Montgomery recently announced a new partnership with Australian Eagle Asset Management, an impressive team of six who have been managing Australian large cap equities under mandate or Separately Managed Accounts (SMA) since February 2005 and Australian long/short equities in an unlisted unit trust since July 2016.

Naturally we have received many questions on the Australian Eagle team and specifically how they will operate as the sub investment manager for The Montgomery Fund. I will look to explore the Australian Eagle team, process, and performance further in a two-part series over September.

Can Australian Eagle hold up to 30% cash like Montgomery could in The Montgomery Fund?

Australian Eagle’s preference is to be fully invested. In fact, over the last 17 years their Australian large cap equity SMA has averaged only three per cent in cash. As such, the cash range for The Montgomery Fund post the transition date will be zero to ten per cent which will be reflected in the updated Product Disclosure Statement.

Under Australian Eagle, will the income and growth components of the return for The Montgomery Fund change?

Like Montgomery, Australian Eagle seek to buy superior quality companies with a sensible value buffer and hold those investments until their longer-term advantages manifest in a superior rate of return. The ability for a company to pay a sustainable dividend or a consistent yield isn’t a large determinant in their investment selection process and as a result you can expect the return profile over the longer term for The Montgomery Fund to continue to be more capital growth orientated rather than income orientated.

Australian Eagle have been managing their Australian large cap equity portfolio against the S&P/ASX 100 to date, will this now change under The Montgomery Fund?

The Montgomery Fund will continue to be benchmarked against the S&P/ASX 300. Similarly, to Montgomery, Australian Eagle like to have the optionality to invest in companies outside the ASX 100. In fact, they can invest up to 25 per cent of their portfolio there, hence why they are also considered “all-cap.” The only change from an investment universe perspective will be that The Montgomery Fund post the transition date will focus on ASX only listed companies, as opposed to also NZX which historically have made up less than five per cent of the Fund.

Can Australian Eagle own any resource-based investments?  

Australian Eagle can and do own resource-based investments, with Fortescue Metals Group Ltd for example being a current holding in the portfolio. In addition to Montgomery’s philosophy pillars of quality and value, Australian Eagle further focus on the market’s inefficiency in pricing emerging or forthcoming change, and therefore the value of underappreciated change is a key component in their investment process. In the case of Fortescue specifically, Montgomery have generally assigned a lower overall quality score to this business due to both the capital intensity of the industry and the market participants being price takers. Australian Eagle, however, whilst assigning also an initial lower overall quality score have further acknowledged both increasing quality and growth profile of this company through their strengthening balance sheet and improving execution on the cost front. This led them into taking a position in the company expecting that this change will cause a closing of this valuation gap.

Given the market volatility, how will the changes in the portfolio impact existing investors in The Montgomery Fund?

Given the commonality in investment philosophy’s, The Montgomery Fund and Australian Eagle’s large cap equity SMA currently have almost 40 per cent in overlap by way of underlying holdings. With the volatility in markets and the challenges many quality growth companies have had share price wise on the ASX year to date, the Capital Gains Tax consequences are therefore low. Our estimates are around 2 per cent. In fact, we expect over 90 per cent of the portfolio will be transitioned across in a matter of days.

Stay tuned for my next article where I look to unpack the performance of the Australian Eagle’s large cap SMA over the 17 years it has been running.