What Australia’s top equity manager is buying now

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After topping the Australian equity fund performance tables last year, Bennelong Australian Equity Partners has maintained its very strong track record with one of the highest returns for the financial year.

While the fund maintains its focus on high quality defensives with good prospects for earnings growth, such as consumer staples and healthcare, it has lifted its exposure to resources stocks in the past few months.

Bennelong’s Concentrated Australian Equities Fund produced a return of 29.1 per cent (net of fees) for the 12 months to the end of June. Bennelong measures the fund’s performance against the S&P/ASX 300 Accumulation Index, which was up 12.2 per cent over that period.

Over the past five years, the fund has produced an average return of 19.8 per cent a year, compared with a return of 9.9 per cent a year for the benchmark.

Asset consultant Mercer ranks the Concentrated Australian Equities Fund number two among Australian equity funds for its 12-month return and number one for its five-year return.

According to the fund’s latest report, it benefited from strong returns from its holdings in CSL, Reliance Worldwide and Aristocrat Leisure.

“These names typify the kind of stocks in which we seek to invest. All are high quality growth companies that proved again to have better than expected earnings prospects,” the report says.

Bennelong’s likes CSL’s commitment to a large research and development budget, which “benefits the company by widening its competitive moat and supporting its growth profile. We continue to believe the company has better than expected earnings prospects over the foreseeable future.”

Reliance Worldwide is the world’s leading manufacturer of brass plumbing fittings, with distribution in the US and Australasia. Earlier this year it acquired UK company John Guest, the world’s leading manufacturer of plastic plumbing fittings.

Bennelong expects the acquisition to have a number of benefits and to be “at least” 30 per cent earnings per share accretive.

Aristocrat Leisure is growing revenue at more than 30 per cent a year at the moment, helped by its push into the online social games business. It claims more than eight million daily users of its games platforms.

The fund is typical of the type of Australian equity fund that has outperformed in recent times. It is a “concentrated portfolio” made up of Bennelong’s “highest conviction stock ideas”.

Its exposure to banks, which make up 23 per cent of the SP/ASX 200 Index, is just 1 per cent of the portfolio. The fund has had the benefit of the banking sector’s underperformance on the ASX.

Bennelong says it tends to have a significant exposure to defensive stocks, such as consumer staples (Costa Group) and the healthcare sector (CSL).

However, over the past six months it has lifted its exposure to cyclicals, particularly through the resources sector. “Right now, mining share prices are factoring in falls

in commodity process. Based on our research and analysis, the presents upside risk and some cushion on the downside.

“With an eye to the risks, we have preferred the largest and highest quality miners with low cost, long life assets.”

Bennelong has steered clear of “bond proxies – utilities, infrastructure stocks and some blue chips like Telstra – and continues to do so. “These stocks have been popular for their yield, which in turn has pushed up valuations, ad without growth future returns appear lacklustre,” it says.

Bennelong still sees attractive valuations in the market. “Although having a decent run of late, equities still seem to present an attractive option in the competition for investors’ dollars. On consensus numbers, the Australian stock market trades on 15.8 times forward earnings.

“That is about 10 per cent above the historical average of roughly 14 to 15 times. This is more than fair in the context of the current low rate environment. Australian stocks offer a dividend yield of 4.5 per cent, or just under 6 per cent when grossed up for franking credits.

“Underpinning stocks’ relative appeal, corporate earnings appear solid, with nive growth and consensus forecasts holding up, at least for now.”

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