Peter Magee is a member of The Constant Investor community with some great insights into high net worth investors as well as investing in China.
Watching high net worth investors, Peter Magee learned to cut out the noise and focus on the basic economics of the companies he invests in – down to the units of production and profit margins on each unit.
Peter also worked in mergers and acquisitions in Hong Kong where he learned a lot about investing in China. He tells James Brandis that quarterly reporting makes Chinese companies difficult to assess, so instead of investing directly he prefers managed funds.
James Brandis: Peter, you have come to investment through your work, haven’t you. Can you give us your CV? You began as a Chartered Accountant, is that right?
Peter Magee: Yeah, that is right James. I worked with KPMG originally, for some time here and overseas. I then had a stint in investment banking. In terms of becoming an investor, my next step was to work for a private investment firm which syndicated investments for high net worth investors and at that firm I also invested personally in the ventures that we were developing. Later I joined Telstra, working in the merger and acquisitions team, I was based in Hong Kong for about 5 years and Telstra had a number of very successful investments in Chinese internet businesses during that time and I too invested in Chinese internet stocks. So you are quite right, that my investing has been connected to the work that I have done, but I have then explored it further and developed my own style and approach and most recently I am working as a consultant on mergers and acquisitions projects and I still get to spend time on investing as well.
JB: What did you learn from working with high net worth individuals? Did you pick up any investing tips from them?
PM: I think it was fascinating on a few fronts. One thing I thought was interesting was we worked on a particular project which was a rollout of a retail food business, and we would have investors come into our office and we would have investors come in and we would take through the investment proposition and they would ask a series of questions. Now let’s say you have 50 very smart accomplished people come in a room, it is interesting just to see what types of questions they ask and what are the questions that you find are the most penetrating ones. And I think the ones that really stood out is where you are simply ask about the unit economics of the business and try and drill down on how many units does that mean you will make over how many hours will you do that, what is your throughput, what is your point of maximum productivity, and lowest etc. and just focusing on that type of element to get a sense of the businesses prospects. And it was probably a minority of people that had that focus, but I thought that those were really the investors who were the most astute in appraising a proposition.
JB: So they cut out all of the other noise and they just focused on the main thing that the company was doing and their ability to reduce costs and increase revenues.
PM: I think that is exactly right, yeah, to look at it from a financial perspective, but particularly in terms of what can this business possibly achieve, what is realistic etc. To go back to units and say how much can you produce in an hour at what price etc. and just carry out a sense check as well on any given proposition. You rightly say cut out the noise, because when you look at investments there are so many different dimensions you can consider, the strategic part, the people involved etc. but I think that is a very powerful element, that piece of it.
JB: Have you managed to apply that approach to any of your investments?
PM: I think so, yeah, I think you always want to be conscious of what is the size of the market in any investment you look at as a starting point. You know, what is the potential, what does that mean in terms of market share. Because when you look at a business and you are trying to ascertain what their revenue and expense base will look like over time, the expense base is a lot easier to forecast, it is the revenue that is much harder to predict. You always want to have a cross check and say what is the size of the market, the growth of the market. If they say revenue is growing at 10% yet the market is growing at 5, clearly that means that we are growing market share. Is that feasible, how are you taking it from competitors and so on. I think those type of ways of looking at the business are really critical.
JB: What about when you were living in Hong Kong. Did that give you a different perspective on investing, the act of living overseas?
PM: I think it is a good point. It widens your knowledge. What is interesting is, on that front, that at different times, you will be well aware of this yourself, a lot of Chinese businesses were stigmatised as questionable managerial capability, practices and so on. Because in my work I was seeing these businesses first hand and meeting with some very high quality management teams, I came to see that you could identify companies in China which had good ways of doing business and were very investable. Once I had that confidence, I could go on and invest. When I say investing in Chinese companies, these are ones that are listed in the US market, either on the NASDAQ or NYSE. So they have gone through a process where they have done an IPO and gone through a full prospectus process and listing, which is quite an onerous exercise for the companies to do.
