best e best - montgomery investment management best of the best... · stick to the knitting roger...

stick to the knitting Roger Montgomery

the end of the party

David Buckland

floating your best returns

Roger Montgomery

floating a business plan

Ben MacNevin

who’s managing

your business?Tim Kelley

bubble trouble brewing

Roger Montgomery

best bestof the

The only prescripTion for

issUe 03: december 2013healthy finances

carefUlly prepared by

Since its inception The Montgomery [Private] Fund has meaningfully outperformed.

How?

Unlike funds managed by much larger institutions, The Montgomery [Private] Fund is not forced to be fully invested at all times.

So when markets are volatile and preserving wealth is paramount, Montgomery can turn to cash.

welcoMe To THe boUTiqUe inveSTMenT ManageMenT

oFFice oF MonTgoMery

To find out more about how Montgomery aims to find the best stocks and buy them for less than they’re worth, and to find out whether you are eligible to invest in the Montgomery [Private] Fund, visit www.montinvest.com today.

Investment Manager Montgomery Investment Management Pty Ltd | ABN 73 139 161 701 | AFSL 354 564 | GPO Box 3324 Sydney NSW 2001 | 02 9692 5700 | www.montinvest.com | [email protected] Trustee Fundhost Limited | ABN 69 092 517 087 | AFSL 233 045 # Portfolio Performance is calculated after fees and costs, including the Investment management fee and Performance fee, but excludes the buy/sell spread. All returns are on a pre-tax basis. This report was prepared by Montgomery Investment Management Pty Ltd, AFSL No: 354564 (“Montgomery”) the investment manager of The Montgomery [Private] Fund. The Trustee and Administrator of the Fund is Fundhost Limited (ABN 69 092 517 087) (AFSL No: 233 045) (“Fundhost”). This document has been prepared for the purpose of providing general information, without taking account your particular objectives, financial circumstances or needs. You should obtain and consider a copy of the Information Memorandum (“IM”) relating to the Fund before making a decision to invest. While the information in this document has been prepared with all reasonable care, neither Fundhost nor Montgomery makes any representation or warranty as to the accuracy or completeness of any statement in this document including any forecasts. Neither Fundhost nor Montgomery guarantees the performance of the Fund or the repayment of any investor’s capital. To the extent permitted by law, neither Fundhost nor Montgomery, including their employees, consultants, advisers, officers or authorised representatives, are liable for any loss or damage arising as a result of reliance placed on the contents of this report. Past performance is not indicative of future performance. Applications to invest in The Montgomery [Private] Fund are only considered from wholesale investors or investors willing to commit $1 million (or by invitation from Montgomery Investment Management).

Returns to 30 November 2013

Code Change Outperfomance

MPF The Montgomery [Private] Fund 39.17% -

XNAJI ASX 200 Industrials Accumulation Index 15.32% 23.85%

XTOAI ASX 100 Accumulation Index 30.04% 9.13%

XJOAI ASX 200 Accumulation Index 26.86% 12.31%

XA0AI All Ordinaries Accumulation Index 23.74% 15.43%

XK0AI ASX 300 Accumulation Index 25.20% 13.97%

XTLAI ASX 20 Accumulation Index 35.29% 3.88%

XMDAI ASX Midcap 50 Accumulation Index 7.39% 31.78%

XSOAI ASX Small Ordinaries Accumulation Index -18.06% 57.23%

Benchmarked returns are since inception (23 Dec, 2010) of the Montgomery [Private] Fund and assumes distributions are reinvested. Past performance is not indicative of future performance.

Minimum investment $1,000,000

http://www.montinvest.com/mpf



http://www.montinvest.com

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Stick to the Knitting P4

The End of the Party P6

Floating Your Best Returns P8

Who’s Managing Your Business? P11

Floating a Business Plan P13

Bubble Trouble Brewing P14

TABLE OF CONTENTS EDITOR’S LETTER

It has been an interesting two months for us. Firstly, we were delighted to welcome Scott Phillips to the Montgomery Investment Management team as our Head of Distribution, and secondly, we were pleased to move into our new office – a converted wool store – in Ultimo.

On the investment desk, we turned our attention to the many Initial Public Offerings entering the market. With an apparent lack of value

elsewhere, we were excited by the prospects for several of these floats.

In this issue of Best of the Best, I talk about the key ingredients for successful investing, David takes a close look at inflation rates, we discuss the emergence – or lack thereof – of bubbles in the Australian share and property markets, and we explain some important factors you should consider before investing in any business.

We hope you enjoy this issue, and as ever we welcome your feedback. If you would like to read more of our views, remember that you can follow our daily insights on our blog.

From the team at Montgomery, we wish you a wonderful Christmas season. We look forward to bringing you the next magazine in 2014.

Roger Montgomery Chief Investment OfficerMontgomery Investment Management

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issUe 03: december 2013

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We have discussed previously the ingredients required to invest successfully over the very long run. And it is encouraging that the two essential ingredients, the ability to value a business and understanding how the market works – particularly its bipolar nature and tendency to treat temporary events as permanent – can be taught.

But there is one other ingredient that is talked about far less, perhaps because this element is accepted as not being learnable. The ingredient is, I believe, Buffett’s special gift. It is of course temperament.

Many years ago Buffett famously wrote:

“Success in investing doesn’t correlate with I.Q. once you’re above the level of 25. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.”

When markets are volatile and most investors are losing their heads, or when high and rising prices are drawing in ever increasing numbers of former bears who are throwing in the towel – these are the periods in which discipline and fortitude are essential to plant the seeds of the next fortune.

The benefits of the right temperament can be leveraged in any asset class.

Witness, by way of example, the current boom in commercial property on Military Road in the Sydney suburb of Mosman. Vacancies on the exclusive strip are at their lowest in four years and rents are now reaching $2,000 per square metre. According to the Australian Financial Review, 40 national upmarket brands, including one of my old favourites, Henry Bucks, have set up shop.

In the two years to 2011, however, rents had fallen 20 per cent and there were as many as 30 vacant stores. Laura Ashley, Portmans, Saba, Just Jeans and Ella Bache vacated the strip when their leases came up for renewal.

To take advantage of the recovery requires an ability to control emotional urges. One requires patience to take advantage only when commercial real estate is distressed and similarly the

discipline to pull the trigger when everyone else is calling the end of the world.

“...to be fearful when others are greedy and to be greedy when others are fearful.”

Another example of the calibre of emotional intelligence required to succeed is Buffett’s own Berkshire Hathaway share price and his response to it.

Many investors look to the current Berkshire share price of $172,089 per share and compare it to the $11.00 Buffett was offered in 1964, wistfully imagining having purchased a portfolio made up only of stock in the world’s eight largest corporations back in the 1960s.

