Concentrated Leaders Fund (ASX:CLF) CEO & CIO Dr David Sokulsky introduces the fund, its objectives and approach, and what investors can expect from a concentrated portfolio within the S&P/ASX200.
Jessica Amir: Hi I’m Jessica Amir for the Finance News Network and with me today from Concentrated Leaders Fund (ASX:CLF) is Dr David Sokulsky. Dr Sokulsky, welcome to the Network.
Dr David Sokulsky: Thank you.
Jessica Amir: First up David, just give us an introduction to the listed investment company.
Dr David Sokulsky: It’s actually 30 years old, the company was founded by EquitiLink back in 1987. So it’s actually one of the longest running LICs or funds management businesses in Australia. So, I took it over at the start of 2018. One of the original founders is still the Chairman and largest shareholder. But we decided to, or the board decided to internalise the management, at the start of last year. With the reason being that we wanted to really grow the fund or the company. It really was being pretty stable in terms of its asset size for over a decade. So the opportunity is there to grow it, so we brought in a team to grow that and to manage the funds.
Jessica Amir: Before we talk about the fund. Maybe you can tell us your definition of a concentrated fund and how you also manage risk with your concentrated fund.
Dr David Sokulsky: We consider concentrated to be about 30 stocks, so give or take a couple either side. That’s where we think that we can add real value. We’re not following the benchmark, so we’re taking considerable risk away from where the benchmark is. And what that means is we’ve got to manage risk appropriately. For us, that’s done in two ways, one position sizing. So we have a maximum 7.5 per cent in any one position and also, risk budgeting. So we like to limit the contribution to risk of any one position, to be 10 per cent. And that’s based on standard deviation and beta of that individual position. So we think between those two things, we can have a portfolio which adds alpha, but which also negates some of those risks in terms of concentration.
Jessica Amir: How does your approach and style flow through to the underlying portfolio, in terms of your largest holdings and your sector exposure?
Dr David Sokulsky: We try and have a diversified portfolio from a sector perspective, and that really means not taking too much risk in anyone sector. And the most obvious in Australia is, if you buy an index fund you’re overweight the banks, relative to what I’d say our economy is. So for us that generally means being underweight financials, underweight materials and then looking at where the best opportunity set is, amongst the other sectors. At the moment, we find technology to be a very attractive sector and we find consumer discretionary, to be attractive as well.
Important to point out with consumer discretionary, it’s a very broad category. So the difference between say an A2 Milk (ASX:A2M), which is focused on China and baby formula, versus say an Aristocrat (ASX:ALL), which is based on the US and technology, are key to the way we look at again, risk in the portfolios. So we don’t necessarily look at sector as much, but we look at where the risk is being taken and what macro factors we’re vulnerable to.
Jessica Amir: Maybe you can tell us some of your largest positions?
Dr David Sokulsky: So we’ve got Macquarie Group Limited (ASX:MQG) and CSL Limited (ASX:CSL) as our two largest positions. And we think they’re two of the highest quality companies in Australia. Obviously sourcing a lot of their revenue from offshore and being able to deliver consistent cash flows. Outside of that our next three largest are BHP Group (ASX:BHP), Commonwealth Bank of Australia (ASX:CBA) and Transurban Group (ASX:TCL). And again, we are looking at what are the biggest companies, which are delivering what they need to to shareholders, and which are delivering consistent cash flows.
So again, while companies like CBA and the rest of the banks may have some issues, we think those three companies in particular, are delivering very consistent cash flows to shareholders. And that’s what we like.
Jessica Amir: And the Concentrated Leaders Fund, how has that been performing?
Dr David Sokulsky: Since I took over at the start of 2018, 2018 calendar year we outperformed by about 1.77 per cent. Which is quite encouraging, given the volatility we saw at the end of the year. And then at the start of this year, we’ve got the numbers up until the end of February and thankfully we’re outperforming, up until the end of February as well. March has been a bit of a rougher month, but we don’t have the final numbers yet.
Jessica Amir: Now to the outlook, what are some of the major factors that you’re seeing at play?
Dr David Sokulsky: I’m still very positive on domestic equities over the medium term and longer term. But I think in the short term there’s a number of risk factors, which we need to be considerate of. And certainly the upcoming election is one of them, how the US and China resolve their trade issues is another one. And obviously the property market in Australia is a third one, which we want to see some kind of resolution in, before we get too positive on the investment environment. So at the moment, we’re sitting on about 20 per cent cash, just being prudent in terms of waiting for that opportunity. Or until we get a bit more clarity on some of those risks.
Jessica Amir: Dr David Sokulsky from Concentrated Leaders Fund, thank you so much.
Dr David Sokulsky: Thank you.