Martin Currie shows how to add ‘value’ in active Aussie equities

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Reece Birtles is celebrating the 10th anniversary of his Australian equities value-oriented fund in style. It is number one, out of more than 100 comparable funds in the Mercer survey for the last financial year.

In a world which is questioning the role of long-only active equities funds – which big super funds and other clients are doing in droves – the Martin Currie Australia Value Equity Strategy is a standout in demonstrating that even when the rising tide lifts all boats, as they say, the search for alpha can really make a difference.

Birtles is the head of equities for Edinburgh-based Martin Currie in Australia, which is an affiliate manager of Baltimore-based Legg Mason. He oversees the Australian equities component of the diversified global manager’s operations. The history of Legg Mason in Australia and its relationship with Martin Currie is worth recounting in terms of how a top-performing firm has been able to retain a culture, style and key people through both mergers and acquisitions and organic growth.

Legg Mason acquired Citigroup Asset Management’s (CAM) Australian funds management business in 2005 as part of a deal which turned Legg Mason into a pure asset manager globally, involving the divestment of its private client and capital markets business. CAM, in Australia at least, was a quality shop with a good local client base.

Australian-born Birtles was working for CAM in London as head of European equities at the time. Legg Mason asked him to return to Australia where he took over the Aussie equities portfolios and has subsequently overseen the growth in funds under management, in that asset class, to about $15 billion as of June 30.

When Legg Mason subsequently acquired the old privately held Martin Currie, in 2014, it decided that for its Australian equities it would have its new affiliate oversee the business. Legg Mason had about $2.5 billion in total funds under management in Australia at the time.

The recent growth in funds under management has primarily come from Martin Currie’s early positioning in the demographically attractive retirement space. Its ‘equity income’ and ‘real income’ strategies and funds, launched in 2010 and 2011 respectively, have been particularly popular with advisers.

Birtles says: “Everything that’s done well for us, as a business and for clients’ returns, didn’t exist much before the global financial crisis. Even our new channels, such as SMAs, have done really well. But I think you have to be a good investor first, and then you have to build relevant products.”

The “good investor” bit, which delivers the returns comes from the culture, style and key people. Birtles says that it is much easier, and more enjoyable, working with people with whom you have worked for a long time, as the Martin Currie team has.

One of the interesting aspects of the good performance in the Value Equity strategy is that it has been despite a relatively topsy-turvy ride for the value style since about 2009, when markets – in particular US equities – took off in their post-GFC recovery.

Birtles says: “We had a flat year in 2015, which was disastrous for most value managers. And then 2016 was a big year for value. This year, 2017, was once again a strong growth market, but we have outperformed so far as well. We’re currently about 6 per cent ahead of the benchmark year to date. We were 15.7 per cent ahead of the benchmark last year and we’ve added about 6 per cent alpha over the past five years to July.

“What we’ve been able to do well is add value with our stock selection and also manage the risks associated with the market. Plus we have managed the market’s cycles. We look for the right pockets to invest in.”

In the past year or so the team has reduced its exposure to small caps as it saw more value coming back to large caps, but it has remained “materially underweight” the banks, Birtles says. He believes they are at a low point in the “loss cycle” for loans and that credit growth will slow. There are also increasing regulatory issues for the banks to deal with.

The Martin Currie Australia Value Equity strategy is a “best ideas” fund which typically holds between 25-35 stocks. It has an active share (the stocks and weightings deviation from the index) of between 60-72 per cent, which is about 50 per cent more than that of most active equities managers. It is about 17 per cent underweight the top-20 stocks, which includes all the banks.

The managers actively include the tax implications of all investment decisions. Birtles says that having products specifically designed for retirees, such as its equity income strategy, helps the portfolio managers focus on after-tax returns. Warakirri Asset Management does its after-tax performance analysis.

– Greg Bright

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