http://www.asx.com.au/asxpdf/20130606/pd...4p1sk0.pdf
Filing by Paradice as a substantial shareholder, owns 20.23m out of 384m shares up to 31 May 13, there was substantial turnover on the following days:
4/6 - 3.08m shares
5/6 - 2.24m shares
6/6 - 2.54m shares
Profile - David Paradice - The sage of small stocks
John Stensholt
3681 words
26 Apr 2013
The Australian Financial Review
AFNR
English
Copyright 2013. Fairfax Media Management Pty Limited.
Performance is paramount for David Paradice, who has built an $8 billion investment business, John Stensholt writes, by combining an obsessive attention to detail with paranoia about losing other people's money.
Some years ago David Paradice and his mate, fellow fund manager Alex Waislitz, were heading into a meeting with a company in which they were considering investing. Waislitz noticed that the blue suit Paradice was wearing was torn and he could see the white lining. "I said, 'David, you can't go in looking like that'. But he said, 'There's no way I'm missing this meeting because you might get information that I may not.' So, quick as a flash, he got out this blue Texta pen and proceeded to scribble over the white patches on his suit pocket so they blended in with the rest of it. And then we went into the meeting."
Waislitz relates the anecdote to make two points about Paradice, or "Para" as he is known. "He's not an over-spender by any means", and he is relentless in his pursuit of slivers of information to gain an advantage for investment decisions. Others call Paradice the "Columbo" of the funds management industry – somewhat dishevelled, with his odd socks, scuffed shoes, tie askew, fraying suit, and employing the same combination of dogged investigative work and shrewd mind as the TV detective immortalised by Peter Falk.
Driven and single-minded, Paradice has built from scratch an $8 billion-plus funds management business that has consistently outperformed the market through a mixture of methodical number-crunching and "gut feel" investing. The standout quality most mentioned by his peers is an unerring ability to prise information from chief executives and other managers about their companies and industries.
Waislitz, a son-in-law of the late Richard Pratt who often travels overseas with Paradice on fact-finding missions, says the key to his friend's success is being deeply engaged. "He lives and breathes it. Unless you have that passion, you won't go to the extra depths that are needed to get that information, read that extra report or talk to that extra person who can give you insight. Because he does that over and above everyone else, that's why he is so successful."
That obsessive attention to detail was learnt long before Paradice started investing other people's money. Growing up in Scone, NSW, the son of a local doctor, he learnt about the sharemarket from his mother, Robin, a part-time teacher. She would write share prices every night in a notebook and discuss the companies with Paradice, even seemingly small matters such as the appearance of a shop-front or the health of the trees in a supermarket car park.
"I remember one day getting in a big discussion with the owner of a local supermarket," says Paradice of a shopping trip with his mum. "I kept asking him about how his business worked and the conversation continued after we had taken the groceries to the car, as we talked with the window wound down in the car." It was about seeing the little things that ultimately affect the big picture and those lessons have stuck with him. "You've got to have a passion for it, for knowing as much detail as possible and for asking a lot of questions. You have to have this huge love of learning, that insatiable appetite. And you can't take short cuts, I hate taking short cuts."
The legendary parsimony, which ranges from what he spends on suits to how he kits out the office of his Paradice Investment Management, comes from his father John. "My dad's a Scotsman, so he's pretty tight," says Paradice. It underpins his business and investment philosophy, as does an intense fear of losing his clients' money. As James Packer, the chairman of Crown Resorts and a good mate, says: "David treats the money he manages as if it's his own, taking great care with it."
Paradice attributes his "paranoia" about losing other people's money to being sacked from his job as a stockbroker a month after the sharemarket crash of October 1987. He was 28 and barely three years into his broking career. "Those times were hard, and unless you've done it hard, I don't think you appreciate things. What I think about is that ultimately individuals own that money. They have entrusted us and we want to do the right thing by them. They say only the paranoid survive. I'm a bit paranoid, though I'm getting better at putting things in perspective."
In recent times, because of various health scares, the¬ 54-year-old has had cause to reflect on the searing impact of that early career loss and the way it has galvanised him ever since. Not that surgery in February on a cancerous prostate gland, or losing 20 per cent of his remaining kidney, will mean that he slows down much. His daily routine still consists of back-to-back meetings, clutches of company reports and notes, pockets filled with business cards, and – always at hand – a crumpled print-out of Paradice Investment Management's entire portfolio, which he gets updated every two days.
