We once celebrated surviving our first 3 years as success, so reflecting on 15 years of Alphinity, and still going strong, seems therefore somewhat remarkable. We all know that the market has an uncanny way of humbling us all, just when you poke your head up too far, so we hope it can indulge us for just a few moments as we reflect on the last 15 years of Alphinity, the positive outcomes delivered to our clients and the business success that has resulted from it. Hopefully we can pass on a few things we’ve learnt along the way. Then we will get back in our box, we promise.

One of the advisers who assisted us in setting up Alphinity in 2010 (who we still work with today) recently introduced us in a business meeting as “the only fund management partners I’ve ever known to have stayed working together this long and not fallen out”. To us that highlights where we think we are different and why we started Alphinity 15 years ago in the first place. It has never been about the individuals, but more about what we were building collectively and culturally, and what we believed was the best for our investment performance, therefore our clients. We always strived to deliver consistency for our clients (process, performance, team) and be seen ‘as a safe pair of hands’. The origin of our company name “Alphinity” was anchored in this ongoing consistent pursuit of alpha. 15 years later, we are pleased to have delivered on that vision. We are well aware that tomorrow is yet another challenge to keep delivering it.

Our history together started much longer than 15 years ago. The 4 founders (Johan Carlberg, Andrew Martin, Bruce Smith and Stephane Andre) worked together at a US based funds management business restructuring that fund coming out of the early 2000’s tech wreck. When we ultimately teamed up with Challenger to set up Alphinity, it was in the aftermath of the GFC – major market dislocations seem to play pivotal roles in our business success, perhaps less so for our health! We knew we had something special: a shared investment philosophy; a robust and proven process; consistent outperformance for clients; a love for investing and just talking stocks; and importantly, a mutual respect and trust in each other cemented in an alignment of Vision and Values which have all led to a successful working relationship that survived some pretty tough and hectic market times – the GFC was the ultimate learning experience, but also the ultimate test for our team and investment process: we passed it with flying colours. We wanted to keep these essential ingredients together, but in an environment that was much more conducive to sustained long term client performance, where we had direct influence and ownership of the outcomes and shared in our clients’ outcomes directly. There are countless research papers showing a boutique funds management environment produces the best results for clients over time. Having gone through it we absolutely agree and strive every day to make sure that this “hungry, can-do” culture prevails as we grow. We have an ongoing flat structure for that reason, with defined Values that reinforce the cultural foundation of our success to-date: Team, Trust, Performance. There is a lot of richness in these three words inspiring behaviours and mindsets we cherish.

We did a lot of due diligence with other boutique managers before setting up, to learn the ‘traps for young players’, and to work out how to have longevity, which is always key for clients in this industry. For example, we learnt in funds management, and boutique firms particularly, that it is never too early to start planning for succession – this is after all largely a people business. We had our first taste of succession in 2023 when Johan Carlberg retired after 13 years in the business. To put in

context, we had our first meeting about his succession in 2010! That is long term planning, but has worked out very well for our clients, staff and our partnership.

We’ve faced some interesting markets and times to say the least. When we came together and built our thinking around investment philosophy and process, it was just coming out of the early 2000’s tech wreck. You couldn’t get a hearing, never mind attract a dime, unless you were a value fund. Value was the only way to invest we were told (….we are not Value). Then of course, for much of the last decade, it completely flipped and it has all been about Growth, and Value is apparently dead (….we are not Growth). Now, no one has a clue and the markets can’t really make up their mind what they are or what they want (…..neither do we). And yet our consistent, risk focused, ‘slow and steady wins the race’ approach has continued to consistently deliver alpha for our clients

Through all those various market phases we have not changed our investment approach, despite the temptation at times. Refined it, for sure. Learnt from mistakes, absolutely. Changed our investment philosophy and process, not once. That is because our approach doesn’t really care what kind of market we are navigating: it stays completely and utterly focused on the one thing that underpinned markets in 2000, 2008, 2016, 2020 and today, and every market in between: Earnings.

The market value or an individual share price is made up of earnings (E) and what market participants are willing to pay for those earnings at any point in time (PE). The one constant through all of time in that equation is the E. E doesn’t care what type of investor you are or what type of market it is. The PE can move and change materially, and sometimes inexplicably, but it is always driven by the E eventually. If you are a good analyst and investor, and have the right process and tools, you can have some pretty good insight into the E and therefore performance over time. That style agnostic focus on quality earnings approach, has been remarkably consistently successful over a very long time. Our ‘core’ fund, the Australian Share Fund, has only had one alpha underperforming calendar year (gross alpha) in our 15-year history. If you want to go back to the predecessor of that fund before Alphinity, it is only 1 underperforming calendar year in 21 years, (and yes we do realise by writing that we have doomed ourselves to a second one soon!) However, the point being our approach aimed ay consistently adding a little bit of alpha often, adds up over time, and is less affected by market environment than other approaches because of this laser focus on earnings.

It is a truism to say that it is always ‘interesting times’ in markets of course, but some times are more interesting than others! The last 15 years have been no different. We started with the aftermath of the Global Financial Crisis, which morphed in the European Financial Crisis; quantitative easing followed by the taper tantrum; China’s slowdown and then massive stimulus in 2016; Trump in power twice; 6 Australian prime ministers; a global pandemic and all that brought with it; interest rates at zero; fears of deflation, and then rapid inflation; the most rapid rise in cash rates in a generation; war in Eastern Europe; a total upheaval of global trade and tariffs; and the advent of AI (for the record this is written by a human, we can’t vouch for the 20 year anniversary note however).

