The Experts

Anton Tagliaferro
+ About Anton Tagliaferro

In 1998 Anton Tagliaferro established Investors Mutual Limited (IML) as a specialist Australian equities fund manager. IML has a disciplined research driven investment style and has delivered healthy consistent returns to its clients since inception. IML has won many awards since 1998 including best Australian Equities manager in 2002, 2003, 2011, 2012 and 2015.

Anton Tagliaferro

Thursday, August 17, 2017


Forget benchmarks - focus on finding true value!

Thursday, April 02, 2015

By Anton Tagliaferro

One of the least understood reasons why many fund managers have let their retail clients down over the last fifteen years has been because too many of them have moved to benchmarking themselves purely against the index. This has been based on an unwillingness to be seen as under-performing. Unfortunately the approach of achieving a low tracking error from the index has become an end in itself for many fund managers.

In my time of managing money on behalf of investors - which now stretches well beyond 25 years - I have met literally many thousands of investors and one thing that is clear is the very unique needs of most retail investors.

If you’re a retail investor, your needs are not satisfied by building a portfolio that hugs an index via a low tracking error.  Your considerations, rather, are as follows.

1) Capital preservation
The tolerance for negative returns is very low for most retail investors. If they use a fund manager, they expect them to avoid greatly negative returns in falling markets – a focus on capital preservation. This is impossible to do if a fund manager is tracking the index too closely.

2) Reasonable Capital Growth
Most retail investors would be happy with a reasonable return when markets are rising and with a long-term return of 8 to 12 % per annum. Of course, at times when markets are booming, these sorts of returns can be seen as pedestrian, but the truth is that if these returns were achieved over the longer term, one will perform better than the majority of funds out there.

3) Income
For many retail investors it is imperative that all their assets – including their shares - produce a consistent level of income that can grow over time. In addition to the income, retail investors truly value the benefits of imputation credits and the associated franking rebates.

The above needs are not satisfied over the longer term (5 to 10 years) by the building of a share portfolio that hugs an index via a low tracking error.

How to overcome volatility

I can still recall when it became very clear to me as a young fund manager way back in the mid 1980’s that equity markets are, by their nature, very volatile and often unpredictable, particularly over short term time periods of 6 to 12 months.

As a fund manager, I therefore understand why it is important to actively reduce the volatility of the returns from equity portfolios, while at the same time trying to meet the retail investors’ needs of capital preservation, capital growth and income. Here are some ways to do that:

Focus on valuation - Only hold stocks with justifiable valuations, irrelevant of its index weighting. The many stocks with excessive valuations we witnessed during the recent resource/commodity boom, in stocks like Rio and Fortescue, are a perfect example of this and have fallen heavily from their peaks.

Focus on quality - Concentrate on quality as well as value. Look to populate your portfolio with quality stocks that possess the attributes of clear competitive advantage, recurring and predictable earnings streams that are run by competent, honest management and that can grow over time. Highly cyclical stocks or concept stocks may perform fantastically well when markets are bullish, but they often fade to virtually nothing when markets turn bearish!

Focus on capital preservation – Always ensure that the stocks you hold in our portfolio make sense in terms of their investment case. You do this by ensuring that their price remains reasonable and that they are of great quality. This is one’s only protection from inevitable corrections or bear markets in equity markets.

This is key to capital preservation over time. Whilst most stocks will be impacted in a broad sell off, it is the quality companies on reasonable valuations that will always recover.

In addition, from time to time you may need to build up your cash levels. Holding cash is not a decision to take lightly, however, when value is hard to find, you may need to make the decision to hold some cash to help navigate through volatile market periods and wait for better opportunities to buy the good quality stocks at more appropriate prices.

While this strategy may see your funds lag in a fully blown irrational bull market, that is led by fads and high beta stocks, sure as night follows day, such a bull market will be followed by a painful bear market, where all the above points will once again become relevant.

Anton Tagliaferro is the investment director and founder of Investors Mutual Limited (IML) where he heads up the team of 11 investment professionals. IML manages Australian equity portfolios, of around $5.8 Billion as at February 2015, on behalf of a wide range of Australian investors and clients of financial planning groups.