But very few investors who bought stock back in the 1960s would have had the temperament to hold it through thick and thin.

Berkshire Hathaway has been 58 per cent more volatile than the S&P500 Index, and only investors who remained disciplined and held their Berkshire shares would have enjoyed the long term performance.

By way of example, over the 20 month period to February 2000 – the peak of the internet bubble – Berkshire shares lost 44 per cent in market value terms, while the market gained 32 per cent.

Think about that for a moment…

Imagine you invested with a fund manager and while the market went up by 32 per cent, your units fell, in market value terms, by 44 per cent! Perhaps giving more life to the example, imagine you invested $1 million dollars with Montgomery and your $1 million turned into $560,000 while an index fund would have turned your million into $1.32 million. Would you have stuck around?

Not many rating houses in Australia would have continued to give Buffett a high rating after he underperformed by 76 per cent over two years. And very few Australian institutions would have maintained an allocation with Buffett either.

However, Warren Buffett did stick with the strategy, preventing emotion from interfering with discipline.

www.montinvest.comBEST BESTof th

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KniTTinGTO THEsTicKRoger Montgomery, Chief Investment Officer

It’s enouraging to know that the key ingredients for successful investing can be learned. But what about the special skill that can’t be taught? Roger Montgomery discusses.


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Warren Buffett isn’t worth US$53.5 billion because he sold at the first sign of dark clouds on the horizon, because he balked at short term underperformance, or because he sold Berkshire shares when he thought they’d gone as high as they would for the foreseeable future. No. He has more than tripled the return of the S&P500 since 1976 by simply being emotionally intelligent. You can do the same but it isn’t easy – and I’m speaking from experience.

At Montgomery, the last two months have seen both of our funds underperform their respective indices. Should we change strategies? Should we jump out of the high quality companies we own and buy C3 and C4 quality companies that have been rallying the most in the ASX200 Industrial Index (see Table 1)?

Clearly the answer is no.

What we know is that poor quality companies don’t add economic value over the long run, and this is reflected in the less than satisfactory increases in intrinsic values over the same period. Most

importantly, over the long run prices are determined by intrinsic values and as long as the intrinsic values are higher and rising, and the prospects for the business are bright, the prices should take care of themselves.

Warren Buffett said as recently as October 31 for Fortune Magazine, “Temperament is more important than IQ. You need reasonable intelligence, but you absolutely have to have the right temperament. Otherwise, something will snap you.”

In our view the market is once again in expensive territory with just a small number of large caps showing any margin of safety. Nevertheless valuing a company is not the same as predicting its direction and so, while the market keeps rallying, we must follow our process and ignore the temptation to swing – no matter how loud the calls to do so.

Table 1. Performance of XNJ Constituents

This article was written on 5 November 2013. All share and other prices and movements in prices are to this date.

Code Company Name Q:P Market Cap 30/08/2013 31/10/2013 % Change

SEK Seek Limited A2 4,367 10.7 12.99 21%

QUB Qube Holdings Ltd B4 2,003 1.805 2.17 20%

DOW Downer EDI Ltd B3 2,137 4.16 4.93 19%

TPI Transpacific Ind C4 1,784 0.97 1.145 18%

TSE Transfield Servi C5 687 1.145 1.335 17%

MQA Macquarie Atlas C5 1,284 2.34 2.65 13%

SKE Skilled Group Ltd A3 833 3.12 3.53 13%

CSR CSR Ltd C4 1,250 2.25 2.5 11%

SVW Seven Group Hold A3 2,518 7.53 8.35 11%

SYD Sydney Airport C4 8,909 3.78 4.19 11%

CDD Cardno Ltd A3 1,040 6.4 7.08 11%

BKN Bradken B4 1,032 5.7 6.24 9%

GWA GWA Group Ltd B3 956 2.84 3.1 9%

MMS McMillan Shakespeare A2 940 11.84 12.92 9%

ALQ ALS Ltd A3 3,810 9.2 10.03 9%

DCG Decmil Group Ltd A3 418 2.36 2.53 7%

VAH Virgin Australia C5 1,062 0.39 0.415 6%

XNJ ASX200 Industrials Index 7823.87 8315.58 6%

BXB Brambles Ltd C4 14,473 8.8 9.3 6%

TOL Toll Hldgs Ltd C4 4,080 5.46 5.77 6%

AZJ Aurizon Holdings A3 10,206 4.55 4.79 5%

TCL Transurban Group C5 10,376 6.75 7.1 5%

AIO Asciano Ltd C4 5,652 5.57 5.82 4%

ASL Ausdrill Ltd B4 455 1.47 1.53 4%

LEI Leighton Hldgs B2 5,972 17.4 17.91 3%

MIN Mineral Resource A3 2,103 11.06 11.33 2%

NWH NRW Holdings Ltd A2 379 1.37 1.4 2%

UGL UGL Ltd B4 1,230 7.41 7.37 -1%

MND Monadelphous Grp A1 1,681 18.57 18.18 -2%

MRM Mermaid Marine A2 861 3.85 3.75 -3%

CAB Cabcharge Australia A3 474 4.14 4.03 -3%

SAI SAI Global Ltd B4 864 4.26 4.11 -4%

BLY Boart Longyear Ltd A4 195 0.46 0.43 -7%

QAN Qantas Airways B3 2,739 1.37 1.245 -9%

FGE Forge Group Ltd A2 371 5.28 4.4 -17%


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The end ofthe party

Renowned academics, Elroy Dimson, Paul Marsh and Mike Staunton, from the London Business School, in their article entitled The Real Value Of Money, for the 2012 Credit Suisse Global Investment Returns Yearbook, produced a longitudinal study, examining how equities and bonds have performed under different inflation regimes over 112 years and in 19 different countries. It’s fascinating because in 2012 (and arguably still today) investors are willing to buy sovereign bonds that produce negative real yields, regarding them as ‘safe’.

Inflationary expectations play a major role in long bond yields, and in their study, Dimson, Marsh and Staunton argue that prevailing wage growth is the key determinant. I believe the globalisation of manufacturing, technological advancement leading to productivity gains, and reduced unionisation as a percentage of the workforce have led to the weakened bargaining power of labour in western world economies.

As headline inflation continues its decline, the sell-off in many countries’ bonds since mid-2012 indicates that inflationary expectations are now rising. That is, the market is arriving at the conclusion that if there is too much quantitative easing (QE) in the near term, inflation could trend up in the medium term. In this scenario, and in particular given what we have heard from those hopeful of US Federal Reserve positions, central banks will end up ‘behind the curve’. In other words, they will be tightening monetary policy too late.

Ten year bond yields in a number of western world economies have increased by an average 1.1 per cent since mid-2012, as illustrated in Table 2 over the page.

