In the latest Meet the Manager profile, Money Management speaks with Merlon Capital portfolio manager and principal Andrew Fraser.
Fraser began his career at Challenger on the equities team before progressing to a senior dealer and going on to found Merlon in 2010, which runs an Australian Share Income and Australian Share Value fund.
Over three years, the firm’s flagship $631 million Australian Share Income Fund has returned 11.3 per cent versus returns of 8.4 per cent by the benchmark of 70 per cent ASX 200 and 30 per cent Bloomberg AusBond Bank Bill Index.
Read on as Fraser discusses setting up a fund management business in the wake of the global financial crisis (GFC), exploiting behavioural biases and how he feels about ASIC’s greenwashing focus.
Money Management (MM): Merlon was set up in 2010, shortly after the GFC, how has that been and what challenges have you faced?
Andrew Fraser (AF): Over the last 14 years, not only have we had to deal with investment cycles which present challenges, there’s been a demonstrable change in the industry within Australia. Post-royal commission, and what that’s meant for advisers, has had a twofold impact on us as investors, as firms like AMP, Insignia, HUB24 and Netwealth are all listed, so it’s interesting in that sense to say the least. Regulatory change around MySuper has also been a challenge when dealing with institutional clients, but we are still here 14 years later and managed to survive it.
MM: Do you ever regret choosing this line of work given the volatile environment you’ve worked through?
AF: We look at those big moments that disrupted the market like the GFC and COVID-19 as being pivotal points. The reality is investing and not knowing what’s in the future is always challenging and comes with a degree of stress. It’s always something new to deal with, but it’s very rewarding, even in times when the fund’s performance in certain markets is not conducive to our style and philosophy. In the last four years, especially, sticking true to our philosophy and process and seeing investors rewarded with exceptional returns is ultimately the prize for us.
MM: When it comes to advisers, what sort of concerns do you hear from them and what is the sentiment like currently?
AF: If I went back 12 months away, definite areas of concern for clients of financial advisers were the impact of inflation and concern for their children. A lot of advisers I speak to have retirees or pre-retirees as their client base so are concerned about rent and house prices.
Then at the back end of 2023, there was a shift to more positivity, mortgages were no longer a major issue, and their cash accounts were suddenly throwing out income that they hadn’t seen for several years when we had zero interest rates. It was a very different shift over that 12- to 18-month period, and things are bit more positive now.
MM: Merlon has a big focus on ESG. How do you feel about ASIC’s focus on fund managers and greenwashing?
AF: One of the huge issues with ESG and the potential for greenwashing and using ESG credentials as a marketing tool is that ESG means completely different things to different people. I spend a lot of time talking with advisers, and some will talk about how their clients are very focused on ESG and excluding things like coal and tobacco. And then you have other people who only want to invest in solutions that are going to solve the problem. And in between, you have a whole cohort of clients that just want the best returns possible to meet their goals. So trying to come up with a standard is extremely difficult and where do you draw the line?
From our perspective, we’re very clear that we consider ESG issues as they relate to the investment case. We have a high focus on governance because we believe social and environmental issues are risks for business, so companies that have those high standards of governance will typically be better able to deal with or manage those risks more efficiently. We believe active engagement as fund managers provides better outcomes than divestment or exclusion.
MM: How does Merlon go about constructing its portfolios and how challenging is portfolio construction?
AF: Our philosophy is centred around behavioural bias. We’re trying to exploit well-known behavourial biases where we believe people are motivated by short-term outcomes and are uncomfortable having unpopular views. We look at what’s happened in the last six months and project that out far into the future.
When you look at AI and the share price of Nvidia, then that could be a good example where the expectations of the market may not be fulfilled by the earnings of the company, notwithstanding what is a huge opportunity of growth in the area of technology.
A final one would be herd mentality where people are more comfortable being wrong when we’re all in the same basket together.
We’ve designed our business structure and our process to try and limit our exposure to those behavioural biases, so we don’t fall into those traps. We try to invest in companies that are typically unpopular but have a good history of generating free cash flow, and we seek to invest in those when markets become overly pessimistic.
To listen to the full interview with Andrew Fraser and a range of other experts, you may access the Relative Return podcasts here.
