Bedrock for fund: Mining shares

MELBOURNE In 1959, Australia’s benchmark index hit a record 156 as Japan’s industrialization sparked a mining boom. That’s also when 21-year- old Bruce Teele started work as a clerk at the country’s largest stockbroker.

Almost half a century later, the All Ordinaries Index is at 4907. Teele, now chairman of Australia’s biggest listed investment trust, has beaten the index for 22 years by buying shares of mining companies. These days, the country sparking the boom is China.

“China is in the foreground, and Australia’s strength is its resources wealth,” said the Melbourne-based Teele, who manages 4.3 billion Australian dollars, or $3.2 billion, at Australian Foundation Investment.

Teele, 68, has outperformed the All Ordinaries every year he has been chairman, except for 1999 and 2000. Then, he bought defensive shares as technology stocks soared. His self-described “safety-first, buy-and-hold strategy” is paying off in 2006.

AFIC shares are up 9 percent so far this year, beating a 3.6 percent rise for the S&P/ASX 200 Index, which replaced the All Ordinaries as Australia’s benchmark stock index in 2001.

The fund is also besting Argo Investments and Milton Corp., the only other Australian listed investment companies with more than $1 billion under management. Argo is up 8.2 percent in 2006, while Milton has gained 2.8 percent.

Listed investment trusts are shareholder-owned managed funds traded on the stock exchange. They tend to invest in companies offering steady growth and dividend income, with less focus on capital returns from stock holdings than unlisted managed funds.

As AFIC’s biggest individual investor, Teele has more than bragging rights on the line. He owns over 1.76 million shares in the fund, worth about 8.3 million dollars.

AFIC’s best performing stock in 2006 and its biggest holding is BHP Billiton, the world’s largest mining company. BHP, which makes up 10.3 percent of Australia’s benchmark, accounted for 8.1 percent of AFIC’s portfolio as of June 30.

BHP shares have gained 22 percent this year, buoyed by record commodity prices and surging demand from China. The nation of 1.3 billion people last year leapfrogged the United States to become Australia’s second-biggest export market after Japan. China accounted for 16.2 percent of BHP’s sales in the six months ended Dec. 31, up from 12.6 percent in the last fiscal year.

Teele remains bullish on BHP. He said that he wouldn’t mind if China hit the brakes on its economy and sent BHP shares lower so he could buy more. “But don’t tell my board that,” he joked. BHP’s chairman, Don Argus, is an AFIC director.

The Chinese government on July 21 restricted funds available for lending for the second time in two months to cool an investment boom the World Bank says increases the risk of an economic slump.

Argus is not the only executive on AFIC’s board. Four-plus decades in the industry have given Teele time to build relationships in the banking and business communities.

Terrence Campbell, chief executive of Goldman Sachs JBWere Group is a director, as is Commonwealth Bank of Australia director Fergus Ryan. Stan Wallis, who has chaired Amcor, AMP, Santos and Coles Myer, is also on the board. So is Catherine Walter, a director of Orica and the Australian Stock Exchange.

“Historically, I knew just about all the people who ran the major companies, a bit about them, and a bit about the market that they were in,” he said.

Commonwealth Bank, National Australia Bank, Australia & New Zealand Banking Group, and Westpac Banking – the four biggest stocks in Australia after BHP – have dominated Teele’s portfolio for the past two decades.

AFIC’s buy-and-hold approach has sometimes backfired. Teele says he was late to sell HIH Insurance and Burns Philp when the companies ran into trouble.

HIH, formerly Australia’s second- largest general insurer, failed in 2001, with debt in excess of 5.3 billion dollars. Burns Philp teetered on bankruptcy in 1997 as its shares fell from 2.50 dollars to 23 cents in five months. A price war with U.S. spice company McCormick wiped out the value of its herb and spice business.

“We are bad sellers,” Teele said.

AFIC holds nearly 40 million dollars worth of shares in Telstra, Australia’s biggest fixed-line and wireless carrier. Telstra’s 3.6 percent drop this year has made it the biggest drag on Australia’s benchmark index as customers ditch fixed-line services in favor of online calls. The government’s plan to sell off its 51.8 percent stake is also hanging over the shares.

Still, Teele is sticking to his guns on Telstra, seeing “pretty good value,” in the stock.

David Stevens managing director at Contango Asset Management in Melbourne, said a more active approach has helped him beat AFIC’s return this year. Contango’s Australian Equity Returns fund rose 13 percent in the first half of 2006, driven by resource stocks.

“You can only get that management from active investors,” said Stevens. “You have to be very quick when you get a situation that turns on a dime.”