The historic low bond yields should be looked at in the context of long term rates of inflation. Table 1 below shows both the arithmetic average and the geometric average rate of inflation between 1900-2011. In the US, Australia and the UK, these figures have

David Buckland, Chief Executive Officer; withRoger Montgomery, Chief Investment Officer

Country Historic Low When Yield at 12/11/13 Change

US 10 year bonds 1.39% July 2012 2.77% +1.38%

Australian 10 year bonds 2.69% July 2012 4.23% +1.54%

UK 10 year gilts 1.43% August 2012 2.64% +1.21%

German 10 year bunds 1.16% July 2012 1.79% +0.63%

French 10 year bonds 1.83% December 2012 2.56% +0.73%

Japanese 10 year bonds 0.61% March 2013 0.60% -0.01%

AVERAGE +1.10%

Table 1. Arimethic and geometric average rate of inflation, 1900-2011


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As headline inflation continues its decline, the sell-off in many countries’ bonds since mid-2012 indicates that inflationary expectations are now rising. Roger Montgomery and David Buckland explore some of the potential effects.


7

averaged 3.0 per cent, 3.9 per cent and 4.1 per cent respectively.

Buying a ten year bond on a yield at somewhere near half the long term average rate of inflation is dangerous, and yet the popularity of such a strategy appears to have never been higher. Typically, buyers demand a premium of at least 2 per cent relative to inflationary expectations. Even adjusting for weak buying power of labour in these western economies, and associated lower wage growth, it seems reasonable to expect in normal circumstances for US ten year bonds to trend up to 4.5 per cent and for ten year bonds in Australia and the UK to trend above 5.0 per cent.

This not only has implications for bond buyers. All assets are ultimately valued on the basis of a discount rate that in turn is influenced by interest rates. Booming property prices and bank shares can be attributed to a fad. That fad is the chase for relatively higher yields. The above analysis suggests the fad, like all fads before it, will end.

Andrew Huszar managed the first round of the Federal Reserve’s QE program, purchasing $1.25 trillion of mortgage-backed securities from 2009 to 2010. The former Morgan Stanley managing director has penned an opinion piece in the Wall Street Journal that questions the efficacy of the program that can be found here.

The executive summary reads like a warning to complacent investors who believe that they can do nothing but be forced into chasing stocks and property for their relatively attractive income returns:

• Trading from the first round of QE provided trivial relief for Main Street, but considerable relief for Wall Street. The banks have enjoyed lower wholesale credit costs, rising values on their security holdings, and large commissions from brokering most of the Fed’s QE transactions

• The first round of easing wasn’t making credit any more accessible for the average American, as banks were issuing fewer and fewer loans

• $4 trillion of purchases may have only generated a few percentage points of US GDP growth

• QE killed the urgency for Washington to confront the structurally unsound US economy

• It is expected that the program will continue next year, as Ben Bernanke’s likely successor, Fed Vice Chairwoman, Janet Yellen, is supportive of QE

• QE has become Wall Street’s ‘too big to fail’ policy

Andrew Huszar became disillusioned with the (lack of) independence of the Federal Reserve and returned to the private sector after the first round was completed. The apology for his role in the program serves as a timely warning that the economy is likely to wake up with a headache when the party inevitably ends.


Figure 1. Annual inflation rates in the Yearbook countries, 1900–2011

Source: Elroy Dimson, Paul Marsh, and Mike Staunton, Triumph of the Optimists; authors’ updates

all asseTs are UlTimaTely valUed on The basis of a discoUnT raTe ThaT in TUrn is inflUenced by inTeresT raTes


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http://online.wsj.com/news/articles/SB10001424052702303763804579183680751473884

floaTinG yoUrbest returnsRoger Montgomery, Chief Investment Officer

2013 has seen a flood of Initial Public Offerings hit the Australian share market. But how can investors identify the outstanding opportunities and avoid the risks? Roger Montgomery shares his thoughts.

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Much has been written about the rush of fourth quarter Initial Public Offerings (IPOs). Less considered is how to spot outstanding investment opportunities in what could be the best batch of floats in at least five years – and avoid myriad risks when investing in any of these new listings.

Make no mistake, the IPO market is on a tremendous roll. A rising sharemarket and improving investor confidence are encouraging vendors to raise capital via an IPO and list on the Australian Stock Exchange. With the float window for industrial companies virtually shut in 2011 and 2012, there is a huge pent-up supply of floats.

Buyers, too, are showing greater interest. After the poor showings of the 2009 Myer Holdings and the 2011 Collins Foods IPOs, fund managers were even warier of floats vended by private equity firms. Rightly or wrongly, a view that valuations had become too aggressive blocked the float pipeline.

That has not stopped a rush of floats in the fourth quarter, typically the busiest time for them as companies race to raise capital before Christmas.

More than $10 billion could be raised from IPOs this year, which would make it the best year in almost a decade and a remarkable turnaround from a disastrous 2012, when just $1.3 billion was raised. The Shopping Centres Australasia Property Group and Fonterra Shareholders’ Fund offers accounted for two-thirds of float capital raised in 2012, such was the dearth of new listings.

Of course, current IPO strength could end abruptly if the sharemarket corrects. A raging IPO pipeline can quickly become a trickle when global sharemarket volatility spikes and investors become risk averse, shunning new listings.

IPO sentiment is rapidly improving for four main reasons. Firstly, some prominent recent floats have buoyed investors. In Vitro Fertilisation (IVF) provider Virtus Health (an IPO Montgomery participated in) has soared 53 per cent from its issue price, and

insurance broker Steadfast Group is up 43 per cent.

Brisbane-based law firm, Shine Corporate, has soared from a $1.00 issue price to $1.69 after raising $45 million in a May IPO. Foreign exchange service provider OzForex Group is well up on its $2.00 issue price after listing in October.

In fact, some of the best small-cap investments have been IPOs from the last few years. Data centre operator, NextDC, is among the best performing floats since 2010, its $1.00 issue price leaping to $2.24. Corporate Travel Management has soared from a $1.00 issue price to $5.29, Titan Energy Services has raced from $1.00 to $3.46, and Energy Action has increased almost fourfold from its $1.00 issue price.

This brief analysis shows outstanding gains can been made from IPOs – in difficult sharemarket conditions – if you can spot the good ones. Even after stellar increases, Titan, Energy Action and Shine Corporate may still represent reasonable value for very long term investors.

The second reason for renewed IPO support is relative pricing. Value is hard to find in the Australian sharemarket, with the S&P/ASX 200 Accumulation Index up 26 per cent over the year to November 7, 2013. With valuations for many small- and mid-cap industrial shares looking increasingly stretched, fund managers are eager for IPOs offered at a discount to intrinsic value.