JB: So what did you look for in a Chinese company. Can you let us in on some of the insights that you picked up there?
PM: I was generally looking for high growth. You found some fascinating businesses over there, just as you see leaders in the internet space in Australia, in real estate, in jobs, in cars. The same is true in China. So you could find businesses that were number one in their particular space, had huge growth already and when we talked about market size before, just vast market size potential. So those were the ones that I sought to invest on. Already number ones in the market place, and I think the concept that people would frequently think about is just the networking effect in internet businesses. Where once you have more traffic to a site and you have more content on that site, then just create a virtuous circle that repeats itself. Once more people put their cars for sale on a particular site, then you get more traffic and so on it goes. So that creates a competitive advantage for the business. And generally you would always want to see that a business that you are investing in has competitive advantage, in terms of how I approach the market at least.
JB: What is your view on investing in China now?
PM: I am glad you asked that follow up, because perhaps I can offer you a qualifying kind of perspective which is that more recently, because I have had more flexibility with my time, I was able to fly to China and meet with companies, meet with management teams and ask them my own questions and gauge things much more directly than I had in the past. It was interesting that I think I got to a point where I could really ask the suitable questions to be asking. On the US markets they report quarterly. You would have a perspective where you felt confident in how the business is going, all of a sudden the quarterly results are released and the revenue doesn’t look anything like you thought. There is a material deterioration. Then you would speak to the management team again and say how is this possible based on what we discussed, I thought everything was fine, there would always be 10 reasons why it was so. And what I came to find is that to the extent that you want to invest directly in a given stock, ideally you have a much broader perspective than the individual company, you understand the value chain for example, and you have had some contact with competitors and suppliers to the business. They just give you much better cross reference about the merits of a particular company and another perspective on the representations that a company would make to you. So from there I came to find that I would be better placed to invest in managed funds, because when you find equity fund managers, when they can do this full time with a few people on their team, they can get those types of insights, where they can see the entire value chain. So that was the next leg of the journey for me, was looking at managed funds in the Australian market place and finding ones that I thought were good investments.
JB: So what does your investment portfolio look like today?
PM: Today I am invested in some commercial property in a couple of unlisted funds, which produces a good income stream. I would have invested in those a few years ago, so they have capital growth as well, which is a brilliant combination to have. I have also invested in a number of equity managed funds, and then I invested in some individual stocks as well. The individual stocks is a bit rarer and again, I am trying to find isolated cases where I think the business is really exceptional and has excellent long term prospects.
JB: How do you evaluate those unlisted real estate funds?
PM: I found it was fascinating to look at as many as I could in the Australian market place, and you would find there was huge variety in terms of the risk return profile. So say a yield was 8% for a particular fund, if you look at enough, you could find that there are quite a few offering a similar type of yield but the risk profile would be quite different in terms of the quality of the tenants, the duration of the lease and those types of attributes. And so you are obviously looking to minimise risk for the given level of return that you obtain, and hopefully there is some growth potential as well. You also find a lot of variety on the fee structures. Because like managed funds or equities, they are charging you an entry point fee and they are charging you a performance fee, and in some cases the performance fees can be extremely high, and if you can find another product offering that doesn’t have exorbitant performance fees, you are obviously much better placed, and I think the other interesting lesson with the commercial property funds is looking at what happens when you invest your funds in the first instance, because typically a building has just been acquired and you are going to receive a partial interest in that building, but there will be a variety of costs involved, your stamp duty is an obvious one, and then you have got the acquisition fees from the fund manager. You can find that, let’s say you put in $100, on day one it is worth $90 of net tangible asset value based on those varied costs that you have already incurred. So you have to be very cogniscient of that when you are thinking what do the long term returns look like, because actually starting with a base of negative $10, or $90 relative to your $100. So it is those types of dimensions that look very different from one fund to the next and you want to evaluate carefully.
JB: It seems a little bit complicated. I know that there is a little bit of information on the Constant Investor website under the “unlisted Gems” which highlights some of those complications, but makes it seem almost a little bit daunting to get in to that area.
