Investment approach

Optimal Australia’s investment team has aggregate experience in the Australian equity market of over 90 years, with disparate yet complementary skills covering fundamental research, trading, execution, and risk management.


Investment Strategy

Optimal Australia has a fundamental research bias, and places a strong emphasis on stock selection. Our core strategy is to construct a portfolio of listed equity securities priced at levels that do not adequately reflect their underlying value.

We are fundamentally driven investors, and believe that alpha-generation is hard work, requiring a deep insight into industry sectors and underlying companies, a willingness to assume out-of-consensus risk based on that work, and a flexible mind-set.

We view the equity market in Australia as highly efficient. As such, we believe that most high-liquidity, large-capitalisation stocks have an identifiable ‘fair value’ range, based on comparative advantage/growth rate/capital structure and allied fundamental considerations.

Our process is to combine intensive fundamental research with active consideration of non-fundamental factors, and is particularly interested in stock prices variances from our perceived fair value range, in either direction. We make it our business to find out why such variances are occurring, at both the fundamental (e.g. earnings, industry, or peer valuation dynamics) and market (typically liquidity or sponsorship changes) levels.

We are at all times acutely aware of risks arising from a high level of what we term ‘institutional bias’ in Australia — i.e. that such a large proportion of total equity AUM in Australia is managed in the same style (active-index), with relatively high concentration across a small number of very large funds, often trying to do the same thing at the same time.

Risk Management

Our bias is to be net long invested under normal market conditions. However, the Fund seeks to hedge the portfolio against adverse potential market price movements by selling index futures contracts, and by short selling individual stocks when priced at levels that are viewed as materially above underlying values.

Under its Trust Deed, the Fund may use leverage up to a limit of 100% of its net asset value, or may have gross assets (defined as long market value plus short market value plus the market value of derivative contract exposure) of no more than 200% of net assets. In practice, since inception in September 2008, the Fund has operated on an essentially unlevered basis, with gross assets rarely exceeding 90% of net assets.

The Fund’s level of net equity risk exposure (defined as long market value less short market value) is governed by the Fund’s assessment of market and macroeconomic risks, and systemic ‘shock’ factors. Under its Trust Deed, the Fund has the capacity to have 100% of net assets invested net long or net short, if Optimal Australia believes that market conditions warrant such a strategy. In practice, since inception, the Fund has ranged from net asset exposure of between -20% to +30%, with an average of +10%.

The Fund’s single stock (long or short) concentration limits are restricted by the Trust Deed to 15% at cost. In practice, the Fund has only twice reached this limit (and has sold down its position, in profit, within days) and typically adopts a single-stock position size of 1-5% of NAV. While not restricted by the Trust Deed, almost all of the Fund’s equity investments are in highly liquid large-capitalisation companies, with the vast majority of both long and short positions being members of the S&P ASX 100 Index.

The Fund actively manages its long and short position sizes in response to price movements within its target ‘fair value’ range for its core group of stocks, and actively manages its overall market exposure levels.

The Fund observes a ‘hard’ stop-loss limit on short sales, in the event that there is an adverse movement in the price of the underlying security resulting in a 50 basis point (0.5%) reduction in the NAV of the Fund. While no ‘hard’ stop-loss limit exists for long positions under the Trust Deed, Optimal Australia applies a symmetrical ‘soft’ limit policy in practice.

The Fund uses derivatives, primarily in the form of index futures contracts, to hedge market risk. Optimal Australia will infrequently use put or call options as an adjunct to stock-specific strategies, but since inception, the Fund has at no point been short option volatility —i.e. the Fund has to date only been long call options or long put options. All derivative contracts traded by the Fund have been listed on the Australian Securities Exchange or the Australian Futures Exchange.