For proof of his ability to keep up the frenetic pace, Paradice points out that when he had his other kidney removed in 1999, he got that done in between leaving his job at Mercantile Mutual running a stock fund specialising in small companies, and setting up his own shop in early 2000, at first alongside Melbourne fund manager Peter Cooper with their joint venture Paradice Cooper, and then on his own two years later.
Still, the prostate surgery slowed Paradice down to the extent that he agreed to several hours of interviews with the AFR Magazine to give him something to do while undertaking some forced rest at home. That "rest" includes constant checking of share prices, plus phone calls to and from his staff and extensive network.
"People say you've got to slow down but I enjoy what I do," Paradice explains. "I've got this stupid fear, and this is probably one of my weaknesses, of missing out. It's FOMO – fear of missing out. I like being involved and this is what I like doing. If I wasn't on the go I would be stressing about not being on the go."
On the immediate horizon are ambitious plans to tap into the demand from Australians to invest in international stocks, by growing the firm's $160 million Global Small Mid Cap Fund into a $2 billion fund. He is also presiding over a transfer of ownership of his company to the small team of 17 fund managers, traders and support staff who work for him.
Over the past 18 months, in an effort to retain his best stock pickers and lay some sort of foundation for the future, Paradice has literally given away a big chunk of his company, steadily reducing his holding to 53 per cent by issuing stock to his staff to reward their performance.
There is more to come, too, he says. This is not lip service – based on funds under management the firm would be worth close to $400 million. Dividends in the last financial year alone totalled almost $15 million and the year before, when Paradice controlled virtually all of the firm, the payout was $21 million.
Notwithstanding his Scottish genes, Paradice does enjoy the trappings of a rich life. He has a 1620-hectare farm near Scone in the Hunter Valley in NSW, where the family – wife Claire and their three children – live. It's where Paradice indulges his hobby of owning horses while Claire runs a small prize-winning cattle operation. Then there's the penthouse apartment on the top floor of a building in Sydney's North Bondi with stunning views down the beach. Yes, the railings on the balcony are a bit rusty and the furniture is a bit knocked around, but he and Claire own the entire three-storey building, having stealthily acquired separate apartments over about five years. Until a crash that almost killed him in 2009, Paradice would commute between Bondi and Scone by helicopter.
"There's been numerous times when I'd nearly been killed on the road [driving between Sydney and Scone], hitting kangaroos and so on. So I tried the helicopter but nearly got killed on that. I've had a few lives already." These days he sticks to flying in a light plane: "It's reasonably profitable because I rent it out, too, but I don't like what it represents."
Paradice says he has chosen to keep living in the country because he believes it's the best place to bring up his children: Angus, 16, Benjamin, 14 and four-year-old Sabine, a Chinese orphan who was adopted as a toddler after a five-year approval process. "I find in some respects the country teaches initiative. It can make children more proactive than reactive. For example, rather than playing a computer game or hanging out at a shopping mall, children's senses can be tested by playing in a creek or climbing a tree or riding a horse or being around animals." He claims not to mind that his eldest has no interest in following him into the money-making game.
In keeping with his rural upbringing, David Paradice's first choice of career was as a vet. But he didn't have good enough marks to qualify for the university course so he did a commerce degree at the University of NSW instead. He then gained accounting qualifications at Peat Marwick, now KPMG. Restless, the then 22-year-old moved to London where he sold sandwiches, including in the trading rooms of broking houses.
After returning to Australia, he joined the broker McNall & Hordern, starting in 1984 alongside Wallaby legend and friend Simon Poidevin, now managing director of corporate stockbroking at Bell Potter. Did Poidevin expect Paradice to be a success? "Not really. He was a junior there and so was I. It's a bit like some of the colts he has up at his property. Some are going to make it, some don't."
