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Montgomery Fund losing its competitive edge

Lex Hall  |  06 Aug 2019Text size  Decrease  Increase  |  
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Morningstar has downgraded The Montgomery Fund, citing high fees and a “go-anywhere” strategy, including a high cash allocation, which has weighed on returns.

Previously rated neutral, The Montgomery Fund is now rated negative as its competitive advantages are increasingly hard to identify, according to Morningstar analyst Matt Wilkinson.

“The Montgomery Fund has weakened,” Wilkinson says in his latest research report on the fund, which began in 2012.

“Its highly flexible approach to cash management, investment styles, and market cap is too great a challenge for this investment group, and, alongside one of the highest fees in our coverage list, we think Australian equity investors can do better.”

Founded by prominent fund manager Roger Montgomery, the fund invests across the cap spectrum as opportunities arise. But it favours mid- and small-cap companies in line with its strategy of targeting under-appreciated growth stocks.

In Wilkinson’s eyes, this flexibility “is asking too much of” Montgomery as chief investment officer and portfolio manager Tim Kelly and the rest of the team.

“We have not observed a discernible skill in market timing,” Wilkinson says.

Over the past five years, the fund has returned 7.37 per cent, which trails both its category peers (10.50 per cent) and the benchmark S&P/ASX300 index (9.18 per cent).

The fund charges a management fee of 1.36 per cent a year and a performance fee of 15.38 per cent over the benchmark.

“This puts it at the expensive end of our coverage list,” Wilkinson says. “But the performance hurdle here may be higher than those that others in the category adopt, particularly when small-cap stocks underperform large-cap stocks.”

‘Go-anywhere’ strategy with high cash allocation

Wilkinson describes The Montgomery Fund’s holdings strategy as a “go-anywhere portfolio with an eye on value and growth”.

It has a reasonable level of concentration at both stock and sector level, holding 20 to 40 names, particularly across financials, healthcare and technology.

Its top 10 holdings include health names such as Healius, Ramsay Healthcare and Medibank Private. Core holdings include Telstra, Westpac and Spark New Zealand. It also holds plumbing fittings supplier Reliance Worldwide and toll road operator Atlas Arteria.

But certain stocks have dented returns. These include mobile phone operator company Vita Group, which suffered following its renegotiations of its contract with Telstra; private healthcare provider Healthscope, which failed to meet growth targets; and media intelligence and data technology provider iSentia, which faced new competition and acquisition issues, Wilkinson says.

Another key concern for Wilkinson is the fund’s cash allocation, which he fears is too high and risks missing out on opportunities.

“Since 2013, the cash allocation has averaged around 22 per cent and has been as much as 28 per cent (the hard limit is 50 per cent),” he says.

“Investors should expect relative performance to be bumpy because of stock concentration and the cash holding. An elevated cash level could provide a cushion in falling markets, but overall it has been a drag on returns in a rising equity market.”

Downgraded Morningstar funds

is content editor for Morningstar Australia

Any Morningstar ratings/recommendations contained in this report are based on the full research report available from Morningstar.

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