The third reason is demand from international investors. As in Australia, offshore IPOs have been strong this year, and there is talk that Asian investors are showing greater interest in Australian

more Than $10 billion coUld be raised from ipos This year, Which WoUld maKe iT The besT year in almosT a decade


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floats. The soaring share price of Twitter, which listed in the US in October through a US$1.82 billion IPO, adds to the positive global momentum. It shares rocketed 80 per cent in early trade.

The fourth reason for stronger interest is the IPO cycle. Professional investors know better quality businesses are typically brought to market at the start of the IPO cycle. A raging bull market sometimes encourages vendors to float poor quality companies to cash in on sky high valuations.

However, buying IPOs early in the cycle is no guarantee of investment success. Internet insurance stock iSelect (an IPO Montgomery did NOT participate in) disappointed investors after raising $215 million and listing in June in a much-touted IPO. Its $1.85 shares have tumbled to $1.27, reminding investors about the need for float vigilance.

Moreover, the vast majority of floats over the past five years, mostly junior explorers, have sunk below their issue prices. Thankfully, the composition of the IPO market, by volume, has almost reversed: small mining floats are now rare, and investment-grade industrial company IPOs are dominating the present pipeline.

It’s good to be clear on the motives of the key players and how they affect IPO dynamics. When a business owner ‘floats’ a business they are effectively selling it, and naturally they want to get the best possible price. This is most acute when the owner is pocketing the proceeds of the IPO and exiting their holding, but even when the owner is staying and proceeds will be used to grow the business, the owner still wants to sell shares at a good price to minimise their dilution and obtain the best return for shareholders who have previously taken risk to support the business.

The main tool available to the owner to achieve the best price is timing: floating when similar businesses are fetching good multiples. When you see a rush of floats coming to the market, it can sometimes be an indicator that business owners feel that prices are satisfying their demands, and history shows that float activity does correlate with market peaks.

On the other hand, the broker managing the float wants the price to reflect good value. The broker needs to sell the issue to its clients, and it wants to keep them happy too. The investors are repeat customers and a source of future brokerage. The broker has a particular incentive to achieve good value where they are underwriting the issue and may be left holding the bag if investors shun the offer.

The result of these dynamics tends to be IPO pricing that reflects reasonably good value compared with similar listed companies, but at a time when those similar companies are trading at elevated prices. Of course there are exceptions, but as a general observation, participating in IPOs probably makes more sense for investors with a shorter investment time frame.

Several large floats are on the way. None will dominate the press more than the IPO of Nine Entertainment Co., which is expected to to list on December 6 with a $1.92 billion to $2.16 billion market capitalisation, depending on the institutional book build to determine the final price early next month. Successful household

name floats have a history of attracting retail investors back to the IPO market.

Nine’s float is well timed. “Cyclical growth” stocks have been in greater demand this year as investors bet that historic low interest rates will boost companies in retailing, housing and media, with high leverage to an expected improving economy in 2014.

One cannot form a full view on the investment merits of Nine until the final price is known and a comparison with its estimated intrinsic, or true, value can be made.

Pact Group is another likely ‘blockbuster’ float this year. Media reports suggest the packaging company could be valued at up to $2.1 billion on listing. Pact may be an attractive business, depending on the final price, however investors must be aware that packaging companies are cyclical, and the existence of sustainable competitive advantages should be established first.

Other confirmed or speculated floats include Dick Smith Investments, education group Vocation, Redcape Hotel Group, McAleese Transport, credit-reporting company Veda, Industria REIT, PM Capital Global Opportunities, Life Healthcare, GDI Property Group, Real Energy Corp and BIS Industries. The list seemingly gets longer every day.

A potential blockbuster privatisation of Medibank Private, and possibly an IPO for EnergyAustralia in the next few years could further boost the market by providing billion-dollar household name floats. A possible $5 billion-plus offer of Queensland Motorways, should it choose to float, would also set the IPO market alight.

A reasonable interpretation of all this activity is that owners are rushing to market because they feel valuations are attractive. The market is wiling to pay up for the best businesses given the dearth of opportunities in the secondary market. The rush however is also a function of the fact the IPO window was closed for a long time, and vendors like private equity, who need to keep turning over their portfolios, have probably built up something of a backlog that needs to be cleared. This situation can actually work in favour of investors.

Also, as with all equity investments, we need to be wary of making broad generalisations, and it’s likely that we will find both some gems and some dross amongst the various offerings. For investors willing to put in some legwork and properly analyse the businesses coming to market – using the techniques we have advocated here and which we use at Montgomery, as well as the circumstances of each offer and its particular risks – IPOs can be an opportunity to acquire high quality businesses before others have fully appreciated their virtues.

When a bUsiness oWner ‘floaTs’ a bUsiness They are effecTively sellinG iT - and naTUrally They WanT To GeT The besT price


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We have been studying with interest the different opportunities and while we are wary about current valuations generally, we also think there are a few long-term gems waiting to be listed.

1. Ignore market noise

At Montgomery, we are not seduced by newspaper headlines of an ‘IPO boom’ nor stockbroker research notes with ‘buy’ recommendations on new floats. Equally, we aren’t swayed by fund manager peers who complain in the financial media about excessive IPO valuations or the poor performance of previous private equity-vended floats. We simply adopt, as you should, a level-headed approach to assessing each IPO on its merits.

2. Buy businesses, not bits of paper

Think like an owner when investing in an IPO, or any stock. Would you happily own a piece of the IPO for the right price, and hold it for several years if the sharemarket closed tomorrow?

Those who buy IPOs for short-term gains or ‘stag’ profits take enormous risk. Never assume all floats in a rising market will rally on listing.

3. Seek a higher margin of safety

The margin of safety is the difference between the IPO’s issue price and the company’s intrinsic (or true) value, which you or your adviser has calculated. As with any shares, the goal is to buy them when they are available below intrinsic value, meaning the market is undervaluing the company.

A higher margin of safety is required when buying IPOs compared with established listed companies. IPO’d companies sometimes have no commercial operating history and none as a listed company, their management can be untested in a listed environment, and often there is much less financial information and forecasts to assess the merits of. Becoming a listed company can divert attention and turn good managers into bad ones.

4. People

More so than for any share investment, analysis of an IPO requires careful consideration of the executive team and board. In a well-established, listed company, the CEO and directors are usually known to the market. This is not always the case with IPOs, which may have first-time CEOs and small boards with only a few independent directors. Remember, bad people can quickly kill good businesses or at least put them into a coma.

Do not be swayed by glossy biographies in the prospectus. Search the internet and media databases for background stories on the CEO and chairman of a new IPO. Ask whether the board has a sufficient mix of directors to safeguard your investment, and monitor the CEO.

