Investment Policies

Investment Philosophy

The investment philosophy of the Company is summarised by the following broad principles:

• The Company seeks to buy and hold shares investments for the medium to long term.
• The Company primarily seeks to invest in well-managed businesses with a profitable history and with the expectation of sound dividend or distribution growth.
• The Company will construct a diversified portfolio of investments and upon the merits of individual investments rather than market or general economic trends.
• The Company invests as a long-term investor and sells only on the basis of a fundamental change in the original investment case.  Such a fundamental change might be a new and unknown management team, the emergence of a new competitor, a change in industry dynamics or a diversification into a new business sector.
• Whilst the Company’s investments are largely Australian, the Company may from time to time invest up to 20% of its assets overseas.

Investment Strategies

Coverage of all market capitalisations including small capitalisation companies The Company does not segment the universe of investments by market capitalisation, and eliminate investments from consideration because a company’s market capitalisation is “too big” or “too small”.  The Company has earned attractive returns from large and small capitalisation stocks.

Significant undervaluation often occurs among smaller market capitalisation issues which are largely neglected by investment analysts, because the brokerage income that an analyst’s recommendation could generate would be too small to cover the analyst’s costs.  Academic research has indicated a long-term statistical association between smaller market capitalisation and exceptional investment returns.  Small cap bargains are another way that the company tries to gain a long run investment return edge.

No index We do not attempt to eliminate “tracking error”, the extent to which portfolio returns vary from an index, by having the Company’s portfolio mimic the stock and/or industry weightings of, say, the S&P ASX 300.  Empirical data indicates that adding value above index returns is not easy.  We therefore focus on selecting stocks that seem likely to generate above-market returns.  We think shareholders will have more money in 10-20 years if we focus on stocks with robust prospective return characteristics rather than attempting to structure our portfolio to track the year-by-year returns of an index.

Stay as fully invested as possible Empirical research has shown that 80%-90% of investment returns have occurred in spurts that amount to 2%-7% of the total length of time of the holding period.  The rest of the time, investment returns have been small i.e. you need to be invested to win.  We believe that value-oriented stocks are likely to beat the returns from cash over the long term.

Keep turnover of the portfolio low Low turnover of the portfolio results in longer average holding periods with greater deferral of taxable gains and higher after-tax returns than if equivalent pre-tax returns were realised with greater portfolio turnover.  In addition low turnover reduces brokerage costs as a percentage of the portfolio’s value and the impact that buying and selling can have on prices.

Permitted Investments

The Manager is permitted to undertake investments on behalf of the Company in accordance with the Management Agreement.

The Manager is permitted to invest in the following on behalf of the Company:

1. Shares, stock, rights or other securities;
2. Warrants and options to purchase any investment and warrants and options to sell any investment which is a permitted investment.
3. Interest bearing deposits, bills of exchange, promissory notes or other negotiable instruments;
4. Debentures, unsecured notes and bonds of a corporation;
5. Any securities, bonds, notes or other interest bearing debt issued by any Government;
6. Interests in managed investment schemes (both registered and unregistered); and
7. Any other financial products which the Manager may use in the management of the Portfolio in accordance with its Australian Financial Services Licence.

Borrowings

The Company may borrow on either a secured or unsecured basis to purchase additional Permitted Investments, or to provide additional working capital for the Company.