Another Australian-based global equities player has earmarked NZ investors for attention after inking a distribution deal with Heathcote Investment Partners.
Fairlight Asset Management follows a long line of other Australian global equities specialists – notably Platinum, Magellan and Antipodes – tackling the NZ market.
And Antipodes before it, Fairlight has a link to the trailblazing Platinum. Prior to co-creating Fairlight in 2017, portfolio manager Ian Carmichael served four years at Platinum, which also spawned Antipodes founder, Jacob Mitchell.
While Platinum may have been the inspiration for a new generation of Australian-homed international share investors, its offspring are not mere clones.
Fairlight, for example, focuses on the small- to mid-cap (SMID) niche that Carmichael says has a long and distinguished history of outperformance relative to the large global companies sector.
“There’s over 100 years of data that shows that the smaller companies sector outperforms over the long term,” he says. “The factor is persistent and we have a high conviction that it will continue.”
Carmichael says intuition suggests the SMID sector should outperform the big end of town given that smaller companies have a greater capacity for “longer, faster growth” while also prone to pricing anomalies in an under-researched sector.
Small, of course, is relative. Fairlight restricts its investment universe to developed markets in the US, Europe and Asia (principally, Japan, Hong Kong and South Korea), which translates to companies valued between US$500 million and US$20 billion.
“Our average company size in the portfolio is higher than $10 billion,” he says.
The market cap limit alone would exclude most Australian and NZ large companies from the agenda. But the Fairlight selection process winnows down a global potential subset of some 5,300 firms to a core focus group of just 200 stocks.
As well as return on invested capital (ROIC) metrics – Fairlight’s favoured financial indicator – the manager also screens out ‘low quality’ stocks based on exposure to ‘macro-dependent’ forces, ESG [environmental, social and governance] filters and companies at risk of ‘single points of failure’. The latter excludes businesses involved in biotech and ‘unproven’ technology or those dependent a single client or product: those operating in winner-takes-all ‘binary outcome’ plays also miss the Fairlight starting line-up.
Ultimately, the 200 or so stocks in the Fairlight spotlight tend to congregate in just four sectors: consumer and media; light industrials; niche technology; and, healthcare.
Fairlight’s two portfolio managers (Carmichael and co-founder, Nicholas Cregan) along with analysts Will Dowd and Alvise Peggion share the stock research duties evenly. Cregan has a 17-year history in funds management, most recently as portfolio manager position with Australian boutique Evans and Partners after a long career at Schroder Investment Management.
Since 2002, the global SMID index returned about 8.7 per cent per annum against 6.8 per cent for the large cap sector – adding weight to the Fairlight thesis. But that higher SMID return has come at the necessary expense of greater volatility.
Carmichael says, however, that many Australian investors have used the Fairlight SMID fund as a complement to their global large cap exposures. A Fairlight analysis based on MSCI and Factset data shows a blend of 75 per cent large and 25 per cent SMID cap stocks boosted returns significantly (over the time period since 2002) with just a slight bump up in volatility compared to a large-cap only portfolio.
From inception late in 2018 the-now $65 million Fairlight fund returned 23.6 per cent versus almost 15 per cent for the MSCI SMID index. Before launching the unit trust, Fairlight ran the strategy as a separately managed account (SMA) for seed financial adviser groups over a year and a half.
According to Carmichael, the SMA strategy followed a similar investment trajectory.
Curiously, Australia is one of the few stock markets where large companies generally outperform smaller firms, he says.
“There’s a lot of speculative mining stocks that list on the ASX,” Carmichael says. “Most offshore small cap markets are more diversified.”
The swag of ASX mining hopefuls, though, makes it easier for Australian small cap managers to outperform the index simply by excluding the start-up resource firms.
Global small cap managers have a harder time beating the benchmark, Carmichael says, with more competition and a wider range of real businesses to invest in.
He says Fairlight remains focused on holding ‘quality’ SMID companies over the long term. The manager typically holds between 30 to 40 stocks in the portfolio, turning over about 20 per cent each year “by name” and 40 per cent by dollar value.
Currently, the fund is offered as unhedged only but Carmichael says the manager may create a hedged version if there is demand from advisers.
Last year the Fairlight fund earned ‘recommended’ status from Australian research house Zenith Investment Partners (the new owners of FundSource in NZ).
The researcher stamp of approval opens up Fairlight to a broader range of Australian advisers, he says.
Last year Fairlight joined the Perennial multi-boutique stable, which offers marketing and other services to exchange-traded fund specialist, eInvest, and fixed income manager, Daintree Capital (also represented in NZ by Heathcote).
Heathcote now has distribution agreements with nine, mainly Australian-based, fund managers.