Investment Objectives
MFF has three key investment objectives for its investment portfolio.
- To maximise compound after-tax returns for MFF shareholders by identifying and investing in a portfolio of listed international and Australian companies with outstanding business characteristics, at a discount to their intrinsic values. MFF believes that, by investing in such a portfolio, superior risk-adjusted investment returns may be generated over the medium to long term.
- To generate attractive returns to MFF shareholders through dividend payments utilising franking credits and the benefits of the listed investment company structure, although tax will not be the primary factor in investment decisions.
- To minimise the risk of permanent capital loss for MFF shareholders. While it is difficult to completely eliminate investment risk, MFF has established prudent investment parameters to mitigate the risk of permanent capital loss.
Investment Philosophy
MFF’s investment objectives are underpinned by the investment philosophy outlined below.
Identifying quality companies in attractive industries
The assessment of companies and the industries in which they operate focusses primarily on considerations such as the sustainability of any competitive advantages, whether the company earns high returns on invested capital, whether it is likely that the company can continue to deploy capital at high rates of return, the assessed inherent business and financial risk of the company, whether the company has scale advantages, the impact of technology on the company, whether the company will be a beneficiary from globalisation and whether the company’s management is assessed to be honest and capable and focussed on long-term shareholder value. While MFF may invest in companies operating in any industry or industry segment, the focus will be on the following industries or industry segments: banks and general financials; food and beverage producers; retailers; personal and household goods; support services; ports, toll roads and vital infrastructure; and monopoly and duopoly systems.
Assessing value against price
MFF will seek to invest in outstanding listed international and Australian companies at prices which are considered to be below the intrinsic value of those companies.
Investing internationally and in Australia
MFF will seek to invest internationally as well as in Australia. MFF believes that it is desirable to invest internationally as Australian equities comprise only approximately 2% of total world market capitalisation and the Australian market, therefore, necessarily offers investors limited opportunities for diversification. The focus will be on investment opportunities in countries with a well-established rule of law and regulatory oversight.
Preserving capital and minimising risk of loss
MFF believes that it is essential to seek to minimise the risk of permanent capital loss and the establishment of prudent investment parameters is intended to mitigate this risk. MFF considers that risk is reduced by investing in outstanding companies at prices below their assessed intrinsic value.
Selling discipline
MFF believes that it is important to maintain a rational selling discipline to maintain investment portfolio performance. MFF will assess whether to sell investments in the investment portfolio where it believes that:
- the value of a company materially exceeds the price that a prospective purchaser would pay for the whole company, adjusted for potential restructuring, re-leveraging or synergy benefits;
- the medium to long-term underlying fundamentals of a formerly impregnable business franchise of an investment portfolio company have materially weakened;
- the directors and/or management of an investment portfolio company behave against the interests of shareholders;
- there are other more attractive opportunities available, particularly having regard to the primary investment objective of holding a minimum of 20 investments in the portfolio; or
- it has been wrong about the business economics of a company or the company has not performed to expectations.
Derivatives and short selling
The use of derivatives is very limited and permitted only where MFF considers that a derivative, such as a preferred convertible security, is preferable to purchasing ordinary share capital. Short-selling activity will be very limited and permitted only in relation to implementing hedges of underlying investments or merger arbitrage relating to a portfolio investment.
Foreign currency hedging
Currency hedging is permitted. However, it is not anticipated that non-Australian dollar denominated cash-flows and investments will be hedged while current exchange rates and economic conditions prevail. In changed exchange rate or economic conditions, MFF may utilise currency hedging.
Committing to accountability to enhance performance
MFF believes that high standards of accountability, via disclosure and transparency, benefit investors. A transparent disclosure regime requires MFF to exercise prior due care and diligence to avoid or, at least, minimise investment mistakes. MFF believes that investors will support an investment fund that provides timely, detailed disclosure on a regular basis, both when events are favourable and when they are not. MFF believes that high levels of transparent disclosure and accountability may translate into better investor ratings of assets and profits than would be the case if disclosure levels were lower or there was less local investor accountability.
Investment limitations
MFF is subject to the following investment limitations:
- individual investments in the portfolio will not, without the prior approval of its board of directors, exceed 10%, and in any event will not exceed a maximum of 20%, of the portfolio value at the time of the initial investment;
- at no time will MFF own (directly or indirectly) more than 10% of any company or other entity in which it invests; and
- 90% of the portfolio value comprises permitted investments as defined in the Income Tax Assessment Act.
Borrowing limitation
MFF may borrow against all or any part of the portfolio, and pledge securities in the portfolio, provided that at the time any new borrowing is entered into, the aggregate of those new borrowings and any pre-existing borrowings must not exceed 20% of the portfolio value.