Selector Funds Management is a high conviction Australian equity manager with a strong track record in picking stocks over more than a decade. In its latest quarterly report, Selector says that what ultimately gives it the conviction to invest in a company is confidence in the chief executive and key management team.
The Selector High Conviction Equity Fund is rated number one in Mercer’s survey of 89 long-only Australian share funds for returns over one, two, three, five and seven years.
Over 10 years it is ranked number three and over 12 years it is ranked number two.
Over the 12 months to the end of December it returned 39.2 per cent (35.3 per cent net of fees), compared with the median manager return of 24.5 per cent in the Mercer survey and the 23.6 per cent growth of the S&P/ASX 200.
Over the past three years, the fund has returned an average of 22.7 per cent a year, compared with the index return of 10.3 per cent a year. And over the past five years it has returned an average of 18.9 per cent a year, compared with the index return of 9 per cent a year.
During the December quarter, the biggest contributors to the fund’s returns were its holdings in IOOF, Aristocrat Leisure, CSL, James Hardie Industries and Technologyone, a software as a service provider.
The fund’s top holdings in December were Aristocrat Leisure, James Hardie Industries, Altium, Seek, ResMed, Cochlear, Infomedia, Flight Centre, Nanosonics and CSL. Those 10 stocks make up 48 per cent of the portfolio.
Its big sector holdings are software and services, which makes up 21.5 per cent of the portfolio, consumer services (20.3 per cent), healthcare equipment and services (16.3 per cent) and materials (7.1 per cent).
On the subject of stock selection, Selector says: “Investors are left with the task of connecting the dots every six months when new financial information comes to hand. But with so much happening beneath the surface, it is difficult for outsiders to fully appreciate what is really going on.
“The long-term wellbeing of a business is often determined by more than just numbers.”
In reality, financial results are but a snapshot, capturing a point in time.
“Although we are continually refining our investment approach and views on companies within our investable universe, what has remained central to our philosophy since day one is the importance we place on having a high-quality management team that we deem trustworthy.”
Selector says ideal leaders have two key attributes. First, shareholders expect business leaders to set the right example and deploy their capital in a sensible and disciplined manner. Leaders who approach the task as if it were their own capital are far more likely to make sensible decisions.
The second attribute entails an assessment of the team, both as individuals and as a collective unit, all driving towards a common goal.
The report cites a Harvard Business Review study that identifies five stages of the CEO life cycle: the honeymoon, when change is seen as an indicator of success; the sophomore slump, when the focus is on unmet expectations; the recovery, when the strategic direction and internal dynamics are established; the complacency trap, when stagnation sets in; and the golden years, if the CEO lasts long enough.
Selector says a2 Milk’s former chief executive Jayne Hrdlicka never recovered from the sophomore slump. Brought in as a change agent, she delivered strong revenue growth and market share gains, but when the market pushed back against plans for higher investment spend, the board lost its nerve.
“The CEO life cycle analogy would suggest that the CEO and the board were not on the same page,” Selector says.
In contrast, Selector points to CSL chief executive Paul Perreault, who is in his seventh year in the job and “shows no sign of complacency”.
“Slowing top-line growth and sharemarket pressure to return capital were prominent issues when Perreault first took on the role. Yet his ability to obtain board support, augmented by a deep commitment to research and development spending, has created a step-change in business longevity and success.
“Heading into his seventh year in the role, Perreault is showing no signs of complacency. CSL has now become a leading pharmaceutical company that has state of the art manufacturing facilities and plasma collection centres. Further investment in creating a broader R&D portfolio across various medical needs highlights the commitment from Perreault and the executive team to reinvent the business in order to succeed long term.
“We look favourably at CEOs who are not afraid to invest for the long term, do not react to market pressure and are focused.”