Growth Hunter

Lee Mickelburough: We think we’re in an environment where it’s still quite favourable for growth-style investing. Even though the market has been very strong in terms of performance since the low in March, 2003, earnings have been strong as well. So we’ve had a strong market matched by strong earnings and we don’t think we’re in an overvalued situation. For a growth manager, we’re all looking for the dynamic growing companies and we always find opportunities in the market.
Michael Pascoe: Have you got a genuine bias between growth and earnings? Is it your choice or could you play both sides of the street.

LM: Our starting point is that we think that a growing company, a dynamic company that’s innovative and producing new products and ideas, is a company that will outperform the market '” more so than a cheap company that’s not growing '¦ stagnating. It’s probably a poor investment from our perspective. So our starting point is to look for those growing companies because they’ll beat the market.

MP: You say you look for a growing company. How do you find one? How do you recognise one when you find it?

LM: We have a team of five analysts out looking for opportunities all the time; they have an average of 16 years’ experience, so we think we pretty well know what we’re looking for. The interesting thing is that there’s always a new idea or a new concept for something that’s coming along; opening your mind to those new ideas and concepts is important.

MP: Such as?

LM: Well, the most interesting one that we have at the moment is a company called Geodynamics Limited. It’s only a small part of the portfolio because it’s still not producing any cashflow, but it’s using hot rocks in central Australia as a source of energy to superheat steam that produces power. That sounds like a really 'out-there’ concept, but California produces 15% of its power from geothermal sources; New Zealand 10%, and there are other examples in Italy and Scandinavia. So hot rocks as a source of power has been established for a long time. It’s actually not such high technology, but it’s very new for Australian investors. We think that company has enormous potential.

MP: That example is higher risk than a value investor would look for. Is that the other side of the equation: that growth is high risk?

LM: It’s possible, but I think that in some ways the other typical sorts of businesses that we look at are typically high-quality businesses, which have great growth opportunities. We think that in some ways they present a lower risk because if you’ve got a well-positioned business such as a Cochlear, the bionic ear implant company, that has a fantastic technology and a wonderful product and its business, they’re going to sell that product every year for at least 15 or 20 years.

That is a very low-risk business and we think it should translate into a lower-risk investment. So you can find some good quality, growing companies without the risk. Geodynamics is higher risk in terms of the development stage, but once the technology and the process is proven then we think it will become low-risk because demand for emission-free power will make it a pretty valuable business.

MP: Obviously growth means potential. How do you tell potential from the never-will-be’s?

LM: That is the trick to our business, particularly when you go back through the tech boom when we were littered with examples of fallen growth stocks: businesses that promised but never really delivered. One of the things we look for is the management and the industry positioning of that company, and whether it has the ability to execute its growth opportunity.

MP: And how do you tell that?

LM: Some of the things are self-evident; for example, if you have a management that has a track record; if you’ve got an industry '” again using that Cochlear example: they’ve got 65–75 percent of their market so they have a dominant market share. So you look at the business structure, the industry positioning as well as the growth opportunities of the company.

MP: Growth did get a bad name during the tech boom. Is it inevitable that as the cycle rolls on, as growth gets harder to find and the market becomes more expensive '” does it end up getting tricky?

LM: I guess what you’re saying is: will we get to the stage where we pay too much for growth again? We don’t see that in the near term. Certainly, the market as a whole at this point '¦ 75% of the market is below 20 times multiple. So growth is not expensive in that context. In fact, the whole market has really hovered around 14–15 times multiple, so there’s a great set of opportunities in terms of finding good growing companies and not paying too much for them. It’s our job as managers to recognise that even if you have a great company that’s growing fantastically, if you have paid too much you’re going to cost your investors money. So we must have a disciplined approach to valuation.

MP: What else do you like at the moment? What other growth stories appeal to you?

LM: Some interesting ones. A company like Harvey Norman is coming up on to our radar screen. It’s a stock that we haven’t owned for a while. That’s an example of a fallen growth stock because during the boom period to March, 2000, it was the darling of the market in terms of a [growth/great] stock and it’s basically been de-rated now for five years. Now it’s coming up even on value managers’ radar screens. So we have an example here of a company that can still grow but it’s cheap enough for a value manager to have a look at, so both set of investors are really looking at this one.

MP: Are you going to predict who’ll come out better this financial year: the average growth manager or the average value manager?

LM: We think that as growth starts to get tougher in terms of economic cycle, the really strong growing companies will shine, and that will come in the next few years. I’m not sure exactly when but we think that we’re pretty well positioned to add some significant value at some point over the next two to three years relative to our value competitors. Again, if you look at the numbers since the market peaked in terms of growth value in March, 2000, as I mentioned earlier, the price/earnings multiples of the companies are still hugging in a narrow range, so we’re not paying those extreme prices for growth yet.

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