Nathan Bell

Intelligent Investor’s Australian Equities Growth Fund (ASX: IIGF) has reached its minimum listing requirements and will list on the ASX early next month.

With a 20-plus year history of out-performing the ASX 200, the Intelligent Investor growth model – which the newly listed IIGF portfolio directly mirrors – has returned 7.2% p.a. over the past five years. It has also outperformed the average of 1,260 peers and the Benchmark by 5.2% p.a. and 1.2% p.a. respectively over the same time period.

The IIGF portfolio is a low fee (0.97%) Exchange Traded (actively) Managed Fund designed for long-term investors focused on capital growth. The IIGF portfolio comprises 10 to 35 diversified and well-researched quality ASX-listed investments – with a maximum holding in any one share of 15%.

The IIGF portfolio aims to achieve a return of 2% above the S&P/ASX 200 Accumulation Index p.a. over five year rolling periods. It aims to do this by combining deeply discounted large-cap cyclicals with small-caps that could become tomorrow’s undiscovered leaders.

Value and growth are key drivers

The IIGF portfolio’s top five holdings include developer of online classifieds businesses, Frontier Digital Ventures (ASX: FDV); investment management firm Pinnacle (ASX: PNI), Australia’s number one employment marketplace, Seek (ASX: SEK); developer of online classified businesses, RPM Global Holdings (ASX: RUL); and provider of digital audio network technologies, Audinate (ASX: AD8).

By also including heavily discounted large-cap cyclicals within the IIGF portfolio, including Star Entertainment (ASX: SGR), and Crown Resorts (ASX: CWN), Intelligent Investor remains true to value investing origins.

What the IIGF portfolio also recognises, says Portfolio Manager, Nathan Bell is the heightened role that deep value-stocks – with significant growth upside, yet to be factored in the share price – can play when chasing growth within a post-COVID environment.

Skin in the game

Integral to Bell’s stock selection is a heavy focus on investing in owner/manager businesses. Bell believes that focusing on owner-managed companies, where the person running the business has most of their personal wealth invested – right alongside clients’ savings – is one of the most statistically reliable ways to out-perform the market.

“The owner/managers’ ability to increase competitive advantages during a downturn, has been instrumental in these companies taking market share off competitors that have pulled back on critical investments and marketing during COVID,” said Bell.

For example, Shaun Di Gregorio former senior executive at realestate.com.au, and Singapore-based iProperty, used his own money to establish Frontier Digital Ventures in 2014. Frontier is a collection of 12, mostly online property classifieds businesses.

Since listing on the ASX in 2016, Frontier’s share price has more than doubled, and Bell expects the stock to at very least double what it is today. So convinced is Bell in Frontier’s growth upside – much of which will come from its 30% stake in Zameen, Pakistan’s version of realestate.com.au – it is the portfolio’s largest holding (8.4%).

The owner/manager dynamic is equally prevalent within IIGF’s second largest holding, Pinnacle Investment Group Ltd, with individual insiders owning a hefty 50.58% stake – of which founding managing director Ian Macoun controls over 10%. The IIGF portfolio’s best returner since COVID, Pinnacle is an independent umbrella fund, comprising around 16 fund managers that have collectively delivered excellent returns.

The IIGF portfolio is also invested in another investment and funds management group, 360 Capital, of which managing director Tony Pitt is the major shareholder (29.07%). “Like Pinnacle, 360 Capital ticks all our boxes; management with skin in the game; pristine balance sheet; sensible long-term strategy; and a long growth runway,” Bell said.

Value-stocks with growth upside

The IIGF portfolio also owns some genuinely very good businesses, which due to a major earnings hit this year, currently sit in what Bell refers to as the post-COVID value bucket, including Star Entertainment (ASX: SGR), Crown Casino (ASX: CWN), and Sydney Airport (ASX: SYD).

Bell expects the earnings of these value-stocks to come back along with the economy over the next two or three years. Over time, he also expects the value that the market is currently unwilling to recognise in both Star Entertainment’s and Crown Casino’s brand-new casinos, to eventually be reflected in their deeply discounted share price.

“Star’s current market capitalisation of just $2.5 billion means investors are getting the Sydney and Gold Coast casinos for a steal, and this is what value investors call a big margin of safety,” said Bell. “The company’s share price could more than double over the next few years, which is why it’s also a key portfolio holding.”

All Intelligent Investor funds now ASX-listed

Following the recent listing of both its highly successful Ethical Share Fund (ASX: INES), and its Australian Equity Income Fund (ASX: INIF), the IIGF portfolio is the third investment that Intelligent Investor has listed on the ASX.

The decision to list all three funds on the ASX recognises that many investors’ favour the benefits of holding listed investments – including greater portfolio transparency, fewer fees, better liquidity when buying/selling and potential tax advantages – over less stream-lined, off-market structures.

