Merlon Capital Partners, a $1 billion Australian equity fund, has significantly evolved its approach to engaging with underperforming companies on the ASX. The firm focuses on investing in undervalued, out-of-favour Australian listed companies. When Merlon arrives on a share register, it signals that the stock has hit their ‘low case,’ prompting a detailed three-page letter outlining their investment rationale, valuation possibilities, and key drivers. Merlon co-founder Neil Margolis notes that while the low share price is ‘bad news,’ their presence offers a ‘friend’ to companies often seeking support at such times.
This structured engagement marks a notable shift from Merlon’s past, which sometimes involved ‘furious letters’ in response to company actions, such as AMP’s 2018 life insurance sale. Now, Merlon, under an investment team that acquired Challenger’s stake in 2024 and includes new talent like Kirit Hira, proactively shares draft letters with companies. This transparent process, refined with insights from an advisory board, helps Merlon understand where genuine differences in opinion lie and allows for pragmatic discussions on matters like executive remuneration.
Operating in a challenging market for active fund managers, Merlon has maintained its valuation-centric investment philosophy, often investing in positions that ‘feel uncomfortable.’ The retail version of its concentrated Australian share fund has outperformed the index by 3 per cent over 12 months and 3.3 per cent per annum over five years. Merlon targets blue-chip stocks like Seek, where it sees a valuation range from $13.50 (factoring AI risk) to $28.40. The fund also holds positions in healthcare (Sonic, Ramsay), Endeavour, and ASX Limited, demonstrating its commitment to ‘cash flows not to industries,’ even if it means investing in out-of-favour industry leaders.
