Morningstar has downgraded Montgomery Investment Management’s The Montgomery Fund to negative, with a recommendation that “Australian equity investors can find better alternatives.”
The Montgomery Fund strategy is to buy high quality companies with strong growth prospects at cheap valuations. The focus is on businesses that reinvest capital at attractive rates of return.
Morningstar says: “Its highly flexible approach to cash management, investment styles and market cap is too great a challenge for this investment group.”
The fund has had an average 22 per cent cash weighting since 2012 – a period when the S&P/ASX 200 has increased by 90 per cent. The cash holding has been as high as 28 per cent.
Morningstar says the fund’s style has shifted a number of times, moving from a small cap bias in 2013, moving into the mid-cap sector in 2016.
“While both the cash and style shifts are an admirable attempt to avoid risk when valuations appear poor, it can be very difficult to time, even for the most experienced asset allocator. We have not observed a discernible skill in market timing.”
Over the three years to the end of July, the fund has produced an average return of 4.9 per cent a year, compared with the index return of 9.3 per cent over the same period.
It has been a bottom quartile performer in three of the past four years. Its upside capture ratio is 71.3 per cent.
Since 2016 a number of poor stock picks have hurt returns. These include Vita Group, Healthscope and iSentia.
“This highlights the stock specific risk that comes with a concentrated portfolio that has significant allocations to the smaller cap end of the market,” Morningstar says.
The fund charges a management fee of 1.4 per cent and a performance fee of 15.4 per cent over the fund’s benchmark, the S&P/ASX 300.
“This puts it at the expensive end of our coverage list,” Morningstar says.