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Paradice Investment Management Article

Jul. 29, 2013 6:33 AM ET
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Article recently published in 'The Australian' Newspaper.

Written by Tim Boreham


BOUTIQUE fund manager David Paradice has an unashamedly short attention span for most pursuits, but not the all-consuming and mysterious art of stock picking.

Take his recent "holiday" to Colorado to visit the family of his US-born wife, Claire.

"I got bored after the first day," he admits. "How many times can you talk about the same subject with your mother-in-law?

"So I visited the fund managers in Denver and came across Kevin Beck, who has now set up a mid to small-cap global fund with $150 million in it for us."

When he is not on "holidays", Paradice holds a reputation for a furious working day that starts with company briefings over breakfast and runs through dinner, interspersed with as few admin tasks as possible.

He uses the usual array of valuation metrics, but it is a less tangible skill -- knowing when to walk away -- that is just as important in the quest "to find something that's a point of difference".

He frequently annoys family and friends by grilling employees at his local supermarket or bike shop on trading conditions. Having endured several booms and busts, Paradice knows when he's being spun a line by management.

"We know when people are bullshitting us," he says in trademark blunt style.

Like the Queensland property developer who took Paradice on a site visit in a Toyota, hoping he wouldn't spot the Ferrari hidden up a side lane.

"I hate seeing excess. I remember a bloke who would talk about his wine cellar all the time, and he was a shocking investor."

So far, Paradice's acutely honed manure detector has paid handsome rewards to clients who have entrusted more than $7 billion across three funds.

The $1.5bn small-cap fund, overseen personally by Paradice, has managed a 21 per cent annualised return since its inception in June 2000. The mid-cap fund has accrued a solid 10 per cent since September 2006, while the large-cap fund has chalked up a modest 2.29 per cent since May 2007.

All of these are closed funds, but the new global fund is open to new investors.

Each fund is actively managed, but (gut feeling aside) there's no one-size-fits-all method.

So far at least it has been a winding but prosperous road for the boy from Scone, who learned about shares from his mother, a "practical" market dabbler whose investment philosophy owes a little to famed Nebraskan stock dabbler Warren Buffett.

"You either have it or you don't," Paradice says of investment nous. A case in point is the Woolworths execs who snapped up Australian Liquor Holdings for a song, all because one smarty noticed that drink-driving laws had denuded the club car parks (prime real estate) of patrons.

But the siren call of stock chasing didn't trill immediately for Paradice, who worked as an accountant at Peat Marwick before moving into stockbroking. As it happened, the move was consummately badly timed and his employer, Haddersley Maxwell, went broke after the 1987 crash.

Fate led Paradice to London -- where he sold sandwiches office to office for a time -- and then to ING, where he dabbled in small-cap management. "People were willing to support us, so I thought I might as well start myself," he says.

In league with Melbourne fundie Peter Cooper, Paradice Cooper hung out its shingle in 2000. The partnership dissolved, with Paradice citing the tyranny of distance in managing the Melbourne-Sydney axis (Cooper, who is oriented to the large-caps, now runs Cooper Investors).

Paradice says it's impossible to value companies with a template, such as return on equity or price-to-earnings.

"You can't look at a building materials company in the same way as a property company or in the same way as an internet company," he says.

"People used to say you need to be asset-rich. Yes, you want high returns, but it all depends on the business."

However, he adheres to one cardinal rule: the company needs to make money.

"If it doesn't have earnings you can't really model it and you can't value it," he says. "And if you can't value it, then how do you invest in it?"

That precludes most non-producing resource stocks or conceptual internet plays -- but not necessarily down-and-out stocks or maligned sectors such as aviation.

Paradice reserves special praise for Virgin Blue chief executive John Borghetti -- "he's doing a fantastic job" -- and Henderson, AMP's long-forgotten British spin-off.

"Sigma Pharmaceuticals is a terrible business, but it's pretty well all in the price."

He also has kind words for Reece Australia chairman Alan Wilson, Flight Centre founder Graeme Turner and retail tsar Solomon Lew, who hasn't lost the art of doing a deal after all these years.

Paradice says the small-cap fund hasn't suffered from being underweight in small resources. This group accounts for 43 per cent of the index, but only 20 per cent of the small-cap fund.

But he admits performance suffers when investors have an appetite for blue-sky or speculative plays. "When technology or biotech stocks are running, we will do worse."

Paradice says he's done with Australian sectors that, unlike in the US, don't have a "million and one" competitors. Transport, for instance, was fragmented and unappealing. "We made a lot of money out of Toll Holdings."

As storm clouds gather over global markets, Paradice says the the current rounds of initial public offerings (such as Glencore and LinkedIn) presages the bursting of the bubble.

Professional buyers are walking away, he says, citing Whitehaven Coal's failed sale process. "Bigger buyers are going away, so let's go to the public market where there are all those wood duck investors."

Paradice is also wary of a local spate of related-party transactions and was vocal in opposing Gloucester Coal's proposal to buy $600m of assets from its controlling shareholder, Noble Group.

His gloomy prognosis doesn't extend to the industrial sector, where many stocks have been "absolutely belted". The intrinsic value hasn't been lost on unlisted buyers such as private equity, which have been sniffing around the likes of Spotless Group and (the rumour mill has it), Graincorp.

Paradice's funds are sitting on collective cash of $300m-$400m. "We're actually hoping the market gets a bit worse in the short term, as that would open up opportunities."

Despite Paradice's stellar track record, he's not shy about discussing some "shockers" over the years. Television Media Services, Strathfield, ABC Learning and Colorado Group all were on Paradice's investment slate.

Paradice, 52, enters another phase with his plan to divest some of his 100 per cent holding to his 18 employees. "I can't say how much. It's not decided, but it's a reasonable amount," he says.

Still, it's hard to see him stepping back and devoting more time to cycling (he wants to help an Australian win the Tour de France) and the pleasures of horseflesh.

"I grew up in Scone, so I had a lot of friends involved in racing," Paradice says. "When they're looking for a wood duck for a share in a hoof they'll call me.

"If you get it right you make good money out of it, but it's not a big interest."

Paradice is cognisant that many people depend on the mettle of fund managers -- especially their ability to say no to proposals. "Millions of people are beneficiaries of the decision we make investing money," he says.

"Part of that decision-making is not only investing wisely but making sure the bandits don't clean us up."

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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