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MDF Global Limited Q&A
MDF Global Limited Q&A

Fundie’s strategy that saw his fund grow when indexes fell

If ever an investment group embodied the phrase ‘an oldie but a goodie’, it’s Hancock & Gore – from its roots as a blossoming sawmill business in 1867 to its market-outperforming status in modern times.
If ever an investment group embodied the phrase ‘an oldie but a goodie’, it’s Hancock & Gore – from its roots as a blossoming sawmill business in 1867 to its market-outperforming status in modern times. Listed in 1904 on the Brisbane Stock Exchange in an earlier iteration, the current Hancock & Gore (ASX: HNG) has built its reputation on a range of on-balance sheet investments in ASX-listed companies and private equity deals, as well as a funds management business. Its High Conviction Fund – a micro cap fund focused on sub-$300 million companies and currently in the process of being listed on the ASX – has consistently outperformed the market since its 2007 inception. Net of all fees, cumulative gains since inception stand at 180%, or 8.7% per annum (Small Ords 6%, All Ords 87%). In FY22 alone, the fund gained 13.3% while the All Ords lost -7.4% and the Small Ords lost -18.2%. So, what is the strategy that has proved so effective for the fund? “We buy businesses; we don’t rent them – we’re long-term investors,” H&G director Joseph Constable told investors during Reach Markets’ recent Meet the Fund Manager session.
“We, as a high conviction fund, are investing in 15-25 micro caps, and these are uncorrelated, usually at least over the long term, to the market. They have their own sets of catalysts.”
The portfolio manager said the fund invests in a unique portfolio of companies with low-to-nil broker coverage, adding that a positive to the micro cap space is that it is “dominated by managers and directors that have skin in the game”. The fund has a firm belief that, despite the perceived risks associated with micro caps, a concentrated portfolio of thoroughly researched micro caps outperforms over the long term. Demonstrating their hands-on approach, Mr Constable said they visit all the companies’ operations, know most of the employees and delve deep into the businesses in a way that is not feasible with large caps. He said he believes in a high level of engagement with management, joining boards when necessary to steer the company in the direction they believe is best, and keeps the fund nimble to “pursue deep value opportunities where other people just aren’t looking”. Avoiding value traps is crucial too, said Mr Constable, noting that “anyone can find cheap metrics” but sometimes “nothing is ever going to unlock that value”. The portfolio manager also flagged an aversion to companies with leveraged balance sheets and high debt levels – an approach he credits to his portfolio’s resilient performance in FY22. As for what the future may hold, Mr Constable predicts heightened volatility will remain following the battering of markets by macro events, and says this combined with a brutal June tax loss selling season has resulted in a “stock pickers market”. Click here to watch the highlights or full replay of Joseph Constable’s Meet the Fund Manager session; or click here to be booked into the next session, featuring Merchant Funds Management’s Andrew Chapman. Past performance is not a reliable indicator of future performance.
Sources:    

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