Ausbil Australian Emerging Leaders Fund Portfolio Manager and Co-Head of Equities John Grace provides an overview of the portfolio, changes post reporting season and outlook for the second half.
Jessica Amir: Welcome to the Finance News Network, I’m Jessica Amir. Today I’m at the offices of Ausbil Investment Management with Portfolio Manager and Co-Head of Equities, John Grace. John, welcome back and thanks for having us.
John Grace: Thanks Jessica, nice to be back.
Jessica Amir: First up, you’re the manager of the Ausbil Australian Emerging Leaders Fund. Who is the Fund most suitable for?
John Grace: It’s suitable for investors seeking exposure to the growth and income of Australian companies that have significant upside, in the evolution of their businesses. It’s a concentrated portfolio of 30 to 40 stocks, covering the industrial, financial and resources sectors of the Australian market. The Fund was established in 2004 and since then, it’s delivered a compound annual return of 11.8 per cent, outperforming its benchmark return of 9.6 per cent.
Jessica Amir: Businesses are changing more than they ever have before. What industries are really undergoing the most change, and what offers the most opportunity for investors?
John Grace: It’s a good question. We believe both the healthcare and the technology sector in this market, offer really interesting opportunities, as the businesses evolve and offer global competitive advantages. The companies we really quite like include Seek Limited (ASX:SEK), Afterpay Group Limited (ASX:APT) and Altium Limited (ASX:ALU) in particular. These companies evolved in the domestic market, caught their competitors off guard and really started to expand their business models, into a global market. And offer significant opportunities for investors.
Jessica Amir: Now to the Fund. How did your largest exposures perform during reporting season?
John Grace: We had some really good results out of companies exposed to the Chinese consumer thematic. Those stocks include the A2 Milk Company Limited (ASX:A2M) and Blackmores Limited (ASX:BKL) and they outperformed, giving strong results. In addition, we’ve got some holdings in the infrastructure spending thematic. We saw good results out of Cimic Group Limited (ASX:CIM), Downer EDI Limited (ASX:DOW) and Seven Group Holdings Limited (ASX:SVW) in particular. In addition, those stocks in the healthcare space that have got good global exposures as well, also had good results, such as Cochlear Limited (ASX:COH) and ResMed Inc. (ASX:RMD).
Jessica Amir: What changes have you made to the portfolio?
John Grace: We’ve trimmed our resources overweight a little bit. The sector has been a little bit disappointing over the last three to four months, impacted by weak emerging markets, a stronger US dollar and falling commodity prices. However, we really believe that there’re some exciting opportunities in that resource space, as the underlying fundamentals remain robust and balance sheets are very strong.
In addition, we’ve added to our positions in the commercial services and supplies sector. And those companies are really benefitting from strong infrastructure spend. And the big mining companies in particular, are spending more on expanding their operations in WA. Those companies include Seven Group, Cimic Group and Downer, and they’re strong positions in our portfolio.
The Fund remains committed to a global growth scenario and therefore, we’re underweight defensive, such as financials and REITs. And we believe that those sectors will suffer a little bit, relative to the potential in the global growth scenario.
Jessica Amir: How are valuations at this stage of the cycle and what impact, or higher rates and tighter liquidity, have?
John Grace: At this stage of the cycle valuations are reasonable in that sense, they’re not expensive nor cheap. On average the market valuation’s around 15 times earnings, which is par for the course. And we’ve got underlying earnings growth of about 8.5 per cent, which is not too bad, given domestic economic conditions. In the mid and small cap space, earnings growth are higher than that, around 9.5 per cent and 25 per cent for some of the smaller cap stocks. We’re paying a slightly higher multiple for that growth, but prospects look very strong there. In terms of higher interest rates, we believe that that will affect valuations in the financials and therefore, remain underweight the financial sector.
Jessica Amir: Lastly John, what’s your outlook for the second half?
John Grace: Ausbil believes that global growth will continue. In light of that, the Fund is exceptionally well positioned for that scenario. Our overweight in the resource sector should benefit from a recovery in commodity prices, which are currently at very low levels, given some macro headwinds. In addition, the Fund has got some really good high quality exposures to some strong growth sectors. And we do believe that those positions will reward us, over the next 12 months.
Jessica Amir: John Grace, thank you so much for your insights.
John Grace: Thanks Jessica.