Important offer detail and timelines

Limited Initial Offer:              $100 million

Initial Offer opens:               31 August 2020

Initial Offer closes:               25 September 2020

Expected listing date:          5 October 2020

Application price:                 $2.50 per unit

Minimum application:          $2,500 (1,000 units)

Management Fees:             0.97%

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Dates are indicative only and are subject to change

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Nathan Bell

Taking an ethical stance with your investment choices doesn’t condemn you to under-performance.

While there’s a long-held misconception that ethical investors pay dearly for the privilege of favouring companies committed to ESG (environmental, social and governance) principles, nothing could be further from the truth. Given that assets invested according to ESG-related strategies reached $30 trillion globally in 2018, Intelligent Investor senior portfolio manager Nathan Bell reminds investors that ethical investing can no longer be dismissed as a short-lived fad.

Here in Australia, Rainmaker research reported a 76 percent annual growth in ESG products (to $1.8 billion) in the three years to 30 June 2020 – almost three times the growth experienced by the rest of Australia’s exchange traded products market.

Bell also reminds investors that they don’t need to make a binary distinction between ESG and returns. “Taking account of environmental, social and governance considerations in an investment process is not only important, it can improve investment outcomes,” said Bell.

ESG linked to returns

There’s now irrefutable evidence of a clear link between ESG investing and more informed investment decisions, plus better risk-adjusted returns in the long run. Bell cites a renowned meta-study of 2,000 academic studies, which reveals a 90 percent non-negative link between the incorporation of ESG factors and corporate finance performance, while 63 percent identified a positive link.

Fast forward to 2020, and the Coronavirus and its aftershocks have put a greater spotlight on the importance of ESG issues, including income inequality, diversity & inclusion, social justice, employee welfare and climate change to name a few.

While some investors assume that ESG-investments are synonymous with sub-par returns, to date these fears, adds Bell have been unsubstantiated. For example, a recent study also reveals that in first quarter of 2020, over 90 percent of sustainable indices out-performed their parent benchmarks.

“What sceptics can take from this data is a clear reminder that if done right, ESG investing can be immensely profitable,” said Bell.

Intelligent Investor has top performing Ethical Share Fund
One ethical fund to out-perform its benchmark is the Intelligent Investor Ethical Share Fund (ASX: INES). Morningstar figures show that with a total return of 7.14 percent, INES is the number one ethical fund compared to 100 similar ethical managed funds benchmarked to the ASX/200 in the 12 months to 30 June 2020.

As the fund manager of INES, Bell attributes the fund’s out-performance, during one of the toughest markets in history, to its heavy focus on owner/manager businesses. He’s adamant that focusing on owner-managed companies, where the person running the business has most of their personal wealth invested – right alongside clients’ savings – is one of the most statistically reliable ways to out-perform the market. Bell attributes the out-performance of technology and healthcare stocks, both at home and abroad, to the founders’ ability to increase their competitive advantages during a downturn.

He says the decision by weaker rivals – worried about refinancing debt and losing customers – to pull back on critical investments and marketing during COVID, has reinforced the market positions of the better run insider-owner businesses. By offering superior service when it matters, adds Bell insider-owner businesses have been instrumental in taking market share off their competitors.

Given the concentration of technology and healthcare stocks – which have performed well during COVID – within ESG portfolios, Bell isn’t surprise at the market attention they’ve attracted in the last six months.

“Ethical funds by nature push investors into high quality businesses, which due to their strong growth trajectory, and robust balance sheets are often economically immune from cycles,” said Bell. “All that pays off in a crisis, which is why those stocks recover the fastest.”

Filtering for better returns

Listed in June 2019, INES is an active ETF designed for investors seeking a diversified basket of Australian companies with growing sustainable profits. The 20-plus stocks held within the fund, including the top five – Frontier Digital Ventures Ltd, Audinate Group Ltd, Seek Ltd, Pinnacle Investment Management and Carsales.com Ltd – are selected due to both their discount to valuation and their low risk of interruption from mounting threats linked to ESG factors.

Bell attributes much of the fund’s out-performance to only selecting from the ASX-300, stocks that pass the ESG filters – including a commitment to addressing environmental, social and governance challenges.

By excluding stocks that don’t pass the ESG filters, only stocks selected by Bell are those that behave in shareholders’ best interests. The fund generally won’t invest in companies that make most of their profits from non-ESG sources, like tobacco, gambling, alcohol and resource companies.

But what’s important to note, adds Bell is that by taking up this [ESG filter] process, investors are not giving up returns.

“When we applied the ESG negative screen to the 420 BUY recommendations made by Intelligent Investor since 2001, the average return from the companies that passed (the ESG screen) was 14.8 percent annualised, compared to 10.1 percent for those that didn’t,” explained Bell.

“Really good businesses aren’t resource companies, they’re the ones that can produce consistent long-term profits, control product pricing and this is why we’ve made such good returns.”

By Nathan Bell, Intelligent Investor senior portfolio manager

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