Peter Cooper’s edge that machines can't replicate

One of the titans of Australian funds management, Peter Cooper has enjoyed huge success at the helm of Cooper Investors, the firm he founded a little over 20 years ago. During this time, he’s grown it into a $12 billion FUM business and amassed a personal fortune of around $750 million, in the process becoming a regular inclusion in the AFR Rich List.

But compared to some of his higher-profile contemporaries such as Magellan Financial Group's Hamish Douglass and Platinum Asset Management's Kerr Neilson, Cooper has flown largely under the radar. He recently broke cover during a podcast interview with Koda Capital partner David Clark, available by clicking the button below.

In a wide-ranging discussion of a career that kicked off just months before the Black Monday market crash of 1987, Cooper reveals how some of the biggest events, personalities and companies of the global financial sector have shaped his view of the world and driven the success of Cooper Investors. This has seen each of its seven strategies beat their benchmarks for returns when measured since inception, despite having suffered the inevitable performance peaks and troughs over some shorter periods.

One of the standouts is the CI Family and Founder fund, a high-conviction strategy of around 20 companies that are founder-led, family linked or employee-owned. The fund has returned 12.5% since it launched in mid-2019, outstripping the MSCI World benchmark by around 8% on an annualised basis since then.

Discussing the genesis of this fund, the newest in the CI stable, takes Cooper back to the mid-1980s when he worked in a research role with the University of New England in country NSW. As part of a consulting business to small business associations including hardware and accounting industry groups, he and his colleagues were tasked with identifying the qualities of successful firm participants.

While the sales, revenue and profit figures were important, Cooper was most interested in the human qualities of the best businesses. “When we’d gather 20 hardware store owners together swapping stories and insights, it was really the human capital, energy, competence and attention that differentiated the successful and the average firms,” Cooper says.

“Quantitative is important, but the juicy insights for us, in spite of big data and artificial intelligence, come from building that tacit knowledge that can’t be transmitted through zeros and ones.”

Similar lessons were instilled some years later when Cooper was touring the US and visiting boutique-style companies ahead of launching Cooper Investors.

“Businesses like these fail when the original owners and the founders hang on too long, don’t give away enough equity and don’t rejuvenate in terms of retaining and developing talent, which is so important,” Cooper says.

Around a year-and-a-half after leaving the UNE job, Cooper started in his first financial services role, joining the State Super Board of NSW in Sydney as an assistant analyst, just six months before the historic market crash of 1987.

“This didn’t make any sense to me then, but people were explaining why it was different this time, so that was a very formative period for me,” Cooper says.

A sit-down with Charlie Munger

While on a US trip during his time at State Super, Cooper lobbed an unsolicited job application to the famed fund manager, Berkshire Hathaway. After receiving no response, he rang the firm’s office in Los Angeles, where Warren Buffett’s right-hand man Charles Munger was based at the time.

“Quite surprisingly, his assistant took my call and they said they’d take a meeting,” says Cooper.

“Charlie Munger invited me along to the California Club, which was just after Berkshire made the big foray into Wells Fargo, so I had an incredible two hours with someone I’d consider the equivalent to Warren Buffett in terms of his wisdom.”

He didn’t get a job offer, but Cooper says Munger is one of the people on which he has tried to base his own personality strengths.

“After Munger asked me what I do, he said, ‘We’re in completely different businesses, you and I,’ and I was a bit surprised given we both worked in finance circles.

“But he made the point that he was operating in private capital and private equity models, with closed-end and permanent endowment-style funds, whereas I was basically an agent in a public sector job, with many agency sector issues to grapple with," Cooper says.

“I didn’t fully grasp at the time what he was on about, but I do now."

As with many of the most successful investors, broad reading has also played a big part in Cooper’s success. “I’ve worked with and met some extraordinarily clever people, but my favourite learning has been through others’ written material. It’s amazing how much free information is out there, in terms of modelling yourself on amazing intellects and some of these people with such investment acumen,” he says.

“Every time I think I‘ve finally finished my learning phase, I get another lesson, and COVID is another example of ‘this time is different’ with a new twist to it.”

Velvet gloves and raging bulls

After moving on from State Super in the early 1990s, Cooper moved to Melbourne to join Potter Warburg, an investment management business that was later acquired by UK-based Mercury Asset Management. Mercury was, in turn, overtaken by high-powered US investment bank Merrill Lynch.

Riding out these acquisitions, Cooper had the “very English experience of UBS, what I describe as an ‘iron fist in a velvet glove’ culture.”

“This was followed by the very different raging bulls at Merrill, which was very much about setting ambitious targets and either crashing or crashing through – although for Merrill it was ultimately ‘crash out,’” he observes.

