally a duration manager,” he says.

“We analyse the trends and look at what the banks will do with their balance sheets.”

Bingham says the fixed interest team invests conservatively, rather than take active positions.

The investment strategy for listed property trusts (LPTs) is similar to equities, with an emphasis on active management and looking for mis-pricing opportunities.

“We focus on bottom-up stock selection that seeks to identify LPTs that are mis-priced relative to the relationship in which they normally trade against the broader LPT index,” he says.

Compliance is seen as a major issue at Portfolio Partners, Bingham says.

When he took over as managing director, a major review took place and a few issues cropped up.

“They were minor, but they added up,” Bingham says.

“We now look at every team and 10 per cent of bonuses are linked to compliance. Every breach adds up to 20 per cent.

“In the first 12 months, we reduced bonuses by 68 per cent.

“Each year we raise the hurdle a little more, but our bonus situation has returned to a more normal situation.”

Bingham says the new culture at Portfolio Partners has the staff working as a team to be the best fund manager in Australia.

“We have a saying, ‘look after the client, look after each other and if you do that well, that will look after the company’,” he says.

“If you look after the client, you have a healthy business.”

Bingham says the key is translating those aims into reasonable objectives.

The company has always been a wholesale and retail manager.

However, Bingham says there is a push to gain extra retail sales by becoming listed on a number of platforms.

“We have targeted platforms that have a sustainable model,” he says.

“We identified about 12 opportunities and we have been listed on seven platforms. We want to achieve our target gradually and smartly.”

The aim is to be on about 12 platforms in the next 15 months and Bingham admits they may go for a few more.

“We will not be walking away from our institutional business,” he says.

“We have just diversified our growth through platforms.”

Portfolio Partners is aiming for $17 billion of funds under management, with 60 per cent coming through external platforms. The company currently has $9.25 billion of funds under management.

“When we achieve our funds under management goal, we will still be a specialist manager in Australian assets,” he says.

Vital Statistics: Portfolio Partners

Established:1994

FUM:$9 billion

Staff:70

Ownership:Morley Fund Management, UK

Key Figures:Managing director, Craig Bingham; head of diversified funds, Davina Machin; head of equities, Glenn Hart; head of fixed income, Lance Pupelis.

Products:Portfolio Partners manages a range of Australian equity, listed property, fixed income and diversified unit trust products.

Investment expertise:Portfolio Partners specialised in the active management of Australian assets. Since its inception in 1994, the company has developed a strong reputation as experts in the areas of Australian equities and fixed income.

Investment style:Australian equities - Actively manages with a bottom-up, research-focused approach based on fundamental valuation analysis. It is a GARP (growth at a reasonable price) manager, however, stock selection is not restricted by a style definition. Fixed income - Actively manages a range of fixed income securities while carefully controlling risk. Diversified trusts: Takes a simplified approach to asset allocation. For diversification and risk benefits, the allocation to international equities and listed property is maintained at, or very near to, benchmark levels. Management of the international equities component is outsourced to an industry specialist.