Paradice's next job was as an analyst/dealer at Hattersley Maxwell Noall, but just after Black Monday on October 19, 1987, he was sacked. He drifted to Melbourne for a stint with Phil Ruthven's data company IBISWorld, before returning to Sydney to a job at the body charged with investing NSW public servants' superannuation, the then State Authorities Superannuation Board. By that stage he had the investing bug, especially for the smaller and often more speculative end of the market where returns can be spectacularly boom and bust. He joined Mercantile Mutual, where in a five-year stint until 1999 his small caps fund returned 28 per cent annually, or about double the benchmark Small Ordinaries Index. It inspired him to strike out on his own.
John Nolan, managing director of Warakirri Asset Management and chairman of the investment committee for REST Industry Super Fund, was integral in giving Paradice his start, with a $30 million mandate from the fund. "I think David is smart and persistent and he's got a huge capacity to process a lot of information, which helps in making investment decisions," he says.
But Paradice readily admits to moments of panic in the early days. There was one nerve-wracking night when he was so wound up about his fund's negative one-month performance, he had little sleep. He got up at 5am and went for a run in the pouring rain near Chatswood golf course. "I was just sick with worry and having a hard time sleeping, thinking I had wrecked the company already. But then I realised I had got the decimal point wrong and instead of being down three per cent, it was 0.3 per cent. So then I started running faster and was punching the air with joy." It was his Rocky moment. He admits he is slightly more relaxed now, though only slightly.
Two stacks of Dr Seuss children's books sit in what passes for a reception area in Paradice Funds Management's office in Sydney's Macquarie Street. Horton Hatches the Egg, a tale of a loyal elephant who never flinches from its task, and The Sneetches and Other Stories, which includes a short piece about the Zax, who refuse to move with the times.
"Yes, they're kids books but I admire the messages," Paradice explains. "You have to be open-minded and listen to people. Otherwise an old guy like me might remember something about a company 20 years ago and think it's no good and never buy it. But things change."
Sitting alongside the children's books are various investment awards and a trophy awarded to Paradice in 2010 when he was inducted into the Australian Fund Managers' Hall of Fame.
His style is to build up a stable of funds and then close them to new investors relatively early, putting faith in his abilities to boost value. The Paradice Small Cap Fund, for example, closed with $513 million worth of investor funds in June 2002 and is now worth $1.8 billion, while the Large Cap fund has almost doubled in value since closing at $2.38 billion in June 2009.
Having started with that mandate from REST, the Paradice Small Cap Fund has provided a positive return for 80 per cent of the 156 months it has been in operation and outperformed the Small Ordinaries Index by more than 13 per cent on average every year since July 2000. The Mid Cap fund is up more than 8 per cent annually compared to its benchmark of a mix of four ASX mid cap and small indexes since September 2006, while the Large Caps and Global funds have also outperformed. In particular, Paradice Investment Management has ridden the success of new media companies such as Seek, Realestate.com and Carsales.com in the past decade.
It's why Robert Whyte of Audant Investments says Paradice and another (in)famously parsimonious fund manager John Sevior are "just about the best going around". Whyte, who sometimes meets Paradice for breakfast in Bondi, says: "There are some that are a bit more clinical in just looking at the numbers mainly. But with David he looks at the human aspect to get a feel for a company as well."
When Sevior was setting up shop for himself last year after 17 years with Perpetual Investments, Paradice sat him down and told him all the mistakes he'd made running his own business. Sevior much admires this generosity of spirit: "He is straight and interesting and vulnerable at the same time. He's got breadth and depth." Sevior also notes Paradice's ability to combine an intense work focus with balancing out other priorities such as family, philanthropy, or just plain fun – usually of the physical variety.
Over the years, that physical energy has had outlets in first-grade rugby, polo and, in more recent times, cycling. Tour de France winner and mate Cadel Evans says: "David is an interesting character. I admire his perspective of life. With all his success in business, he still places emphasis and energy on his family and friends."
Poidevin recalls that when Evans was staying with Paradice in Bondi during the cycling off-season, they organised a training ride around Sydney's eastern suburbs with ex-AMP stock picker Greg Barnes and Roy Gruenpeter from Westfield Retail Trust. Not able to hack the pace, Paradice quietly dropped off after about 15 minutes and returned home. He persuaded Evans' agent Jason Bakker to do the one-kilometre swim from one end of Bondi beach to the other. The pair struck trouble after swimming through a school of bluebottles and had to be rescued by the Bondi lifesavers. Back home, Paradice showered, got back on his bike and rejoined the others. "Who does that?" Bakker asks. "David is one who goes out and grabs life, he doesn't wait for it to come to him."
