Portfolio Talk: Paul Harrison

I didn't like that philosophy of investing. The only reason why I want to buy a company is because I like it and think that it is going to perform. I don't want to buy Air New Zealand because it is going to be 2% of the index. I don't want to be pulled up because Air New Zealand has bounced for a few weeks of that month and I don't own any of it.

GR: Why do you think there haven't been a lot of absolute return funds in New Zealand?
PH: I think it is to do with the dominance in New Zealand of the superannuation funds and the consultants who tend to use index or index hugging funds. It's normal for people to use benchmarks, and it's a way for them to measure their level of risk against something. I suppose my argument would be that the New Zealand benchmark doesn't make too much sense.

For example now the NZSE40's going to include Air New Zealand and that weighting will include the government's (82%) but there's no liquidity because the government's not allowed to trade its shares.

GR: Why do you like the absolute return approach?
PH: I would say that's it's more how individuals would invest their money.

You don't get much of a hearing if you say I beat the index and the index went down 20% and I only went down 15.

Also our ability to rise up to 50% cash means that we can be conservative if we want to.

GR: How's the fund invested at the moment?
PH: We've got about 42% in New Zealand and about 44% in Australia and the rest in cash.

GR: That's quite a high amount of cash
PH: Yes, but it has been higher. We've had periods where we have got close to 50% and I actually had it running at about 35% cash in September as I got a bit concerned about the markets and we were struggling to find value and opportunities.

Then post September we were actually in the market buying stock and we pulled the cash weighting right down.

GR: The split between Australia and New Zealand is fairly equal. Which way is it trending?
PH: We are trending towards Australia because there seems to be more opportunities arising in the last few weeks as there's been quite heavy sell-offs in their stocks.

I brought some Brambles the other day at $8.80. I brought some more Baycorp when they got down to $6.

Some of the stocks get sold off heavily in Australia. What we try and do is have maybe 3 or 4 stocks in New Zealand and Australia that we're keeping an eye on that we don't own. If they get down to our price targets we buy some.

GR: You're real bargain hunters?
PH: Yeah. This kind of market suits us.

GR: Why are you more disposed to Australia?
PH: We are seeing a little bit more opportunity with the aggressive sell off of some of their stocks. As an underlying theme we expect the Australian economy to grow faster than New Zealand The natural assumptions are that the basic GDP driver into your businesses would be stronger than they are for New Zealand.

One of the issues facing both New Zealand and Australia is that we have had a very good performance in our equity market over the December year because of the fact that our GDP growth versus the rest of the world has been positive and the issue now will be how far behind our GDP growth is to the rest of the world and if you get a big pick up in global growth then New Zealand and Australia equity markets will probably under-perform global markets. They still be positive but not as positive.

Overall we expect the US will grow around its potential growth which is about 3.5%. Most of the forecasts I have seen for New Zealand predict growth of 2.5% and Australia will be slightly higher.

GR: How do you describe the fund's investment style?
PH: The nicest thing to say is that we are style neutral. I find New Zealand too small to try and attempt either a value or growth style. You could maybe get away with it in Australia. We just try and take advantage of anything that we can get our hands on. I'm not too precious about (style).

What we try and do is run three strategies in the fund where we buy good companies at a good price and sell them if they get over valued. There's always that basic underlying theme that you always buying something that you think is a good company for a good price so in a way that's the basis of the fund.

The second thing we try and do is take active positions based on short term trading opportunities. For example we brought quite a lot of Telecom and Carter Holt at the end of December where we paid $4.82 for Telecom and about $1.62 for Carters. I sold my Carters when they got towards $1.80. I've still got a little bit of Telecom, but I did trade them out and then brought some back.

We are also quite happy to particiapate in any placements or IPO's which are done in discount.

The other thing we do is utilise the options market.

That's really to enhance the returns or protect the returns that we have got.

GR: How do you split the portfolio up in terms of its three strategies?
PH: It depends very much on where we view the market. I don't trend to write options or carry too much cash if the market looks cheap.

At the moment we've got about 14% of the portfolio in cash, but we also have 14% of the holdings we've got with options written on them. Options always work best if the markets are going sideways because you sit there and write premium and collect the premium out of it when you get called away.

GR: Do you run any themes?
PH: The theme we're running is that I've got some late cyclical stocks in the portfolio including media stocks. I've got some Sky TV and INL, and a little bit of News Corp and Fairfax. The thing you tend to find in the mid to later stages of a pick up is that consumer discretionary type businesses do very well.

GR: What are your biggest holdings
PH: Tranz Rail - most of that came out of that placement. I've also got some Mainfreight which I'm still quite happy with. I brought a little bit of Macquarie Bank to top that position up as well when it got sold off. I'm also quite a big holder in Fletcher Building. I've got a little bit of Nuplex and I've toped up my Baycorp position as well.

GR: What's you're turnover like?
PH: In a typical superanunation fund you might turn the portfolio over once a year. We've had cases where we've turned the portfolio over once in two months. That was running into September when we were selling it down.

The thing that we never want to be afraid of doing is taking a profit on anything and if we get one or two good ideas to buy in the month that's all we want to do. We want to add incremental value, we're not trying to shot the lights out every day.

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