Emphasising he’s not critical of the firm, Cooper recalls a late-night call in the early 2000s from a former Merrill’s senior executive Jack Walsh, who was famous for his sharp one-liners.

“I’ll never forget it, ‘Having a difficult time here in NY, drop the bottom 10’ he said, to which I replied, ‘what do you mean?’”

“He was asking us to drop the bottom 10% of staff to cut all these costs out of the business.”

For Cooper, this highlighted the distinction between Merrill’s investment banking culture and that of its asset management arm Mercury.

Having worked across such an eclectic mix of financial services firms – a super fund, investment banks and asset managers from Australia, France, England and the US – provided Cooper with a rich mix of cultural experiences, both workplace and international.

He drew on these when establishing Cooper Investors in 2001, grabbing the positive elements he had observed and discarding the negative. An example of the latter is the often-cutthroat culture of firms like Merrill Lynch.

“The culture of investment banking is very short-cycle, very project-oriented where they scale up and scale down quickly; whereas in investment management it’s all about stability and relationships with companies and clients,” he says.

“So, chopping and changing cost base and particularly people – being a people business – was disastrous.”

“Investment management is very much about self-determination and being focused on investors, our clients and all decisions really should be made and aligned to ‘what’s good for a long-term investor.’”

In addition to helping shape Cooper Investors, Cooper views mismatched cultures as a huge global thematic in financial markets. “This idea of localism – having producers and consumers aligned and having their interests integrated – is a really big issue in the consumer space now,” he says.

The CI investment process

As a high-conviction fund manager whose strategies cut across Australian and global equities, Cooper Investors’ potential universe of companies could be unwieldy. But it narrows down the list using its VoF process, which is both qualitative and quantitative.

• Value Latency
• Operating, industry and strategic trends
• Focused industry and management behaviour

A key part of this revolves around finding companies that display “risk-adjusted value latency.” What is this? In this context, operational latency refers to companies that maintain a margin of safety around how they manage risk in their business models.

Cooper explains that many investors look for optimal balance sheet latency, for companies that use balance sheet capacity to deliver capital returns and bigger dividends to shareholders. But he believes Cooper Investors takes this a step further by seeking companies that can use this balance sheet latency at specific times when value is on offer.

“I really love these private, proprietorial companies that get aggressive when opportunities are on offer and get conservative when risk is apparent. Institutional companies, average ones at least, tend to do the opposite,” says Cooper.

He points to the behaviour of commodities giants BHP Group (ASX: BHP) and Rio Tinto (ASX: RIO) during the last downturn as an example. “They couldn’t spend enough money when we were at the top of a 150-year commodity cycle, but when it all tipped over, they could’ve bought the whole mining industry and yet they spent nothing.”

“We’re extremely wary of that behaviour in some companies and industries. What we’re trying to do is risk-adjust these return expectations in accordance with what we see in both industries and companies, to push the capital towards these,” Cooper says.

The insurance sector is another he highlights, where company management teams often display this type of behaviour. “But after the sector has been hurt by catastrophe and losses, they all get much more disciplined and that’s a really positive sign for us to put our money in and follow their more conservative decision-making.”

Cooper Investors also categorises companies into what he terms “subsets of value”. These group firms into archetypes including:

• Growth
• Stalwart
• Reversionary – low-risk turnarounds
• Endowment securities – with real asset and real income attributes that display bond-like characteristics.

“Each of those has different characteristics, and we’re really trying to quarantine that low-risk source of returns in each of those,” Cooper says.

Cooper Investors uses the above processes to narrow its universe of potential stocks. “You can’t possibly go deep on 30,000 listed companies out there; we really only track 400 companies and there are linkages between them,” Cooper says.

As an example, he and his team have been big backers of plumbing and bathroom supplies firm Reece Group (ASX: REH), a proprietorial family-linked company. “And as a result of that work we’ve pyramided into a global equivalent called Fergusons in the US.

Colliers International, a Canada-listed diversified professional services and investment management company is another portfolio holding he highlights. Though it is known locally as a commercial property firm, two-thirds of its business is in annuity streams.

And among some of the “new economy” industries – though Cooper emphasises this isn’t about venture capital or new technology firms – his team looks for traditional industrial-style companies that have deep research departments. Constellation Software, another Canada-listed company, is one such company that Cooper holds. Local examples include biotech CSL Limited (ASX: CSL) and diversified financial firm Macquarie Group (ASX: MQG).

Across the Tasman Sea, he likes New Zealand-listed logistics firm Mainfreight and aged care and retirement village operator Ryman Healthcare. A firm that designs, owns and operates aged care facilities, Cooper believes Ryman’s model is far better than other corporate models he has seen. “When you get that relationship between customer, employee, shareholder and the social license to operate, it’s just a goldmine.”

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