Tag: Australian Market
This is the fourth portfolio manager change on this strategy in four years. In early
2019, Devon announced it was changing the portfolio manager to Mark Brown from Nick Dravitzki. Prior to taking the portfolio manager role, Brown had been the chief investment officer at Devon. Dravitzki had been the portfolio manager on this strategy since 2017 following previous portfolio manager Robertson’s ascension to the key business management role. This level of portfolio manager change on a strategy that allows significant flexibility for the key decision-maker rarely leads to good outcomes in the short to medium term, even with an experienced team.
The investment process seeks to identify companies in the NZX 50 and S&P/ASX 200 indexes that have the ability to generate strong returns on invested capital and achieve good cash flow expansion or have unappreciated catalysts for revaluation. The strategy allows for a portfolio of just 10-15 stocks, so the fund carries significant stock- and sector-specific risk, which may result in greater volatility than more-traditional strategies. In addition, the portfolio manager has a high level of discretion and can allocate 0-100% to New Zealand stocks, 0-100% to Australian stocks, or 0-100% to cash. Historically, cash levels have often been in the 20%-30% range but have been lower since mid-2020. The portfolio manager also has the flexibility to short-sell stocks (though we’ve rarely seen it used) and invests outside Australasia.
Since inception, the strategy’s returns have been largely lacklustre, which is not entirely unexpected given the difficulty in getting cash levels right and the portfolio manager changes.
Devon Alpha has some interesting characteristics, but the numerous portfolio manager changes constrain our enthusiasm.
Devon seeks to identify Australasian companies with the ability to produce strong returns on invested capital. Devon generates investment ideas through its fundamental research process and draws on its members’ extensive experience. On-the-ground research is an important part of the process; the team will not only visit management of companies in the portfolio and potential holdings, but also competitors, suppliers, and customers. Discounted cash flow is the most important factor in the valuation decision, ensuring the team avoids overpaying for companies. The investment decision also considers the strength of the business model, the relative attractiveness of the industry, quality of management, and the company’s financial health. These factors are assigned weightings that the portfolio manager uses in his portfolio construction process.
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
However, Nick Dravitzki, who had been portfolio manager on this strategy since it was launched in 2012, resigned in early June 2020. Devon’s experienced chief investment officer, Mark Brown is now portfolio manager here. He is assisted by the investment team, which includes managing director Slade Robertson, three portfolio managers, and two senior equities analysts.
The investment team is tight-knit and possesses valuable experience, but in recent years the good quality research and portfolio construction we had come to expect from Devon has marginally declined relative to peers. In addition, a change of portfolio manager, in the short term, can be unsettling for an investment team and strategy. However, Robertson has restructured and reinvigorated the team by hiring two additional analysts and increasing his mentoring of the investment committee. The investment process is straightforward, with an emphasis on fundamental bottom up research. The team invests in companies based on their gross yield to a New Zealand investor and the sustainability of that yield. The 20-25 stock portfolios is high-conviction and therefore carries significant stock- and sector-specific risk, which may result in greater volatility than peers.
Utilities, listed property, and financial services companies typically take up 45%-50% of FUM.
However, there are no restrictions on the amount invested in Australian and New Zealand companies, providing the portfolio manager with significant flexibility to allocate capital where he sees opportunities. Since inception, the strategy has experienced mixed performance. The process worked well up until late 2016, but since early 2017 the strategy has struggled against the index and equity region Australasia Morningstar Category peers. The process behind Devon Equity Income is reasonable, but our conviction is stronger with peers at this time.
Devon Dividend Yield aims to provide investors with a stream of income by constructing a concentrated portfolio of New Zealand and Australian companies, with a 2% blended yield improvement compared with the market. Devon screens the S&P/NZX 50 and S&P/ASX 200 indexes and ranks stocks by their gross dividend yields to a New Zealand investor. Valuation of top-ranked stocks is determined using a discounted cash flow methodology. Devon will go the extra mile to obtain an understanding of the intrinsic value of a business. Fortunately, a healthy travel budget accommodates this, whether for company visitation or investment conferences.
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
Willis and Robertson are supported by the Devon investment team of Chris Glaskin (portfolio manager), Mark Brown (portfolio manager/ chief investment officer), Victoria Harris (sustainability portfolio manager), and two investment analysts. The investment team is tight-knit and possesses valuable experience and knowledge. In addition, Willis undertakes considerable company visits and management meetings in New Zealand and Australia. However, during the past few years, there have been some missteps in stock selection and portfolio construction that have prevented the fund from outperforming its index and peers. Issues have included limited exposure to some of the largest and best-performing New Zealand stocks. We believe the good quality research and portfolio construction we had come to expect from Devon had declined relative to peers. However, during 2020, the highly experienced Slade Robertson restructured and reinvigorated the team by hiring a sustainability portfolio manager and two additional analysts; he also became co-portfolio manager of this strategy. Robertson had been portfolio manager of the fund up until 2015.
The process is straightforward and repeatable, with an emphasis on fundamental bottom-up research. The team searches for companies with sustainable earnings, high return on capital, good cash conversion, and low capital expenditure. A benchmark-agnostic high-conviction approach is adopted when constructing the growth-orientated portfolio of 25-35 stocks, which often contains mid- to small-cap companies. Despite recent solid performance, on a trailing returns basis, the strategy has fallen behind equity region Australasia Morningstar Category peers the category index (50% S&P/NZX 50 Index and 50% S&P/ASX 200 Index) over the trailing three and five years to 30 April 2021.
Devon seeks to identify Australasian companies with the ability to produce strong returns on invested capital. Devon generates investment ideas through its fundamental research process and draws on its team members’ extensive experience. The team travels extensively to obtain an understanding of businesses and to determine the intrinsic value of companies. A healthy travel budget accommodates this, whether it is for company visitation, investment conferences, or idea generation.
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
