3 top tips from a small cap fund manager

Credit: Simon Cunningham

The Bennelong Concentrated Australia Equities Fund has thrashed its benchmark index since it began way back in January 2009, delivering unit holders an annualised 17.85% after fees, compared to the benchmark’s 10%.

In the past year to the end of February 2016, the fund was ranked by research house Mercer as the top performing fund and came in second over 3 and 5 year periods, according to the Australian Financial Review.

In other words, a $10,000 investment at inception would now be worth over $31,500, compared to an investment in the benchmark – which would be worth close to $19,500. That’s over 7 years, so you could imagine what similar performance could do for a much larger starting position over a lifetime of investing, say 30 to 40 years.

In fact, even $10,000 over 30 years at a compound rate of 17.85% would make for an astonishing sum of $1.38 million.

So maybe investors might want to pay attention when fund manager Mark East tells the public what shares he finds attractive.

Interestingly, at the end of February, the fund held absolutely zero shares in Utilities, Energy, REIT’s, and Materials sectors and has done for many months. The majority of the funds holdings are in the consumer discretionary, health care and financials sectors with just 26 stocks held compared to the ~300 in the S&P/ASX 300 (Index: ^AXKO) (ASX: XKO) benchmark. The current top three holdings are CSL Limited (ASX: CSL), Westpac Banking Corp (ASX: WBC) and Domino’s Pizza Enterprises Ltd (ASX: DMP).

Ramsay Health Care Limited (ASX: RHC) has been in the fund since inception and is up more than 500% since early 2009. Mr East says he still expects earnings growth ahead, and says he thinks the market has continually underestimated the hospital operator.

Concentrating on high quality companies capable of producing strong earnings growth also lead Bennelong to skin care products manufacturer BWX Ltd (ASX: BWX). Bennelong invested prior to the IPO, and BWX’s share price has soared from the IPO price of $1.50 to $4.37 currently but has been as high as $5.00.

Another company Mr East likes is Breville Group Ltd (ASX: BRG), mainly thanks to its strong US earnings growth. The company saw 40% growth in earnings in the US in the six months to end of December 2015. Breville’s share price plunged from above $7 to a 52-week low of $5.48 in February this year, and Mr East says the fund was happy to top up its holding. The share price has since recovered to $7.42 currently.

Foolish takeaway

Bennelong’s success over many years can be attributed to their strategy. High quality companies generally have high returns on equity, low debt to equity ratios, and higher sales and earnings per share growth.

Sometimes you have to pay up for quality.

Forget resources companies or Woolworths and look for top quality

These 3 "new breed" top blue chips for 2016 pay fully franked dividends and offer the very real prospect of significant capital appreciation. Click here to learn more.

And here's a tip. I already own two out of the three in my SMSF, and will own the third at some stage.

The report is free! No credit card required.

Motley Fool writer/analyst Mike King owns shares in CSL. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.