The following extract was originally published in 2002, in Australian Business & Investment Explorer, titled “Greg Perry’s final farewell”, on the occasion of Greg’s retirement from Colonial First State. At the time, Colonial First State had been voted the Morningstar Fund Manager of the Year in three of the previous five years, and Greg was the doyen of Australian fund managers.
Chris Cuffe was Chief Executive Officer at Colonial First State over the 12 years to 2002. Chris and Greg turned a fledgling operation into the largest fund manager in Australia.
Graham Hand: Do you see a broader role for fund managers beyond maximising portfolio performance?
Greg Perry: I don’t think the market realises fully the role that fund managers play in allocating resources and building wealth. People seem to think we just play with money, but it’s a very serious role. I think there’s a responsibility on behalf of fund managers to understand that and to try to have some influence on business ethics. Sometimes we have made points to companies when we think something is unacceptable.
GH: Were those discussions one-on-one with management?
GP: Yes. We would say things like something is unacceptable, and although I don’t want to single anyone out, there is a greed factor that needs to be controlled. Too much regulation will stifle business, so it’s a fine mix. Many people got away with a lot of things in the late 1980s. Anyone who rorts the system will eventually be brought down. Things got better in the 1990s. Decent people who care about society generally do better in the long run.
Something I’m wary of is principal trading by brokers. There are meant to be Chinese Walls between the agency business and principal trading, but there is a conflict. They’re not working for us. I think principal trading in brokers is almost impossible to separate from advisory. One of the jobs of a principal trader is to know where the orders are – it’s a natural thing – so they find out anyway. We ask, “Who’s that?” and they say, “That’s our trader”. Then we ask, “Well, hang on a minute, who are you working for?”
GH: What do you do when you know a business is exploiting its customers, and you feel uncomfortable personally, but you expect the company to perform well in the short term?
GP: It’s difficult. We shied away from some companies we were uncomfortable with. If a company is rorting the system in some way, inevitably, that rorting is going to come to an end. With the banks, you can’t deny it, I think there’s a real sense of rort that has gone on in the last few years [Editor comment: note this was said in 2002]. They have a massive return on equity, although you can argue it’s good for the country to have strong banks. Mortgages were obviously an exploitation. Then the fees came in.
GH: That hasn’t stopped fund managers investing in them.
GP: No (he sighs). But we have done well to avoid the really poor performing companies and the corporate disasters. When in doubt, get out and keep out.
GH: First State now has so much market power that chief executives come to see you. Is that important?
GP: It probably helps. There were only one or two of us initially, and we tried to visit companies once a year. Now we might see a chief executive three times a year. They come and see us. It gives you an entry and insights, but you’ve got to be careful.
GH: You mean with insider trading?
GP: Yes, companies are much more mindful of that now. It’s more about seeing the thought process, where they are going and where they are taking the company. There might be angles and thoughts.
GH: But one of your roles as a fund manager is to research companies and learn as much as possible. If the company tells you things are going well and there’s a degree of enthusiasm, does that mean you’re not supposed to buy it?
GP: It’s a fine line. There’s a lot of insider trading that goes on because the market is not totally informed. But sometimes, you can hear one piece of information, and it’s the last bit of the jigsaw puzzle. Take Westpac. They told us about their use of the intranet and said they were making more savings on the intranet internally than on the internet externally. We knew their costs were coming down through the introduction of technology.
It’s not insider trading as such but something that clicks in your brain. Someone else may hear the same information and not use it, even if it was public knowledge. But if a company tells you profit is going up 50 per cent and the market thinks it’s 20 per cent, that’s insider trading, and we stay away from that.
GH: I guess it comes back to investing also having an element of art and not just research.
GP: Also, as you get older, you see the same stories being replicated. They say this business is hard. It’s not hard if you read, listen and learn and see what happened in the past.