Portfolio Construction

Our aim in constructing the portfolio is to maximise the Fund’s expected return while minimising the risk of permanent loss of capital.

The Value Fund’s constitution allows us significant flexibility in managing the portfolio. We are able to purchase any ASX-listed stock, hold unlisted securities (up to 10%) and as much cash as deemed appropriate.

Such flexibility allows us to be patient, nimble and seek value wherever it arises. The Fund has owned shares in companies as small as Rubik Financial, an $11m IT company, and as large as QBE Insurance, a $15bn insurance company.

The Fund holds a relatively small number of stocks (typically around 15 and rarely more than 20). We don’t diversify the portfolio for the sake of it. The expected return from our best idea is usually significantly better than the expected return from our 20th best idea. So much so that it substantially outweighs the small additional benefit from extra diversification.

We do, however, spend a lot of time trying to minimise the risk of any one external event significantly impairing the portfolio. The portfolio is regularly stress tested against a number of macroeconomic risks, including recessions, interest rate movements, credit crises and declining house prices. It is impossible to avoid risk, we simply seek to avoid large exposure to any one event and seek adequate returns for the risk we are taking on.