Photographer: Carla Gottgens/Bloomberg

Australia's Best Stock Fund Is Winning With Cash

Updated on
  • Smallco Broadcap managers investing 25% of stock fund in cash
  • Australia index rose average 4.8% in 3 months after past polls

Australia’s best stock fund is betting against history and national elections.

Despite Australian equities typically climbing after elections, Smallco Broadcap Fund is putting a quarter of its assets in cash. Managers at the fund, which has beaten more than 450 stock funds with an annual 22 percent return over the past five years, say valuations are too high and either political party will struggle to boost economic and earnings growth, especially after the Brexit vote sparked global market turmoil.

The stock pickers at Smallco Investment Manager Ltd. are concentrating on what’s made them successful in recent years: lifting cash levels when markets become expensive and buying more stock when valuations are favorable. From Brexit angst to concern about China’s waning economy, managers have trimmed positions in companies including REA Group and Magellan Financial Group Ltd. after higher prices made them less appealing.

“Things are expensive and I envisage it will be tough going forward,” said Craig Miller, 44, a fund manager who helps oversee about A$750 million ($553 million) at Smallco Investment. “It will certainly be tougher than it has been in the past few years.”

The ageing Australian bull market has left valuations trading at the most expensive level on record going into a national election. The Australian Stock Exchange All Ordinaries Index is up more than 7 percent from this year’s low in February. It traded at an average 14.9 times estimated earnings in the month of past elections, according to data compiled by Bloomberg starting in 2005. That’s about 12 percent below the current level. The equity index rose 0.8 percent in Sydney on Wednesday.

Smallco’s 25 percent cash position compares with an average of about 10 percent since 2008, said Miller. He picks companies that can show him strong cash flow and good management teams, in a sector where they have a proven competitive advantage.

Miller said he’s been buying shares in Webjet Ltd., a one-stop shop travel services provider. The stock is up 26 percent this year after a 90 percent surge in 2015.

The fund’s managers say they can’t rely on historical trends, which shows the All Ordinaries index climbed an average 4.8 percent in the three months after national votes since 1983. Equities rose eight times out of 12 occasions in that period, data compiled by AMP Capital Investors Ltd. show.

The lead-up to the July 2 general election comes against a backdrop of heightened volatility in equity markets from Toronto to Sydney where investors are being rattled by everything from U.S. monetary policy to Chinese growth concerns and Britain’s decision for secession.

Prime Minister Malcolm Turnbull’s government nudged ahead in an opinion poll just six days before Australia’s election, as he used Britain’s shock decision to warn voters they face economic peril without a stable government.

“It’s still a factor but obviously Brexit worries are dominating at the moment,” Shane Oliver, Sydney-based head of investment strategy at AMP Capital, which manages more than $110 billion, said by phone. “This could still have the potential to rattle investors.”

For Miller, macro-economic and political uncertainty aren’t as crucial as finding stocks with the right attributes.

“Valuations have increasingly become more difficult,” said Miller. “We’d much rather sit in cash than be in very expensive quality companies. Domestically there is still plenty of concern. This is a time when people that are good at their jobs will earn their pay, the good stock pickers and good fund managers.”