The best gauge of executive performance however is the

company’s long-term financial performance, but such data can be challenging to come by for IPOs, meaning investors often make a value judgement on the management and the board.

5. Executive pay

Nothing tells you more about the people behind an IPO than executive pay. Excessive remuneration for executives or boards, compared with its nearest listed peers, can suggest the management team sees the company as its own, and that there is little reward alignment with new shareholders.

Consider performance incentives. Is the board showering the CEO with options or other equity incentives that have low, or no, performance hurdles? Better-quality companies often base performance targets on operational goals. For example, a certain profit target has to be reached. Poor quality companies sometimes base targets on the share price, which is all too often an inaccurate yardstick of true performance.

The capital structure also provides important clues. Excessive options issuance to executives can swell the number of issued shares in coming years, and badly dilute those of shareholders.

6. The business

The value investor’s ultimate goal is to buy exceptional companies at bargain prices. Ask yourself whether the IPO is – or has the potential to be – an exceptional company.

Hallmarks of exceptional companies include a clear, sustainable competitive advantage; a well-regarded, hard to copy product or service; consistently high Return on Equity; little or no debt; strong surplus working capital that can fund future growth; low capital investment requirements; and recurring, annuity-like revenue.

7. Alignment

No IPO indicator is more reassuring than the vendor, executive team and board having a strong alignment with new shareholders. Simply put, high alignment means the vendor (who ideally should still own a significant number of shares after the float) and executive team do well when the company does well, and poorly when it underperforms. In this way, their interests are aligned with yours.

The other trait of good IPOs is how prepared a vendor is to ‘leave a little value on the table’ for new shareholders.

8. Do not give up on floats after listing

Investors may believe they have missed out on a float if they cannot secure stock in the IPO, or give up on it if the share price falls after listing. Often, the best value emerges several months after listing when IPO hype dies down and investors can judge the company’s quality by its half yearly or annual economic performance. The trick is finding higher quality IPOs at low prices – and that usually occurs when fewer people are looking at the company after the listing.


never assUme all floaTs in a risinG marKeT Will rally on lisTinG


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poor manaGemenT can qUicKly erode valUe, even in a Good bUsiness, so iT’s imporTanT To have confidence in The people pUllinG The levers

As investors, you tend to see only a carefully curated slice of senior executives

Like many investors, we try to gauge the quality of the management of the companies we invest in. We believe that the prevailing investment concern should generally be the quality of the business rather than the people running it, but poor management can quickly erode value, even in a good business, so it’s important to have confidence in the people pulling the levers.

This is not always easy to do. As investors, you tend to see only a carefully curated slice of senior executives, and it’s easy to be impressed by charismatic leaders or confident presenters – when confidence and charisma may not be what’s required for ultimate success. Making a reliable assessment of management may take years of carefully following commentary and promises, and comparing these to subsequent achievements.

As an aside, it is interesting to note that CEOs the world over tend to conform to certain stereotypes. For example, the average CEO is much taller than the population’s average. Not many boards would explicitly set height as a CEO requirement, but it clearly finds its way into the selection process.

Where a detailed multi-year track record of success in the role is not readily available, there are some things you can focus on as an investor to get a read on management. The key is having a clear idea of what skills or traits really matter, and which you can sensibly assess from outside the company.

Below, we have set out some of the things we have on our management shopping list, together with the reasons why we think they are important, and some indicators you can look at to help judge whether they are present.

At the top of the list is integrity/character. At the end of the day, management is in control, and a CEO who puts their own interests ahead of shareholders is unlikely to do a good job for investors. This problem is sometimes referred to as agency risk, and

Who’s manaGinG yoUr bUsiness?Tim Kelley, Head of Research; withRoger Montgomery, Chief Investment Officer


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Knowing how the managment behind any business works is crucial in understanding what the prospects for the company may be. In this article, Tim Kelley and Roger Montgomery explain some of the factors you should take into consideration.


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there are many ways your ‘agent’ can act contrary to your best interests. These include using investor funds to build an empire through unsound acquisitions, and managing the business or the share price (such as through buy backs and unsustainable dividend policies) to achieve their personal remuneration goals rather than to maximise the value of the business.

One of the things you can consider in assessing this quality is the standard of disclosure. Is the business and its performance explained by management in a clear and transparent way, or is it largely PR spin and obfuscation that makes it difficult to understand what is really happing (recall Enron)? Good management will demonstrate respect for the owners by telling the market what is really happening, and letting investors set the share price accordingly. Management that is more concerned with managing the share price than the business is unlikely to do well at either in the long run.

The remuneration report can also tell you something about agency risk. Modest rates of remuneration and a focus on long term performance goals can be taken as a very good sign – especially if profitability measures such as return on equity are considered as well.

Another useful management attribute is passion for the business. A good leader need not be perpetually cheerful, but one who genuinely enjoys the work they do will achieve far more than one that doesn’t. When you hear a passionate manager speaking about their business, their enthusiasm is usually apparent. Paul Zahra at David Jones may be well-regarded by some of the larger shareholders, but from reading recent reports it might be reasonable to assume that he’s not tap dancing to work, and a manager that doesn’t enjoy what they are doing may find it challenging to give their best efforts for the company, or to inspire others to do so.

On a related note, we believe that a detailed understanding of the business is valuable. A manager with a complete grasp of every aspect of their business and its industry can be far more effective than one who relies heavily on others to fill in the gaps. Every negotiation or interaction with suppliers, customers and staff presents an opportunity for a poorly-informed manager to put a foot wrong by failing to properly understand the flow-on effects of the choices they make. In this regard, there is no substitute for industry experience, so it’s good to look at senior management’s CVs. If a CEO can confidently answer questions on the business without needing to delegate them, take them on notice or issue subsequent ‘clarifications’, it is usually a good sign.

This is far from an exhaustive list, and other skills including intellect, vision and strong leadership will be more or less important depending on the business and the circumstances.

However, as a general observation, if you can feel comfortable that management is honest, enthusiastic and knowledgeable (in that order), you have a reasonable basis to expect that they will be able to steer the ship around some of the larger icebergs that inevitably lie in the path of every business venture.

a manaGer Who has a compleTe Grasp of every aspecT of Their bUsiness can be far more effecTive Than one Who relies heavily on oThers To fill The Gaps


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In May, we warned about the prospects for Allmine, the one-stop mining servicing company. Allmine was founded by an investment banker who had experience structuring deals within the sector. The plan was to create a company that catered to every aspect of a mine’s life by rolling up a number of diversified services.

Consolidations involve the purchase of private companies to list on the share market and realise a higher trading multiple. The success of this strategy relies on disciplined management, a stable operating environment and a little luck. Unfortunately, Allmine was a victim of the slowdown in the mining boom, and the company was placed in administration shortly after our article was published. What sounds good in theory can often be challenging in practice.

