Argo Still Aims To Shake Out The Golden Fleece

The Age

Saturday May 24, 2008

Christopher Webb.

Argo Investments is a lean operation, with a close focus on providing its shareholders with dividends, writes Christopher Webb.

ITS offices are bare-boned, there are no fancy paintings on the walls; it's a lean operation if ever there was one. And that's the way it will stay at Adelaide-based Argo Investments as long as Robert Patterson is in charge.

Patterson, 60, has been looking after a great deal of Other People's Money for nearly three decades. Argo's cash and portfolio of 180 stocks at last count was worth $4.3 billion.

He was hired nearly 40 years ago by Argo founder Alf Adamson - who had set up Argo 23 years earlier - to be the company secretary.

Adamson, a chartered accountant and a member of the Adelaide Establishment, was as tight as they come and it rubbed off on the young Patterson.

"He was old school, very conservative, and paid himself a pittance, and me, too!" Patterson recalls. "He was terribly frugal. There was nothing flashy about Alf. He was very, very basic. There was no company car in his time, no expense allowances or things like that. I think he saw it more as a hobby than a job."

Adamson's way of doing things has stuck to this day, although the purse strings have been loosened just a bit. There are now two company cars and staff numbers have increased from just Adamson and Patterson to 15 employees, including five analysts. Patterson is paid about $700,000 a year - a figure many fund managers wouldn't get out of bed for.

The portfolio has increased from about $30 million when Patterson joined Adamson, to about $70 million when he took over in 1982, and to the aforementioned $4.3 billion now.

It's a folksy scene. It is one of the few companies that still operates its own share register. "I don't know if you've ever tried ringing a share registry and getting put on hold and a thank you for your call message," Patterson says. "We don't do any of that, we answer the phone every time."

Then there's the owners' manual that Patterson put together to answer any questions about the company's investment style. Such homespun assurances as "like our founder, we would never consider trading a good night's sleep for a few extra percentage points of return" litter the document; and that one in particular is a pinch from Warren Buffett's owners' manual at Berkshire Hathaway.

"I've got a feeling that Buffett might have one, and ours might have been a little copy without mentioning the man," Patterson says with a twinkle in his eye.

But unlike many fund managers who trade off Buffett, Patterson is loathe to compare himself to the great man.

When pressed he says: "I guess we think a lot like Buffett, but we're just a portfolio investor whereas he takes it to the next level and actually buys companies. I'm not sure that we're as deep-value focused as he is, but I think in general terms his philosophy is similar to ours."

Argo is as conservative an investor as you could get, with big holdings in BHP, Rio, the banks, Wesfarmers, Origin, Milton, Telstra, Woolworths and Macquarie.

In his early Argo early days, Patterson says that Adamson was doing all the dealing. "Before long I placed the orders, but he was telling me which orders to place."

But in 1982 when Adamson was 76, he appointed his young protege, then 35, to run the whole show. "I'd been trained by Alf in the way he chose investments. Generally it was fundamental analysis, having regard, in particular, to asset backing and trying to buy companies below their true value. But also price-earnings ratios, and dividend yield and dividend growth were important, as well as looking at the board and management," he says.

"We like to look at their track record and keep in touch with them. We observe whether they deliver what they say or, if they don't, have a good explanation. You don't want people pulling the wool over your eyes. There are plenty of those out there," he says.

You won't find any really speculative stocks in Argo's portfolio. "We try not to be in the flighty end of the market. We don't invest in explorers, for instance, in the resource sector," he says.

Argo's research is a mix of what Patterson calls "analysing the analysts" and company visits. For large companies, Argo collects earnings and dividend forecasts for the next three years and enters them in a database.

He explains: "National Australia Bank, for example, is pretty well analysed by every broker in the country, so you'll have a heap of broker forecasts. We might select eight of them and enter them in our database and then we'll monitor and get an average of them, but we overlay it with our own views on the company.

"Small caps is where it gets more difficult. There might be only two or three analysts covering them. You need to visit those companies more frequently and talk to the managements."

The small-cap sector has particular significance for Argo. Funny as it may seem, Argo's big small-cap to big-cap experience concerns Macquarie Group.

Argo bought into Macquarie when years ago it was known as Hill Samuel. Argo's cost would probably be a couple of dollars a share, compared with Macquarie's current $59 price.

It is now its second biggest holding - at about $222 million - after BHP Billiton. Macquarie rocketed from a couple of dollars to close enough to $100 but Argo has never sold a share.

"It's driven itself up there," Patterson says. "Having said that, we have an over index weight in the stock, and for a long time that served us very well."

The shares are down nearly $8 since Macquarie's result this week and Patterson reflects that "the outlook is a little disappointing".

"Clearly it's more difficult in their space but, relative to the international investment banks, they've done particularly well to deliver a 23% increase in profit and even nearly a 10% increase in dividend for the year."

"Given the disruption in global markets, I think it's been a fantastic performance. But it's going to be difficult in 2009, and I guess the market might just mark time there for a while."

Why didn't Argo sell any shares after such a huge run?

"We discussed it. The taxman was going to have a huge field day and the amount we would have had left to reinvest meant that the share price could come back quite a way before we were really any worse off after the tax we'd have to pay."

He says: "When they got down into the 40s we'd have obviously been better off having sold. But given that our philosophy is to invest long term, if we still like what that company is doing, we're not going to worry about the short-term fluctuations in the share price."

So, what has Argo's performance been like?

Over the past 10 years, the company has outperformed the market, but more recently it has underperformed. It is due to Argo's historical bent of providing what many of its 60,000 or so shareholders want - dividends.

"Because of this five-year resource boom and given the nature of our portfolio, which needs to deliver increased dividends, we are underweight resources," Patterson says.

"So it's been a tricky period for us in terms of trying to match the performance of the index."

So, what do you do?

"Just have to accept that we're going to underperform for a period. We've tried to rectify it (by buying resource company shares) but it's fair to say we're still underweight and we don't fancy buying them up here after the huge run that they've had.

"Having said that, it's not our total be-all and end-all to outperform indices. Our objective is to deliver long-term capital growth and dividend income growth from a diversified portfolio of Australian stocks."

Argo raised $440 million 14 months ago through a rights issue and is still sitting on a big chunk of the money.

"We didn't have the confidence to invest it all because the market was so high, so it was costing us to carry the cash through until November when the market started cracking. Then, of course, it became a Godsend and we've still got roughly $290 million in cash today," he says.

It doesn't look as if it is about to be spent. "There's not a lot of value around, whereas there was three months ago," he says. "It's probably rebounded a bit too quickly, but what is driving the market are resource and energy stocks at all-time highs, and they're still not overly expensive at these prices, if commodity prices stay high."

© 2008 The Age

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