Scary start for boutique fund manager

Pie Funds chief executive Mike Taylor. Photo / Supplied

The belief is that big companies were once small companies and if we can find an undervalued growth company then there's a big opportunity ... Mike Taylor

Mike Taylor would have struggled to pick a worse time to start an investment business.

It was June 2007 when he took the plunge. The global financial crisis was just around the corner.

Taylor, then 27, had recently returned to New Zealand after a stint in Britain, where he'd worked in derivatives for Merrill Lynch.

By that stage he'd already notched up an impressive investment track record with his own money.

Taylor says he turned $10,000 into $250,000 between 2000 and 2007 investing in Australasian stocks.

"That $250,000 gave me the money to start Pie Funds."

Eight years later, the company has close to $250 million under management, almost 1300 clients and around 10 staff.

But growing the business has been a long, hard road.

The firm's Growth Fund launched in December 2007 after 10 of Taylor's friends and family members came on board. They invested about $3 million.

So far so good, but it wasn't long before equity markets spat the dummy with the onset of the GFC.

With all the upheaval, it was a big ask for a newly launched boutique fund manager to attract clients.

It was just horrible. All through 2008 it was a challenge to make sure that $3 million didn't go to zero.

Pie Funds founder Mike Taylor

"People were losing money and finance companies were collapsing," Taylor says. "Who was going to invest with me? No one."

He largely pulled out of stocks and kept the fund mostly in cash.

"It was just horrible," Taylor says. "All through 2008 it was a challenge to make sure that $3 million didn't go to zero."

Paying himself a salary was out of the question.

Taylor says he sold his car, then his furniture, to make ends meet.

Adding to the pressure was the February 2008 arrival of Zach, Taylor and his wife Jacqueline's first child.

"We lived very frugally that year."

But the outlook began to improve at the end of 2008 when Steve Nichols, now a Pie Funds director, provided the fund with a shot in the arm in the form of a $1 million investment.

Taylor began deploying the fund back into stocks in 2009, when the buying opportunities were many.

"Companies had been beaten down to valuations two to three times PE [price-to-earnings]," Taylor says. "Stocks that might have been $2 once were selling for 20c."

He describes that year as a "once in a lifetime" investment opportunity.

Equity markets bottomed out in early 2009 and then began rallying. The bull market had begun.

You can't make a 105 per cent return unless there has been a decimation [of the market] beforehand.

Mike Taylor

Taylor's Growth Fund had delivered a 105 per cent annual return by the end of that year, making it New Zealand's best-performing retail fund in the period.

He admits he got lucky in terms of having cash available to invest at an opportune time.

"You can't make a 105 per cent return unless there has been a decimation [of the market] beforehand."

However, the Growth Fund has continued to live up to its name, delivering a total return (net of fees but before tax) of 322.2 per cent, or 21.2 per cent per annum, between its inception and the end of last month.

The company likes to point out that $100,000 invested at inception would have grown to more than $420,000 by today.

Taylor says the firm's investment approach, which focuses on small companies, has paid off.

"The belief is that big companies were once small companies and if we can find an undervalued growth company then there's a big opportunity to make a large gain."

Taylor says small companies tend to be inefficiently valued, with a lack of analyst coverage meaning their potential often flies beneath the radar.

"The [small cap] strategy has worked," he says. "I can't see any reason it won't continue to work."

One of the Growth Fund's top five holdings is cinema software provider Vista Group, whose shares have gained more than 130 per cent since the company listed last August.

"We like Vista because it's a great New Zealand business first off. Secondly, it's almost a monopoly-style business with recurring revenue and they're expanding their footprint out of New Zealand to the US, Asia and Europe."

Taylor says he hasn't set any lofty targets for growth in funds under management. Staying small makes it easier to have a close relationship with clients, he says.

"There are two competitors out there - Fisher and Milford - who at one stage were our size and successfully scaled their businesses. They offer a suite of products, while we are most likely to stick to our small-cap niche."

The firm is evaluating the potential for additional small-cap products, with a move into KiwiSaver one possibility. Taylor says the demands of running Pie Funds mean he has little free time to pursue his hobbies, which include kayaking and hiking.

"I try and squeeze a hike in when it's work-related," he says. "I took a group of clients recently to do the Tongariro Crossing."

Throw two kids into the mix - Heidi arrived two years after Zach - and leisure time is very much at a premium. "My wife says I should have more outside interests."

The couple also have a side business publishing Juno, a quarterly investment magazine.

Now 35, Taylor says he probably wouldn't go out on a limb again to the same extent that he did when setting up Pie Funds.

"Only a naive 27-year-old would embark on what I did," he says. "But my dream was running a portfolio. It just so happened that I could make a business out of it."

Pie Funds

• Funds under management around $250m.
• Clients about 1300.
• Fund performance (Growth Fund) 322.2 per cent total return since 2007 inception.