Paradice claims he suffers from "nice bloke syndrome". He procrastinates and goes out of his way to avoid conflict. Though he backs a campaign to fight mining impinging on farm land in the Hunter Valley, he is going to move the family to a recently acquired 4450-hectare property rather than stay and fight and risk being over the road from a site earmarked for a coal mine.
But he is uncompromising in his expectations of staff. They have to be as obsessed with stocks as he is. One young indus-trial stocks specialist learnt this the hard way early in his employment. Paradice tells the story of flying to Perth with his team for some company meetings. He glanced up from poring over notes on the companies they were visiting and spied everyone else absorbed in the research, except for the indus-trial specialist, who was reading the Sunday newspapers. A couple of weeks later on a trip to New Zealand, Paradice saw him reading a book. He let that specialist go soon afterwards.
"It wasn't the fact he was reading a book, it's just that you want to learn about the companies you are going to see and making use of that time you have between meetings. We like to be really well-prepared and its really important to dive into the key issues." Nevertheless, Paradice says he tries not to intrude into his staff's home life although he admits to calling them late at night to talk shop. It's a mindset that even extends to their rare social gatherings. "We have a Christmas party, but we have it at my house. We used to have the wives along but they got sick of us talking about stocks, so it's just us now. It's a pretty quiet affair. We are a boring lot, I think."
His family hates shopping with him as he'll invariably emulate what he did with his mum years before and grill the shopkeeper about how the business operates and how it is performing. They'll often sit in the car waiting for him. Once, during a family holiday with Claire's family in Denver, he got bored so went off in search of someone local to talk stocks. He found Kevin Beck at his small fund management office, which led to Beck becoming the portfolio manager in charge of running Paradice's Global Small Mid Cap Fund.
Paradice says he welcomes the input and flexible investment styles of his younger staff, reasoning that they will have a fresher way of looking at the market and companies than an "old guy" like him. That's why he has given them equity. "I remember Richard Pratt saying to me, 'I want people to want my job. I want people to challenge me.' I feel the same way."
But why give away $200 million worth of equity? Paradice says he wants to keep his business going for a long time and doesn't want to end up being "the guy in the corner who doesn't add a lot of value". Instead, after rejecting offers to sell the business outright – going by the multiples ASX-listed Platinum Asset Management is trading on, Paradice's company could be worth close to $400 million – over the past two years he's given away 47 per cent of it to his staff. "If I kept 100 per cent of $8.5 billion or so funds under management, I wouldn't have it for very long and it would probably be down to $1 billion eventually. It's not about owning 60 per cent or 40 per cent or whatever for me. It's about making sure the people coming through keep the business sustainable and are treated fairly ... and compensated accordingly."
Paradice Investment Management can also charge fees higher than many of its peers. It's something Paradice admits the company is feeling some heat for, but he is sticking to his guns. "We're low compared to the hedge fund guys and higher compared to the asset-gathering companies, which are the big guys. But we don't mind taking the risk and if we underperform we know the money won't stick with us."
To justify the fees, Paradice's fund managers have to outperform. There is no taking advice from analysts. "What we look for is a point of difference for a company. There's [price to earnings ratios], discounted cash values, net present value, all of it. There's not just one way of measuring a stock."
Yes, the numbers are important, but so are those investor briefings. Geoff Wilson, a former stockbroker turned fund manager, says Paradice has just the right way of putting a CEO at ease "and then extracting the maximum amount of infor-mation out of them". Paradice says he will sit and hear out a CEO, not interrupting their train of thought: "I like a good pregnant pause." He is also attuned to semantic differences. "They might say, 'I think we can do that' or 'Yes, we can do that'. It's a subtle difference, a game of cat and mouse."
Virgin Australia chief executive John Borghetti is one who has experienced this game first-hand. "David is one of the sharpest minds out there and has got a wonderful knack of smelling out the information and getting a feel for what he is going to do with it," he says. "I remember the first time I met him just after starting at Virgin [in May 2010]. I knew within a couple of minutes, despite his appearance, that this was a guy to be reckoned with in meetings."
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AVID UREN From: The Australian June 12, 2013 12:00AM