Transcription of The Stock Network Interview with TIP Group (ASX TIP) CEO, Andrew Coleman
Lel Smits: Team Invest Private Group, known as Tip Group, is an ASX-listed investment house using proprietary research-driven insights to create better investors and better business people through its three operating divisions. The first of these three verticals is education and advice, secondly funds management, and finally equity in which the company takes direct ownership or a partial position in medium-sized businesses. Joining me today from Tip Group is its CEO, Andrew Coleman. Andrew, welcome to the Stock Network.
Andrew Coleman: Thank you for having me.
Lel Smits: Now, Tip Group’s approach to investing is aligned with Warren Buffett’s approach of identifying and investing in businesses looking for things like good margins, moats and management. How would you summarise Tip’s strategy to target market-beating returns and how successful is it?
Andrew Coleman: Absolutely. Look, at Team Invest, we take the view that there are three simple steps in order to making a really good investment. The first is to use the insights provided by education and research to avoid potential dogs, and you can do that using 27 quantitative factors that research has proven are indicative of future underperformance.
There’s nothing, according to the efficient markets hypothesis, that helps us pick unicorns, but there’s a lot that helps us avoid dogs. The next stage then is to try and avoid the false positives because, of course, any quantitative system is going to throw up some companies that pass through, or assets that pass through if it’s property or debt, that really are there by statistical fluke, not because they deserve to not be considered a dog. They’re a dog masquerading as a unicorn walking around with an ice cream cone slapped to their head.
And you can do that using the wisdom of the crowd. Sir Francis Galton in the 19th century came up with the beginnings of what we use in modern statistics, and we’ve known ever since then that whilst we as individuals can get fooled quite easily, getting a large enough collective group of intelligent people together, the average of that group is almost always right. And so what we do is we try and look through the companies that pass or avoid being seen as a dog by the filters and knock out the false positives using the wisdom of the crowd.
And then thirdly, we rely on a really simple insight developed by one of our founders, John Price, Dr John Price, who very simply worked out that, and it’s common sense when you think about it, market sentiments are mean reverting. And that is that over time, the same companies that the market is euphoric about in one period and pushes its PE ratio or EBITDA ratio or cap rate, whatever metric you want to use high, the market is likely to be pessimistic about that in future. In fact, Benjamin Graham put it so well in the Intelligent Investor when he referred to the market as like having a bipolar business partner.
And so if you can put those three things together, it’s very easy to beat the market long term. The first is avoid the dogs. The second is use the wisdom of the crowd to try and identify and remove false positives.
And then lastly, wait for Mr Market to offer you an opportunity to buy that asset below its average long term valuation as viewed in terms of market sentiment. And in our 24 year track record of doing that listed equities, we’ve achieved an average gross return of about 18% per annum, which as you’d know, be roughly double the market average in that period. And net return in funds management for the 13 years we’ve operated has been about a 300 basis points increase above our benchmarks.
And in listed also in the unlisted space in the private equity operations, we’ve achieved an average money on invested capital of 2.9 times to date, which again is well above the average of our peers and really, it’s not hard when you look at it in that way.
Lel Smits: Absolutely, now TIPS, Team Invest business provides education through a technology platform accessed by more than 650 members, many high net worths who collectively manage several billions. Can you outline why the Team Invest community is unique and also what sets it apart from its peers?
Andrew Coleman: It’s the second part of that equation, which is the wisdom of the crowd. What we provide to members of Team Invest really is a combination of that investment education, being able to identify and understand how to look at investments.
Secondly, the quantitative filtering tools based on research that we mentioned before. But then most importantly, many times a month, it’s once a month in every capital city face to face plus a couple of times online through webinars. An opportunity is the wisdom of the crowd to look both at individual assets and at global trends and get a picture of what do those independent sample of intelligent people think.
So a good example in this most recent month, of course, is there’s been lots of noise coming out of the United States and we’ve been able to use that wisdom of the crowd to get a really good picture as to how we think our assets are likely to be affected, which gives us a material edge over everyone else in the market who has to deal with the noise on a day to day basis and try and hope that their prediction is going to be more accurate.
Lel Smits: Excellent now, TIPS wealth arm involves funds management focused on stocks that are highly cash generative with strong brands and businesses, which is consistent with the methodology you apply in your team invest network. Can you give us an overview of the products on offer for investors?
Andrew Coleman: Absolutely. We operate, I think at the moment it’s five major funds. First, our flagship fund is the Conscious Investor Fund, which is a global listed equities fund that has achieved an average alpha of about 300 basis points over its 13 years of operation.
That’s our largest fund. Our second largest fund is an NFP specific fund called the Corinthian Balance Fund that’s aimed at not for profits and charities. And effectively, what we do there is we provide the same kind of quality investment advice we would any other client, but in a more discounted rebated arrangement because they’re doing good for the society, obviously, as a charity and an NFP.
And then we have an Australian listed equities fund called the Team Invest Access Fund, a property fund called the Future Property Fund, which does some funky cool things with identifying future property uses, which is quite exciting. And then we have a financial services specific fund. Excellent.
And you also take direct ownership of medium sized businesses through TIPS Active Investments Division. What’s your proprietary process for these kinds of investments and also how many groups is TIP equity invested in? So the reality is we just got a little big, which was a problem that we found. So we started to find that we were becoming a larger and larger shareholder to the point where we were starting to exert significant influence or control in a number of assets over the years of our operation.
And so we bit the bullet about 12 years ago now and decided that we might as well just operate them ourselves and own them ourselves if we own the majority of the capital structure. Those assets are all the same kind of things we would invest in if they were listed. So businesses with strong moats, identifiable risks, management who have a partner’s mentality and operating ethically, honestly and capably.
And where we see that that business through the wisdom of the crowd has a material long term advantage. And those in the end, we just end up owning 100 percent and operating ourselves or a very large material minority stakes, say 25, 30 percent, where we go along with the existing management with the aim of partnering with them to help them grow their business materially. Today, I think there’s about 10 companies in that portfolio.
It fluctuates because obviously we’re adding some and selling some at all times. And we generate about 160 million in proportional revenue, which is sort of our proportional ownership multiplied by the revenue of those companies and about 15 million dollars in EBITDA off the back of those operations. So material in aggregate, but individually, not necessarily as material.
Lel Smits: Well, Andrew, thank you so much for running me through Tip Group today and I look forward to seeing progress across all of your key divisions. Thank you very much.
Andrew Coleman: Thank you.
Ends