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Ask A Fund Manager
The Motley Fool chats with fund managers so that you can get an insight into how the professionals think. In this edition, SG Hiscock portfolio manager Rory Hunter recalls the faith he had in one ASX share that was never repaid.
Looking back
MF: Is there a move that you regret from the past? For example, a missed opportunity or buying a stock at the wrong timing or price.
RH: Plenty. I'd actually say the opportunities that you don't end up buying, that end up generating significant returns, are probably almost the hardest to stomach.
We'd like to think that we manage the risk in the portfolios with positioning but, on the flip side, it's hard to stomach when you like a stock and you don't pull the trigger. All the best portfolio managers are the ones that are always ready to pull the trigger.
But I'd say in terms of investments that I've made that have been big mistakes, possibly iSelect Ltd (ASX: ISU), which would have been about 3 or 4 years ago now.
I remember looking at the business and seeing that there was margin compression, because their revenue was shifting away from the life insurance business, which was the highest margin segment. I was convinced that they could generate enough volume in other segments to actually still grow overall profit, despite that margin compression.
The reality is they didn't grow volumes enough. That was one mistake. But the other mistake was that whenever you see margin compression in a business, it's very rare that you see the share price continue to perform, because investors just ascribe another multiple to the business. So it's very hard for the business to actually grow a profit and the share price to perform.
But also, in the face of that, you get multiple compression. In the face of multiple compression, as I pointed to earlier, you've got to grow profit at an extraordinary rate, just to keep the share price at a relatively elevated level. That was a big mistake and we lost a lot of money in iSelect.
I try to make sure that when it comes to actually buying businesses, as soon as we like something, we get it worked on as quickly as possible, because speed to market is a major advantage in this space, if you've got it. And that speaks to why we don't run investment committees at SGH. Yeah, we very much think that you back the team, and you back the research and the management who are willing to do that. Speed to market is a big advantage.
MF: Especially in those smaller cap companies, it really can make a huge difference, can't it?
RH: Without a doubt. It's a thing that we love about this space, that there's so much imperfect pricing. You don't actually have to dig that far below the surface, to find it.
There's just so many opportunities out there in that universe. Well, in the small cap space, it's almost 2,000 stocks.