Of course, the various market crises have invariably played a key role in our history – and have actually been quite pivotal in stress testing and cementing our investment approach and process over time. We have taken away several enduring lesson from those times:

• “Observe, then act”, rather than “guess, act and hope”. Focus on facts rather than assumptions to make decisions. There is on average value (and lower risk) in waiting for that additional insightful information to make the right decision.
• Stop trying to pick market and/or stock turning points and wait for it to be confirmed – it will take out a lot of risk (and underperformance). You have to be prepared to lose a little bit of near term performance on a genuine market/stock leadership rotations, to make long term consistent returns. Thankfully genuine market leadership changes are much rarer than people expect (think tech wreck, GFC, China stimulus, Pandemic stimulus, AI in 25 years).
• Trends (positive or negative) go on a lot longer than you think they will, especially earnings as they tend to be serially correlated Cutting losers fast and letting winners run is on average an alpha generative strategy.
• The market collectively is almost always a lot smarter than you (closely related to “it’s never different this time”). So when you are genuinely different, and all parts of research point in the same direction, you really need to take advantage of it
• You don’t have to get all your performance at once, because you risk losing it all at once as well – people will tell you otherwise but what they really want is just a little bit of consistent performance all the time. Risk management is as important as stock selection.
• You can’t outperform without momentum in your portfolio. It is constantly amazing to us that people think you can. We have been called ‘momentum junkies’ (not in a positive way!) more than once in our careers – to that we respond, bring it on, because if it is true, then what we own is outperforming – we’ve never outperformed holding a portfolio of stocks doing worse than the market!
• There is a lot more information out there that can help you outperform, if you just swallow your pride and admit you don’t know it all. We have long found that traditional managers have a deep scepticism of quant for example – how can a computer possibly know more than we do about inherently unpredictable markets and human behaviour? Quant managers are much the same – how can human analysts possibly know everything and overcome their natural biases? From day one we have sought to just call both sides of the spectrum, ‘Research’, and use all the information at hand in combination, to complement each other to outperform. Just because objective quant contradicts you doesn’t make it wrong. But conviction is reinforced when both the analyst and the quant points to the same stocks!
• Value almost never tells you when to buy or sell a stock. It just tells you how much risk is involved in buying or selling at that point. It is a great risk control indicator to be considered in positioning. Anyone who tells you they have any precise idea what a stock is worth, is fooling themselves. If you are within 10-20% of true value at any point you are doing well. Every great company was massively ‘expensive’ at some point in its share price journey – spoiler alert, it wasn’t, people just got the earnings wrong. Just the same as every poor company has been very very cheap at some point – again largely it wasn’t, it was just a ‘value trap’. Getting the earnings right beats valuation every day.
• ESG does matter! It is not a tick the box exercise as some may consider it. Look at the share price performance of companies having Governance concerns and/or having lost their social licence to operate due to certain behaviours. We carefully integrate ESG into our fundamental assessment, at the very least to mitigate the investment risk.

Of course, none of this matters if you don’t have the right people to put this investment philosophy and process in place. We have been incredibly fortunate over the years to attract smart, like-minded investors to put our approach into practice. As previously mentioned, it is surprisingly difficult to get people to accept that fundamental and quant can work well together, and there is no shame as an investor to admit at times that they fundamentally don’t know. It is surprisingly difficult to accept that valuations are a great risk guide and not a definitive number you can calculate with any degree of certainty. It is surprisingly difficult to get people to understand that quality is almost as important as anything else. It is surprisingly difficult to find people who genuinely want to work as a team. And it is surprisingly difficult to find people who care about risk as much as returns.

We are all taught that we need to take risk to make returns. We think a bit differently at Alphinity and solidified frankly by markets in the last 4 or 5 years. Yes, you have to take risk to make returns – there are no free lunches. However, you don’t need to take risk all the time. Isn’t it better to take the right level of risk at the time you are most likely to be right? That just means you aren’t taking risks unnecessarily. It also means as mentioned before that we aren’t trying to get all our returns at once. If you are a specific ‘style’ investor and that style goes in and out – by necessity you have to get a lot of alpha when it is in favour, because it has to see you through long periods where it is not in favour. By avoiding ‘style’ investing you don’t have the same imperative to take a lot of risk, you can afford to do it incrementally and provide stability for your clients through the cycle.

We recall when we’ve been told that we don’t take enough risk and that we are too ‘benchmark’ focussed, and our tracking error is too low. We used to say back then that we are ‘unashamedly benchmark aware’ – not sure it helped us grow business at the time! But the point was that risk matters to our end clients, even if they don’t always see that at times. Just materially underperform the benchmark for a period and you will see how much end clients care about the benchmark! It is also a benchmark for a reason and acts as a great risk measurement tool. We think CBA’s impact on investors relative performance in the last 2 years has again proven that point. We were also underweight CBA for much of that time, but just in a risk-controlled way given it was one of the only stocks displaying positive earnings revisions in a market where negative revisions was the trend – and we still made money out of banks, by following earnings. Yes valuation matters eventually, especially when paired with earnings, but it just matters less regularly than you would expect. Being benchmark aware is different to benchmark hugging – we still want to (and do) outperform the index, which the ‘benchmark unaware’ investor also ultimately wants to do – we just have a different risk tolerance.

So, we continue to observe and learn, get humbled and then do it all again. Most of all we have been incredibly privileged to do it with outstanding colleagues and fellow investors at Alphinity, long term supportive clients who challenge us and keep us on our toes, and our steadfast partner and fellow co-owner of Alphinity, Challenger. We are more motivated and excited than ever to see what comes next. We’re sure the next 15 years will be much calmer with less ‘excitement’ than the last 15….surely! Either way, true to our name – the ongoing pursuit of alpha – we will, in the Alphinity way keep on trying to add a little bit of alpha often through those cycles. We would love you to join us on that journey.

Andrew Martin and Stephane Andre – Co CEO’s.