In mid-2008, three months after exiting the deputy head of Australian equities and senior small-cap Australian equities roles at Queensland Investment Corporation (QIC), Michael Dee and Paul Xavier hatched a long-held plan to put capital to work in five sectors displaying ‘long-term structural growth’.
Their business, Harvesting Funds Management, which they chose to set up without the backing of an incubator or a venture capital manager, invests in large and small-cap stocks in five specific sectors considered to have “structural growth characteristics that are typically not sensitive to the economic cycle,” Dee said.
Harvesting sees the duo make a distinct break from their small-caps work at QIC to run individually managed accounts in an absolute return style for institutional and high-net-worth clients.
Dee would not disclose which sectors Harvesting targeted, but described the reasoning behind the strategy, which he began considering 10 years ago.
“It’s about taking a sector that is in structural growth, and then teasing apart that sector and working out where we believe the growth opportunities are.
“Think of China. There are many things that China needs in time. You can exploit the structural shortages in that economy.”
The themes were typically between three and five years or more in duration, he said.
“We will add to [the number of] them but I don’t see us subtracting from them.We haveproduced a volatility index per sector– and we are taking this much deeper. It will allow us to be able to be quite predictive, to emphasise or de-emphasise our sectors according to opportunities.”
To implement the strategy, Dee and Xavier buy Australian large and small-cap stocks, and potentially some international companies.
In his 13 year tenure at QIC, Dee was a resource for the manager’s large-cap team as he brought a different perspective to the discussion. He often attended the large-cap analysts’ meetings with executives of large companies.
He and Xavier also saw many small companies rise through the ranks: “close to 60 per cent of the top 100 have passed through our hands in the past 15 years,” Dee said.
The boutique is run from an office in Milton, in Brisbane’s inner west. After extensive talks with incubators and venture capital managers, the duo, who had worked together for about 10 years, decided to keep equity ownership in-house primarily because the potential backers “wanted ‘QIC II’,” Dee said.
“If I wanted to do that I’d still be [at QIC]. We have purposely created an entity very different from main-street funds management.”
Dee said that he and Xavier saw the market decline of 2008 as imminent and resigned to take advantage of “a generational opportunity to start a firm and a track record”.
“From here, with the right investment strategies, we are confident that investors have seen the worst of it,” he said.
“The extreme volatility is over. There will be hiccups with global events but the upturn can now occur.”
To illustrate the buying opportunities at hand, he referred to buying shares in project developer and contracting group Leighton Holdings on a price/earnings multiple lower than eight-times.