PM: I do think that you need to invest a reasonable amount of time if you want to do that, personally. You would certainly want to go and meet the managers, but at least to have looked at a few funds as well and seen how they compare, not to look at ones in isolation. And potentially, if you do it, you might do it across a few funds. I think it is important to say that these funds are unlisted. You don’t have liquidity. You have to be satisfied that the fund might be saying that this is a 7 year investment period and obviously you won’t see liquidity in that time. You have got to be confident that that asset can sustain itself over that 7 year period, notwithstanding that you might see some economic upheaval over that period. So you have to think things through carefully and believe that your risk is relatively well managed.
JB: On to your equities, David Blake recently dropped Innate Immunotheraputics and he replaced it with MicroX, which is a company that you suggested for Alan to explore on The Constant Investor. Where did you hear about MicroX and what were your first thoughts on that company?
PM: Micro X is a company that I am invested in, and you are quite right, I did highlight that to Alan and then fortunately David Blake, coincidentally a week or 2 later, he highlighted it as well. So I was pleased to see that he got to speak to their CEO and feature that. I know a couple of the directors involved because I happen to have worked with them in the past. One of my former colleagues in investment banking is director on the board, and another colleague that I went to school with is also on the board. So that always helps to know some of the people involved and it just means that I followed the company closely and have done a lot of reading on the business and feel very positive about its prospects. Again, that is the case where you have a business which, they are developing a miniaturised x-ray machine and they have significant competitive advantage and it is protected by patents. For me, that can be very powerful. Not only can they generate good returns in the future, but it is defensible.
JB: They are about to start selling their first x-rays in May or June this year, apparently. How closely are you watching the company at the moment?
PM: I watch it as close as I can. I think you mainly want to be focused on the fact of how the business is placed long term. You prefer to have investments where you don’t have to follow them day to day and you just feel very confident in their long term propositions, then you sleep well and you know that over time things should work out well for you financially. Because you can have short term movements which don’t necessarily reflect the underlying economics of the business. I am very positive on the investment, but equally I think that you need to see it first from a long term perspective before you think about the shorter term dynamics.
PM: Peter, you are clearly a well-informed investor. Have you read any books that you recommend to people that you keep coming back to as good books on investing?
JB: yeah, I have read plenty. I love reading books. I always think you can learn by reading about other investors. One that I find really fascinating is called the Outsiders, it has a long title, 8 unconventional CEOs and their radically rational blue print for success. It is a book by a US author who looked at the most successful CEOs in the US and described their characteristics. They measure their success at these companies or CEOs that they identify by their return on investment for shareholders. They found that they do share a few attributes, which was fascinating to see. One of which was typically they would have a decentralised management system, where they put decision making for operations down in to the divisions of the business, and the other which is the CEO would retain responsibility for allocation of capital. For example identify MA projects and when to execute them, and undertaking share buybacks when shares were at low prices relative to their true value. What you see is these types of CEOS are fundamentally focused on return on investment for the company and that is what results in the best outcomes for investors and also being CEOs who are contrarian, be prepared to be patient and are probably not investing in 2007, when the market was at heady levels, but rather in 2009 when valuations were extremely favourable.
JB: Sounds like a good one. I’ll check it out. Peter, what is your major motivation for investing, what is your investment goal?
PM: I look at it on a couple of fronts, one of which is just to build some independence for the future, and to do that I have found that it is better if you do that in a structured way and have a target. Maybe for example you might say that you want to generate a 10% compound growth rate on my investments. More is always better but it comes at more risk. Something like that, then you can start to hopefully plan for the future and also have a sense of how you can achieve that. Have a plan, I think is really valuable, and the other thing is do it hopefully because you enjoy it. And I certainly enjoy investing, I find it fascinating and read as much as I can and appreciate being a subscriber to The Constant Investor and listening to regular updates from Alan and yourself.
JB: That is great Peter, thanks for sharing your story on the community catch up.
PM: Yeah, thanks very much for your time, James.