With optimism abounding in the share market, we at Montgomery Investment Management are once again warning readers against investing in a business plan with unproven performance. There has been considerable demand for floats in recent months, and many operators are hoping to capitalise on this appetite by raising funds for businesses that are yet to exist.

While Montgomery Investment Management has participated in some compelling floats recently, there are a number of floats that we would never touch due to their fundamentals (or lack thereof). Buying into a plan is a very risky way to manage your money, and those who think it is a shortcut to quick financial return should intimately understand the following considerations before parting with any capital.

The vendors of a business plan will typically ask investors for capital to acquire a portfolio of assets. The benefits of a roll-up increase with scale, and because of this, the vendors would aim to acquire a large portfolio of assets in the float. Investors must examine every asset in the portfolio to ensure that the purchase price is reasonable. If it appears that some assets are being purchased at a premium for the purpose of generating scale, they may be disposed of after listing due to poor economics. Like any business, you must fully understand the fundamentals of each division.

With that said, it can be difficult to assess the fundamentals of a business plan due to the lack of proven financial numbers. The statements provided in the float will typically have the earnings of the aggregated assets, with a one-period forecast for the merged entity. It may be hard to take these estimates at face value, as the company is yet to be formed, so the credibility of these numbers rests largely on the competency and experience of management.

Yet the vendors that bring these roll-up plans to market may have more experience in coordinating a roll-up than running the businesses they plan to purchase. Having a disciplined board capable of making conservative acquisitions is necessary to generate long term value with consolidation plays. But equally important is having a management team that not only has an intimate knowledge of the business, but also a vision for growth.

Of course, if management of a proposed roll-up has minimal experience in the industry, it is likely that greater costs will be incurred with consultants, lawyers, and accountants conducting due diligence. While consultation is necessary with any operation, if the consultants know more about the industry than management themselves it can result in higher overheads, which means less capital can be reinvested into the business.

This brings us to what is perhaps the most important consideration for any float – where will the capital be directed? When a business plan is brought to market, it is prudent to identify how much the founders are being remunerated for their ‘idea’, and how much ‘skin in the game’ they will have after the float. If the vendors are simply selling an idea and expect to pocket a large share of the capital raised, you may be left holding the bag.

Value investing is all about carefully controlling the risks with the aim of earning a reasonable return over the long term. There are no shortcuts to this strategy. The next time you consider that a business plan has merit, just remember that when an informed seller meets an uninformed buyer, you should stay on the side of the vendor.


bUsiness plan Ben MacNevin, Analyst; withRoger Montgomery, Chief Investment Officer

floating a


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With optimism abounding in the share market, at Montgomery Investment Management we are once again warning against investing in business plans with unproven performance. Ben MacNevin and Roger Montgomery explain why.


Roger Montgomery, Chief Investment Officer

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A lot has been said recently about the emergence of bubbles in stocks and property in the Australian market. But are things that clear cut? Roger Montogomery gives his view.

Please allow me suggest something to you: amid only the emergence of rising prices, all the talk of bubbles in stocks or in property is simply premature. We’ll leave US T-bonds and the US Federal Reserve out of this discussion until the postscript and focus on Australia for now.

It is not to say that price will not decline. They may do, but any decline from current levels is not because of the presence of a bubble, nor evidence of it bursting.

Having said all of that, I do believe the first seeds of a bubble have germinated, and it is also true that bubbles currently exist in some individual stocks and sectors, but it may be some time before a true bubble – one whose contagion is damaging to markets, investors and the broader economy – emerges, and it may be that no potentially damaging bubble develops at all.

To discuss both shares and property in the context of bubbles, it is worth first defining them.

Canadian and US, economist and diplomat, John Kenneth Galbraith, in his book The Great Crash observed:

“…at some point in a boom all aspects of property ownership become irrelevant except the prospect for an early rise in price. Income from the property, or enjoyment of its use, or even its long-run worth is now academic. As in the case of the more repulsive Florida lots [in a mid-1920s Florida land boom], these usufructs may be non-existent or even negative. What is important is that tomorrow or next week, market values will rise – as they did yesterday or last week – and a profit can be realized…”

Stewart Robertson of Raine & Horne real estate in Mosman recently sold a block of five flats in Mosman, NSW for $3.52 million dollars on behalf of a couple who had purchased the property at the depths of the GFC in 2009 for $2.9 million. The block contained one three bedroom apartment, two two-bedders and two one-bedders. The gross rent was just $139,000. The new buyer will have to subtract maintenance costs, property manager fees, and tax before a net yield is available. If more than 50 per

cent of the purchase price was borrowed at an interest rate of, say, 5 per cent, you can be sure there is no income return at all.

When John Galbraith said: “...these usufructs may be non existent or even negative,” he was referring to income, or the lack thereof, from vacant Florida swamp land, but the reference is equally valid for the Mosman block of flats, where at least some of the usufructs are marginal at best.

Back in 2010, I wrote on my blog: “A bubble guaranteed to burst is debt fuelled asset inflation; buyers debt fund most or all of the purchase price of an asset whose cash flows are unable to support the interest and debt obligations. The bubbles to short are those where monthly repayments have to be made.”

And in his book The Map and The Territory; Risk Human Nature and the Future of Forecasting, Alan Greenspan goes further, distinguishing a bubble whose bursting causes widespread damage from one that doesn’t:

“The crashes of 1987 and 2000 had comparatively minimal negative effect on the economy. The severity of destruction caused by a bursting bubble is determined not by the type of asset that turns ‘toxic’ but by the degree of leverage employed by the holders of those toxic assets. The latter condition dictates to what extent contagion becomes destablising. In short, debt leverage matters.”

With bubbles properly defined, it may be prudent to apply the definitions to both the Australian stock and property markets.

In Australian stocks there are a few signs of elevated prices. As you may already be aware, at Montgomery, we first define companies according to a quality score. A1 companies have the lowest risk of catastrophe between now and the next reporting period. Companies with a C5 rating have the highest risk. We only invest in companies whose scores are A or B and 1 through to 3. That means companies rated A4, A5, B4, B5 and C1, C2, C3, C4 or C5 at the time of possible acquisition will not find their way into The Montgomery Fund, irrespective of whether or not they are cheap.

breWinG?bubble trouble

Roger Montgomery, Chief Investment Officer


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15

If we put aside this test, we can rank all of the largest 100 Australian companies (we can rank every listed company in the world, see skaffold.com) by their discount and premium to our estimate of their intrinsic values.

Interestingly, if we apply this test we discover that at the time of writing just four companies display any discount to intrinsic value. The four companies are Fortescue, JB Hi-Fi, Orica and Leightons. Now, before you run off and buy these companies, you should note that if only four companies are cheap, it suggests 96 companies are expensive.

