(pictured: Julian Beaumont)
In times of uncertainty, such as now, ‘quality’ stocks tend to do well. But everything is cyclical and what is going well at the moment is not necessarily going to go well in the future. Julian Beaumont, investment director of Bennelong Australian Equity Partners (BAEP), says that there is a long list of attributes which go to make up a ‘quality’ stock.
“We put a lot of work into understanding companies, to see what their longer-term opportunities might be… We look for a strong competitive position that supports a high return on capital. It should give rise to strong profitability and a strong balance sheet.”
In the subjective area, BAEP looks for experienced and astute company management who are good capital allocators. “We like them to under promise and over deliver,” he says.
BAEP was launched in 2008 as part of what has now become a multi-affiliate business. BAEP is 40 per cent owned by Bennelong, which does the backoffice and some sales duties, and 60 per cent by the seven investment staff. It has about $5 billion under management. Its flagship strategy is an Aussie equities ex-top-20 strategy.
Beaumont points out that so far this year the top 20 stocks are down about 4 per cent, while the ex-top-20 are up 16 per cent.
“We think quality works best over the long term,” he says, having previously worked with Anton Tagliaferro at the value shop Investors Mutual. “Some people say it’s a free lunch. It offers better returns at lower risk… But the cycles can stretch valuations. It seems that every second year we’ll underperform for a few months. What was a high P:E stock becomes a low P:E stock.”
Corporate governance is important alongside the assessment of management. Even though the managers like the industry because of the demographics supporting tourism, they don’t like Crown Resorts very much because of its corporate governance issues.
“We call ourselves ‘neutral’ in terms of the old style boxes,” Beaumont says. “We don’t think that anything will work all the time.”
Following a demographic theme, BAEP is long the health care sector, such as Ramsay Health Care, and also tourism stocks, including Star Entertainment and Sydney Airport.