18
Mar
2020

By Joseph Kim

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Four criteria we are considering before buying shares in this market

With the Australian market in freefall, readers and clients alike have asked us where we are looking to invest. While we continue to monitor the fluid situation closely, we have established some key criteria that we would look to satisfy in anticipation of a potential recovery.

Over the past few weeks, the term “coronavirus” has well and truly entered the world’s lexicon, devastating populations, exposing weaknesses in health systems and global supply chains, and putting a halt to broader economic activity. The equity market has for the large part reflected the uncertainty faced by investors, with some of the most significant one-day falls and intra-day swings we have experienced in the history of financial markets (-8 per cent to +4 per cent on Friday, 13 March comes to mind).

While The Montgomery Fund has not been immune, we have held a significant cash balance in the fund on the potential for a less benign coronavirus outcome than investors initially anticipated – which it would now be fair to say is worse than our initial, more cautious assessment.

However, with the Australian market down approximately 30 per cent from its recent peak at time of writing, many of the questions we are fielding from investors are focused around what we are looking to buy (which may be a sign that wide-spread capitulation has yet to occur!). While not exhaustive or prescriptive in nature, the following categories are the types of businesses that we are presently focused on, with a view to investing on a 12-18 month time-frame:

  1. Quality companies with strong business fundamentals without structural impairment due to coronavirus – that is, the slowdown represents missed or delayed earnings, rather than impaired earnings
  2. Asset backed companies with latent capacity that will recover over the course of time – many of these have balance sheet leverage, but we expect banks to prioritise high quality assets with significant moats in their financing decisions over other weaker businesses
  3. Companies where competitors may / will suffer from a prolonged shutdown, providing medium term opportunity for these companies to capitalise on weakness
  4. Companies that will survive the downturn and should be well positioned in a recovery – these businesses are either economic sensitive, or more impacted as a feedback loop, but given the fall now appear more attractive on medium term return expectations

While it remains very early days in the evolving coronavirus crisis, the sharp falls in equity markets suggest investors are starting to price in the disruption to the economy. Financial system stability will remain top of mind in the short term, but it is our view we are yet to see significant second-order impacts to the economy, with first-order impacts – that is travel, education, hospitality bearing the initial brunt of changes to human behaviour.

However, we continue to seek quality opportunities that meet the above criteria should selling become indiscriminate given the potential for these businesses as the world “returns to normal”.

Our Funds

The Montgomery Fund

  • AUSTRALIA/NZ
  • Concentrated high conviction equities
  • From $25,000
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Montgomery Global Fund

  • GLOBAL
  • Concentrated high conviction equities
  • From $25,000
Learn More

Montaka Global Access Fund

  • GLOBAL
  • Access long/short global equity portfolio
  • From $50,000
Learn More

Montgomery Global Equities Fund (ASX:MOGL)

  • GLOBAL
  • Concentrated high conviction equities
  • No minimum investment - see your broker limits
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Montgomery Small Companies Fund

  • AUSTRALIA/NZ
  • Concentrated high conviction equities
  • From $25,000
Learn More
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Our Funds

Concentrated High Conviction Equities

Listed

Montgomery Global Equities Fund (ASX:MOGL)

Global
Available on the ASX as an Exchange Traded Managed Fund, invests in 15 to 30 quality global businesses for long-term capital growth with a target distribution yield of 4.5% per annum. Mirrors the strategy of the Montgomery Global Fund.
Unlisted From $25,000

Montgomery Global Fund

Global
Invests in 15 to 30 quality global businesses for long-term capital growth. Priced daily. Mirrors the strategy of the Montgomery Global Equities Fund (ASX:MOGL).
Unlisted from $25,000

The Montgomery Fund

Australia/NZ
Aims to provide long-term growth and income by investing in 20 to 40 high-quality Australian and New Zealand businesses trading at attractive valuations. Priced daily.
New Fund

Montgomery Small Companies Fund

Australia/NZ
Aims to provide long-term growth by investing in 30 to 50 high quality, undervalued, Australian and NZ small and emerging companies with strong growth potential. Priced daily.
Unlisted from $1 Million

The Montgomery [Private] Fund

Australia/NZ
Seeks to deliver absolute returns from a portfolio of high-quality Australian and New Zealand businesses. Capital preservation is paramount. By invitation only.

Alternate Equity Strategies

Unlisted from $50,000

Montgomery Alpha Plus Fund

Global
Aims to generate positive returns in both rising and falling markets. Invests in 80 to 180 global businesses expected to deliver above-average returns, while selling short a similar-sized portfolio expected to deliver below-average returns. Priced daily.
Unlisted from $50,000

Montaka Global Access Fund

Global
Aims to generate materially higher risk-adjusted returns, net of fees, than is generally available in the equities market over the medium term. Priced monthly. Provides retail investors access to the Montaka Global Fund.
Unlisted from $1million

Montaka Global 130/30 Fund

Global
Provides the opportunity to benefit from both the gains of extraordinary businesses and the declines of deteriorating businesses through a global equity active extension strategy, which has the potential to significantly outperform the broader equities market over time. Seeks to generate double-digit annual average returns, net of fees. Daily priced.
Unlisted From $1 Million

Montaka Global Fund

Global
Aims to generate materially higher risk-adjusted returns, net of fees, than is generally available in the equities market over the medium term. By invitation only.