Over the last three or four years, when I have observed such a situation, the market has ceased rising and in fact, in most cases, has subsequently fallen by between 5 and 15 per cent. Once again, I am not predicting the commencement of a sell-off, nor the presence of a bubble, but it does seem that prices are not currently justified by valuations.

Having made this observation I should point to the existence of one of several ‘mini’ bubbles. Their bursting is, I believe, inevitable, however the impact will be quarantined by their microscopic size. Since mid-July, the share prices of Mint Wireless, Smarttrans Holdings, and Mobile Embrace have been riding a euphoric wave of optimism, buoyed by industry buzzwords such as ‘cloud’, ‘mobile’, ‘payments’ and ‘online scale’. The share price trajectories have left us shaking our heads.

Suppose we offered you the opportunity to buy a diversified digital ‘business’ for $292 million. If, upon telling you that the business generated just $16.9 million in revenue and produced a loss in 2013 of $4.1 million, you didn’t close your wallet and run you would arguably need your head checked. Combine current market capitalisation, revenue and profit for Smarttrans, Mobile Embrace and Mint Wireless and you have the same scenario.

Paraphrasing Galbraith, all aspects of ownership have become irrelevant except the prospect for an early rise in price. Income from the businesses, or even their long-run worth is now academic. What has become important is that tomorrow or next week, market values will rise – as they did yesterday or last week – and a profit can be realised.

When it comes to property, it appears a slightly different ingredient is emerging as the germinating input for a bubble that could be much more damaging if permitted to inflate further.

During the GFC, many homeowners, some of whom may be reading this column, found themselves unable to offload their multimillion-dollar abodes. In Mosman, entire streets were ‘quietly’ on the market. Properties purchased for $10 million to $15 million couldn’t find buyers at $8 million. The impact was felt most acutely by those whose financial obligations were reliant on continuing bonuses that failed to repeat previous excesses. The wealthy however, largely represented the boundary of the fallout.

Today, matters are quite different. Low interest rates have encouraged the broader market to acquire homes at every price point, but low interest rates and generous borrowing terms – you can obtain a fixed rate mortgage for 4.8 per cent with 100 per cent gearing, 70 per cent in your super fund – have meant that it

is inevitable many will overextend.

By way of example, Narayanan Somasundaram from Bloomberg, in an article entitled, Australians Ride Housing With Pensions Not So Super, writes:

“Howard Kindler, 57, dipped into his pension to turn property investor, spending a third of his retirement savings and taking out a mortgage to buy a Melbourne apartment.

Disappointed with the returns of his retirement fund, Kindler is one of the million Australians who go it alone and manage their own pensions, known as self-managed superannuation funds or SMSFs that together hold A$500 billion ($474 billion) in assets. Many are increasingly banking on surging home prices to provide a comfortable retirement, and like Kindler, are leveraging their investment, expecting higher returns.”

Remember Alan Greenspan’s observatio: “The severity of destruction caused by a bursting bubble is determined not by the type of asset that turns ‘toxic’ but by the degree of leverage employed by the holders of those toxic assets.”

The Reserve Bank of Australia noted back in September: “Property gearing in self-managed superannuation funds was one area identified where households could be starting to take some risk with their finances.”

To be fair, supply is one thing we don’t have an excess of. When visiting New York and Florida in 2007, I was struck by the billboards that urged Americans to buy a house and get one free. And this was before it all went pear shaped. Up until 2007, low interest rates in the US led to a boom, not only in house prices, but also the construction of residential accommodation. A subsequent supply of excess stock, combined with the rolling over of sub-prime loans from interest-free periods, triggered a collapse as home owners were unable to support the mortgages that had been supporting house prices.

So in Australia we don’t have a bubble in stocks or property yet. We do have a couple of the key ingredients that if left unchecked could help fuel a bubble.

In property, the germinating ingredient is that everyone believes they can become rich, or safely retire, by buying property. Low interest rates and the fear of missing out may just encourage enough buyers to borrow too much, supporting houses prices whose elevated levels prove temporary.

In stocks there’s no bubble in the broader market either, although there are examples in certain sub-categories. The broader market does appear however to be expensive.

As we are on the subject of stocks and bubbles, and given that I think a bubble currently exists neither in property nor in shares, I thought it might be worth adding a postscript that ties this discussion to developments in deep dark corners of the US Federal Reserve.

One of the conversations occurring in the halls of global central banks but not being reported in the Australian press is whether the Fed is about to embark on a ‘regime change’ – by which I mean a very serious shift in policy.


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When European Central Bank President, Mario Draghi, famously pronounced in just seven words that the central bank would do “whatever it takes to preserve the euro,” he signalled a massive regime shift at the central bank. And it worked.

When Japanese Prime Minister Shinzo Abe replaced both the governor and the two deputy governors of the Bank of Japan and committed to ending deflation as well as setting ambitious targets for inflation by engaging in quantitative easing on a scale that makes the US program “look timid” (to quote Christina Romer) he signalled to the world and its officials that to get something done, you really need to ‘move the dial’.

The US is looking at this in the context of a study that found since January 2009 the US stock market rose every week the Fed bought bonds and fell every week it didn’t.

The idea of fuelling a bubble may be gaining momentum.

Now, we all know that Janet Yellen is taking the chair at the Fed and that she has said that targeting inflation will play second fiddle to ensuring healthy employment. And the US central bank is widely regarded as having been unsuccessful in its policy settings as they relate to unemployment.

What you may not know however is that Christina Romer, who was head of Obama’s Council of Economic Advisers from January 2009 to September 2010 and a worldwide expert on the Great Depression, may replace Yellen as vice chair of the US Federal Reserve.

With that in mind it may be worth knowing that Christina Romer aligns with Yellen in that she forcefully supports the idea that withdrawing stimulus too early threatens a 1937-type economic reversion, and she believes that economic growth can be improved by changes in expectations on growth and that if the Fed turns its focus to targeting nominal GDP, it can achieve its aim.

Two weeks ago (October 25) at Johns Hopkins University, in a speech entitled, Monetary Policy in the Post-Crisis World: Lessons Learned and Strategies for the Future, Christina Romer said:

“A final way beliefs may be important involves expectations of growth. People’s expectations about the future health of the economy have a powerful impact on their behavior today … If a central bank through its statements and actions can cause expectations of stronger growth, that can be a powerful tonic for the economy…

“People tend to think that Franklin Roosevelt’s most dramatic actions involved fiscal policy and the New Deal. But, his monetary actions were even more dramatic and more important.

