Quality is the best policy

Hyperion can thank the high quality stocks in its Small Growth Companies fund for winning it the Australian equities small cap category in the 2013 Money Management/Lonsec Fund Manager of the Year awards, according to Hyperion chief investment officer Mark Arnold. 

The fund has only 17 stocks, Arnold said. 

He attributed their very strong long-term and short-term performance over the last 12 months for the nomination. 

These are high quality businesses, he said. 

“We’ve always had a focus on trying to buy the highest quality businesses within the relevant universe, so we do that across all of our products,” Arnold said. 

Hyperion’s managers use screening processes based on return on capital and sales growth to reduce the investment universe, and then  do a qualitative assessment of the businesses to decide what actually goes into the portfolio. 

The fund has four investment managers influencing what shares go into the fund and the weighting for each individual share. How much influence they have also depends on the experience of the manager, with the more experienced ones having a heavier influence on the weighting, Arnold said. 

Hyperion plans to grow the fund from $60 million to at least $100 million over a reasonable period of time. Ideally, it would like to get the fund to the $150 million mark, he said.  

Finalist Ausbil Dexia’s portfolio manager Tony Waters said his company’s support in setting up the fund, and its back-office support in letting him focus on what he does best - picking stocks - had been instrumental. 

Ausbil’s support had been critical to the success of the Microcap fund in its first three years, Waters said. 

Ausbil’s wide market and broker networks and its information flow had been beneficial to the fund as well, Waters said. 

“I have been looking at small caps since 1999, which from that tenure is a lot longer than other peers in the market,” he said. 

The close relationship between Waters and microcap analyst Chris Prunty had helped the fund, he said. 

OC Funds Management’s strong focus on risk management helped it be chosen as a second finalist for the Australian equities small cap category, said head of investment Robert Frost. 

The Premium Equity fund only invests in stocks where it can forecast drivers of the earnings, the profit and loss balance sheets, and cash flow statements. 

“A lot of investors end up investing in stocks that are opaque and where the key earnings drivers aren’t clear,” Frost said. 

A very heavy focus on company visits helps OC understand these key drivers, Frost said. 

“The aim is to develop some kind of informational edge, which gives us a tangible belief that a company is undervalued,” he said.