Performance Programme Report

By Michael Higgins, Portfolio Manager – Milford Dynamic Fund

As Portfolio Manager of the Milford Dynamic Fund, my focus is on smaller companies. It’s something I’m passionate about and have been lucky enough to be involved with for nearly 12 years. In smaller company investing, there is no shortage of those looking for capital to grow their business. There are some on the brink of reaching product acceptance and proving out their business model. Others may just need a little more time and/or capital to fully penetrate their addressable market. So, it’s extremely satisfying when you identify a business that ticks all the right boxes in our investment process.

Something unique to small cap investing is investing in companies that are more likely to be founder-led, family-linked, or employee-owned. One of the consistent themes I’ve witnessed over the years is that these businesses have an exceptional track record of outperformance.

Milford is fortunate in the Dynamic Fund that around 25% of the current portfolio is in founder-led or family-linked businesses. This is typically much less common in large cap investing given the time it takes for businesses to reach around the $4bn market capitalisation level required to enter the S&P/ASX 100 large capitalisation index.

As an interesting exercise, I tracked the three-year performance data of all the founder-led companies (19) we have owned in the Dynamic Fund over the past three months. It’s quite fascinating to see the significant outperformance these founder-led businesses have experienced, when compared to the ASX/S&P Small Ordinaries Accumulation Index. The founder-led portfolio has returned around 41% p.a. over three years against the ASX/S&P Small Ordinaries index return of 9.2%, an outperformance of 31.7% p.a!

Companies with a founder who owns a material stake and who is still actively engaged in the business can often think and act differently to companies run by professional managers. So why do founder-led, family-linked, or employee-owned companies generally deliver superior performance over the long term? We have identified three key differentiators:

Founders are typically looking at establishing a business with a multi-generational timescale. According to a 2018 report by PWC strategy consulting arm Strategy&, the average tenure of a CEO in Australia is only five years. This is not a very long time to grow and develop a company. Management incentives are also typically associated with earnings performance over shorter timespans (1-3yrs), which can encourage management to focus on near term outcomes.

Milford believes having a founder’s money next to ours is very powerful. This makes for a real alignment of interests. I’m sure you have heard the saying, ‘no one works as hard as the owner’.

Where professional managers come and go over time, it is the founder who is there and leading it toward success. These founders derive meaning from the challenge, identity, ethos of their work and not necessarily from the incentive package that the boards’ remuneration committee has devised for them. It’s this commitment that often leads to remarkable levels of performance.

Founders often bring a passion to business. They are building a legacy, which requires long term thinking. The most underestimated attribute we find is the broader love of the business and the intent to continue the success they’ve had into the future. As Warren Buffett says, “We’ve had terrific luck with the entrepreneurs who basically love their businesses the way I love Berkshire.”

I believe that Milford shares many of the same attributes I have discussed. One of our core values is to align our success to the performance of our clients’ capital. As a company, Milford is majority staff & board-owned and staff are only able to invest in Milford, or its funds.