Roosevelt staged a regime shift – by which I mean he had a very dramatic change in policy. A month after his inauguration, he took the United States off the gold standard, which had been the basis for our monetary operations since the late 1800s. Then the Treasury, not the Fed, used the revalued gold stock and the gold that flowed in as means to increase the U.S. money supply by about 10 percent per year.

“This regime shift had a powerful effect on expectations…

“Stock prices surged instantly, suggesting that expectations of future growth improved dramatically…people went from expecting deflation of close to 10 percent a year early in 1933 to expecting inflation of 3 percent just a few months later.

“This rise in expected inflation implies a dramatic fall in real interest rates had a profound impact on behavior soon after…

“The bottom line from this episode is that for policymakers to really move the dial on expectations and push them firmly in the direction they want them to go – it takes a regime shift. Smaller, more nuanced moves are easily missed or misinterpreted by people in the economy.

“Back in 2011, a number of economists, including me, argued that the Federal Reserve ought to adopt a new operating procedure for monetary policy: a target for the path of nominal GDP. A nominal GDP target is just a different and more concrete way of specifying the Fed’s dual mandate. The Fed is supposed to care about both inflation and real growth. Nominal GDP, which is the current value of everything we produce, is just the product of both those things – price changes and real growth…

“To set a target path for nominal GDP, the Fed would start in some normal year, such as 2007. Then it would specify that nominal GDP should have grown at some constant, reasonable pace.

“Switching to this new target would have some important benefits. In the near term, it would be a regime shift. It would unquestionably shake up expectations. Since we are currently very far below a nominal GDP path based on normal growth and inflation from before the crisis, it would likely raise expectations of growth, and so help spur faster recovery…

“Today, I worry that guilt over letting asset prices reach the stratosphere in 2006 and 2007 have made some policymakers irrationally afraid of bubbles. As a result, they focus on the slim chance that another bubble may be brewing rather than on the problems we know we face – like slow recovery, falling inflation, and hesitancy on the part of firms to borrow and invest.”

As I mentioned at the very beginning of this column, we are not in a bubble.

Yet!

since janUary 2009 The Us sTocK marKeT rose every WeeK The fed boUGhT bonds and fell every WeeK iT didn’T



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The Montgomery Fund has outperformed materially since inception.

How?

we don’t change course or switch boats half-way across the stream, and The Montgomery Fund invests in the safety of cash when the market appears expensive.

no time to invest yourself? Too much information to process? invest in The Montgomery Fund – high quality businesses purchased at rational prices.

welcoMe To THe boUTiqUe inveSTMenT ManageMenT

oFFice oF MonTgoMery

To find out more about how Montgomery aims to find the best stocks and buy them for less than they’re worth, visit www.montinvest.com today.

Performance to 30 November 2013*

$93,000

$100,000

$107,000

$114,000

$121,000

$128,000

$135,000

$142,000

17 August 2012 30 November 2012 28 March 2013 31 July 2013 29 November 2013

The Montgomery

Fund $136,040

ASX 300 Accumulation

Index $128,997

Minimum investment $25,000

Investment Manager Montgomery Investment Management Pty Ltd | ABN 73 139 161 701 | AFSL 354 564 | GPO Box 3324 Sydney NSW 2001 | 02 9692 5700 | www.montinvest.com | [email protected] Trustee Fundhost Limited | ABN 69 092 517 087 | AFSL 233 045 * Portfolio Performance is calculated after fees and costs, including the Investment management fee and Performance fee, but excludes the buy/sell spread. All returns are on a pre-tax basis. This report was prepared by Montgomery Investment Management Pty Ltd, AFSL No: 354564 (“Montgomery”) the investment manager of The Montgomery Fund. The Responsible Entity of the Fund is Fundhost Limited (ABN 69 092 517 087) (AFSL No: 233 045) (“Fundhost”). This document has been prepared for the purpose of providing general information, without taking account your particular objectives, financial circumstances or needs. You should obtain and consider a copy of the Product Disclosure Statement (“PDS”) relating to the Fund before making a decision to invest. While the information in this document has been prepared with all reasonable care, neither Fundhost nor Montgomery makes any representation or warranty as to the accuracy or completeness of any statement in this document including any forecasts. Neither Fundhost nor Montgomery guarantees the performance of the Fund or the repayment of any investor’s capital. To the extent permitted by law, neither Fundhost nor Montgomery, including their employees, consultants, advisers, officers or authorised representatives, are liable for any loss or damage arising as a result of reliance placed on the contents of this report. Past performance is not indicative of future performance.

http://www.montinvest.com/tmf



http://www.montinvest.com

This document has been prepared by Montgomery Investment Management Pty Ltd.

The issuer of units in The Montgomery Fund (Retail Fund) is the Retail Fund’s responsible entity

Fundhost Limited (ABN 69 092 517 087). The Product Disclosure Statement for the Retail Fund

contains all of the details of the offer. Copies of the Product Disclosure Statement are available from

Montgomery Investment Management (02) 9692 5700 or at www.montinvest.com. An investment

in the Retail Fund will only be available through a valid application form attached to the Product

Disclosure Statement. Before making any decision to make or hold any investment in the Retail Fund

you should consider the Product Disclosure Statement in full.

The issuer of units in The Montgomery [Private] Fund (Private Fund) is the Private Fund’s trustee

Fundhost Limited (ABN 69 092 517 087). The Information Memorandum for the Private Fund

contains all of the details of the offer. Copies of the Information Memorandum are available from

Montgomery Investment Management (02) 9692 5700 or at www.montinvest.com. An investment in

the Private Fund will only be available through a valid application form attached to the Information

Memorandum. Before making any decision to make or hold any investment in the Private Fund you

should consider the Information Memorandum in full.

The information provided does not take into account the your investment objectives, financial

situation or particular needs. You should consider your own investment objectives, financial situation

and particular needs before acting upon any information provided and consider seeking advice from

a financial advisor if necessary.

Future investment performance can vary from past performance. You should not base an investment

decision simply on past performance. Past performance is not an indicator of future performance.

The investment returns of the Retail Fund and the Private Fund are not guaranteed, the value of an

investment may rise or fall.

This document is based on information obtained from sources believed to be reliable as at the time

of compilation. However, no warranty is made as to the accuracy, reliability or completeness of this

information. Recipients should not regard this document as a substitute for the exercise of their own

judgement or for seeking specific financial and investment advice. Any opinions expressed in this

document are subject to change without notice and MIM is not under any obligation to update or

keep current the information contained in this document.

To the maximum extent permitted by law, neither MIM nor any of its related bodies corporate nor

any of their respective directors, officers and agents accepts any liability or responsibility whatsoever

for any direct or indirect loss or damage of any kind which may be suffered by any recipient through

relying on anything contained in or omitted from this document or otherwise arising out of their use

of all or any part of the information contained in this document. Additional information will be made

available upon request.

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