Glenn Freeman: I'm talking today with Daniel Moore from Investors Mutual. He is speaking about the process that the company follows in managing investors' money, including asset selection, portfolio turnover and how they identify quality companies at the right price.

Daniel, thanks for your time today.

Daniel Moore: Thanks, Glenn. Thanks for having me.

Freeman: Now, Daniel, firstly, within the Australian equity space that you cover, can you just talk us through your process here?

Moore: Yeah, sure. Really our process is around two key things, which is, quality and value. So, as you can imagine, we are trying to buy the best-quality companies we can at the best prices we can. And I guess, really, it means two questions, well, what's quality and what's value.

So, for us, quality is really around three key things, which is, a company has to have a strong competitive advantage. So, it normally means that the number one or two player in the industry for a reason that's sustainable. So, it normally means they have a very low-cost position in the industry or they might have some level of intellectual property in the industry which is sustainable, and it means they can earn above-average margins and returns in that industry which is sustainable through the long-term. We also like to invest in companies that have a strong recurring earnings stream.

In terms of value, it's quite a subjective thing. To us, value doesn't necessarily mean low P/Es. I think this is a big misconception to many people in the market. For us, low valuation is where the earnings multiple is low relative to the quality of the business. So, for a company like CSL that trades at quite a high multiple, that might not necessarily be expensive if the quality of the business is incredibly high. So, we have to marry up the quality of the business relative to, say, the market and the valuation relative to the market. We make this assessment when determining if the stock is good value.

Freeman: And in terms of portfolio turnover, how often do you change the companies that you hold, and have you actually changed your cash allocation in recent times?

Moore: Yeah, sure. We take a very long-term view. I mean, a lot of people say that, but honestly, at IML, we do. So, our turnover is 20 per cent and in some cases, less than some of our funds. So, the average holding period is about five years. Some companies we've held for much longer. So, I guess, it comes down to when you make that initial purchase of an investment. You are really doing a lot of research into the long-term prospects of the company. So, you don't get spooked by selling that happens in the short term.

Our cash levels are very high at the moment, roughly 9 per cent of a maximum of 10 per cent. We are finding it difficult to buy good-quality companies at good valuations. So, we are patiently waiting for that opportunity to occur. And we are starting to see a few things already this year. With long bonds, interest rates are starting to move up. You are getting some quality stocks like Transurban gets sold off quite aggressively which we'll start to look at.

Freeman: And Daniel, can you talk us through the Investors Mutual process in identifying underappreciated companies?

Moore: It's really case-by-case. I guess you can get sectors that can get unappreciated as a whole and then you get stocks, individual stocks can be unappreciated as well.

On a sector basis, I guess, a good example is if interest rates were to rise substantially, you can get more interest rate sensitive sectors getting sold off quite aggressively. And sometimes, the sector might get sold off too much and then there's quite a basket of opportunities.

The other situation we look for unappreciated companies is more on a case-by-case basis. And normally, that's because something has gone wrong in the short term. And I guess, this is sort of the advantage we try to take advantage of being a long-term investor is the market is very short term, I mean, incredibly short term.

The focus on quarterly earnings and quarterly sales, sometimes monthly data from economic indicators. We tend to look through that and we tend to try and look through the noise and really assess the long-term prospects of a company. So, quite often we'll see share prices down 20 per cent in quite a short period of time, in a matter of weeks or months. And we really sort of ask ourselves each time, is that valid, have the actual long-term prospects of the business changed that much, has the value of this business really changed 20 per cent-plus.

So, that's sort of what we do. We try to look through the short term and try and keep a very long-term view and take advantage of those short-term movements