Blending prudence with opportunity
Achieving the right balance between safeguarding investor funds and positioning their portfolios to best capture opportunities is one of the key challenges facing any fund manager. If addressed properly, an appropriate balance between risk and reward can offer a compelling long term investment.
PPM’s success is built around investment expertise in navigating this balance. We believe it is this expertise and capability which differentiates us from other fund managers.
Our investment philosophy is focused on growing the earnings of our clients portfolios through market cycles in a tax effective and attractive risk/reward manner by building a concentrated portfolio of direct equities of 20-25 exceptional companies that meet our valuation and return expectations over the medium to long term.
“Our success is based on several tenets that guide our investment decisions and portfolio management discipline.”
Peter Reed, Director & Portfolio Manager
We identify structural themes that produce attractive economic environments for the companies that operate within them. Broader than industry research, a thematic approach looks to capture long-term structural opportunities and is forward looking. It may identify them at an industry, sector, or company level, either globally or locally. We look to leverage several themes at any given point, and invest in the companies best positioned to benefit from the attractive business environments created by these economic, regulatory or structural themes.
PPM believes that there are a limited number of attractive situations in the market at any given time, and our clients’ interests are best served by holding exceptional companies rather than diversifying into mediocre companies. A concentrated portfolio of between 20 and 25 companies provides sufficient diversification and affords a greater opportunity to outperform, as the larger the number of holdings in a portfolio, the greater the likelihood that the portfolio will track the broader market.
PPM will invest in companies that we understand well. We are research driven and regularly attend company briefings. Our research philosophy gives us the confidence and patience to allow the full benefits of our investment decisions to play out. Underpinning our proprietary research is the analysis and insights provided by a panel of leading global and Australian institutional brokers. Companies with complex business structures or less than transparent propositions are excluded as they can carry unquantifiable risks.
Portfolio positions are built and held to enable the underlying growth forecasts of the business to play out over the next 3-5 years. The market risks in short-term investing are substantial and inherently unpredictable. Our patient approach is more predictable as we are relying on the performance of well managed companies and the investment themes we have identified, rather than market sentiment to generate returns. We work with our clients to structure a diversified, tax effective investment portfolio based on their chosen investment strategy. Such a portfolio should preserve capital through different market conditions and outperform the share market over long periods in a tax effective manner. Consistent with our long–term focus, turnover is low reducing transaction costs and tax. We do not employ active market timing or derivatives trading strategies.
At PPM, we prefer to avoid investments that are considered popular, as their pricing usually reflects the value of the opportunity plus a premium of their popularity. Where the underlying fundamentals are attractive, we are comfortable investing in companies and industries that are not fully understood by the market. When, combined with our long-term approach this strategy allows us to capture these underappreciated opportunities.
Our risk minimisation efforts begin at the company level where we look to a range of factors, critical to this process is the elimination typically of companies with high debt levels or complex financial structures. When constructing a portfolio, achieving diversification across companies, business models, investment themes, and industries is an important consideration. Unless requested by a client, no one security will exceed 10% and no one industry sector will exceed 25% of the portfolio’s value. Market timing is not utilised, with portfolio turnover generally less than 25% per annum.
Tax effective investment management can produce significant increases in real returns. Although the benefit of tax effective investment strategies will vary depending on the individual investor and their overall tax situation, academic studies estimate that investment management using a tax effective investment approach may add up to 2% per annum to real returns.
Even for those in a low or tax exempt environment, adopting a tax effective investment strategy has considerable benefits due to Australia’s dividend imputation system and the ability to enhance returns through franking credits.
PPM employs a variety of measures to help maximize after-tax returns and we are mindful of the tax position of the ultimate beneficiaries of the portfolios we manage. Our long-term approach means fewer tax events. Capital gains concessions can be fully franked dividends over other forms of returns which can create powerful tax benefits. This approach can have the effect of enhancing investors’ real returns.
Specifically, our approach to after tax investment management incorporates a variety of elements to help create tax effective investment portfolios, these include:
- Minimising transactions that result in the creation of tax events
- Adopting a long term investment approach conscious of capital gains implications
- Considering the implications of franking credits
- Considering the tax implications of corporate actions
PPM’s individually managed account (IMA) structure offers a distinct advantage in producing tax effective investment returns over pooled investment vehicles such as managed funds. Managed funds ‘pool’ investors with different tax status and strategies together. This makes tax effective investment management impossible because they require adopting one tax strategy across all investors, which can create tax advantages for some investors, it can create disadvantages for others due to differences in tax situations of the individual investors. However, under the IMA structure, each investor has a separate portfolio that can be managed in accordance with each client’s individual tax status and to suit their individual tax requirements.
It is important to note that PPM does not provide tax advice however we work closely with each clients accountant/financial adviser.
The investment in fads and noise that characterise the market are driven by sentiment which is not predictable. Having the discipline to ignore the market’s changeable sentiment has allowed us to avoid the pitfalls and deliver attractive returns over long periods of time. Therefore, our focus is wholly on investing in quality companies that operate in attractive environments.