Photographer: Brendon Thorne/Bloomberg

A 20-Stock Fund Smashes Peers With Risky Dose of Self-Belief

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  • Bennelong fund’s 26% gain in a year ranks it top in Australia
  • The high-conviction fund finds hidden value in pizza, wine

Over in Sydney, one fund is leaving the rest of the market behind by having the courage to bet the house on just a handful of stock picks.

The Bennelong Concentrated Australian Equities fund is beating its competitors and almost doubling its benchmark by holding as few as 20 shares at any one time, just one quarter of what is held on average by its peers. The strategy has helped the fund return more than 26 percent in the 12 months through September, the best performance among more than 500 Australian large-cap equity funds.

The fund is part of one of the country’s fastest-growing boutique money managers, which has doubled its assets to A$8 billion ($6.1 billion) within the past three years even as some larger institutions have seen fund flows stagnate. Bennelong Concentrated is winning this year with bets on Domino’s Pizza Enterprises Ltd. and Treasury Wine Estates Ltd., the maker of Penfolds Grange.

“It’s about putting every dollar weighted to where we think it’s going to get the best bang for our buck,” said Julian Beaumont, a 40-year-old money manager who is part of a seven-person investment team at Bennelong Australian Equity Partners in Sydney. “It’s all about that high conviction.”

The fund’s 26.2 percent surge over the past 12 months compares with a 13.5 percent gain on the S&P/ASX Accumulation 300 Index, a gauge of the country’s largest companies which includes reinvested dividends. The portfolio also ranked second over five years for notching up 20 percent a year return during that period, Morningstar Inc. data show.

By picking as few as 20 stocks, Beaumont is going against the grain. Australian domestic-equity funds contain an average 79 stocks, according to Morningstar data. A reliance on fewer shares increases the burden on those companies to deliver earnings growth and can make the fund more volatile because it’s less diversified. Beaumont says it forces his team to act only on their best ideas, while the firm’s incentive models ensure they get paid when their picks work out.

Earnings Momentum

Beaumont tries to buy companies whose earnings are picking up momentum and that are likely to deliver strong results. The key, he says, is to notice this growth trend at an early stage, when the stocks are still under-appreciated.

He gives Domino’s Pizza as one example. Australia’s largest pizza company is up 26 percent this year after a 130 percent surge in 2015. The fund first bought the stock in 2012. Chief Executive Officer Don Meij has expanded into Japan and some European countries, making it the biggest franchisee outside the U.S. for the takeaway brand owned by Domino’s Pizza Inc., with net income doubling for the 12 months ended June compared to two years earlier.

The stock climbed 6.7 percent at the close of trading in Sydney, the most in almost three months. That compared with a 0.1 percent advance on Australia’s S&P/ASX 200 Index.

Treasury Wine has more than doubled its profit in 12 months and its stock price has surged 27 percent in 2016. The owner of Wolf Blass and Lindeman brands is being revamped by Michael Clarke, who’s trimming the number of brands and targeting premium and luxury drinkers. The stock fell 0.9 percent on Tuesday.

While funds containing fewer stocks are generally riskier, Beaumont says he take steps to minimize the danger, including shunning companies that are heavily debt laden or that have a history of missing earnings growth targets.

Risk Element

“It does have a strong risk element to it,” said the former corporate lawyer. Before joining Bennelong, Beaumont worked in investment banking for Dutch financial-services firm ING Groep in Singapore and clocked up seven years under the stewardship of renowned Australian stock picker Anton Tagliaferro at Investors Mutual in Sydney. But “we only buy quality companies, so we can sleep well at night.”

Bennelong Australian Equity Partners is part of Bennelong Funds Management, named after an Aboriginal leader at the time of British colonization and founded in 2001 by Jeff Chapman, one of Australia’s 100 richest people, who made his money from owning golf courses and a media company.

Back at Bennelong’s Sydney office, Beaumont pores over his position in BWX Ltd., a maker of skin creams and lotions. The fund is now the largest shareholder after buying a 13 percent stake before the company’s initial public offering last year, when Beaumont says the stock wasn’t even on the radar of most fund managers. The stock closed unchanged after rising as much as 2.4 percent on Tuesday.

“Here you’ve got something that isn’t well appreciated,” Beaumont said. “Those businesses have good momentum in terms of earnings and the fundamentals improving, and the market’s not appreciating that. That’s key for us.”

(Updates to close share prices.)
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