I think a useful way for share investors to get good investment ideas is to look at what professional fund managers are buying, selling and holding.
One of the most successful asset managers in Australia is Wilson Asset Management, led by founder Geoff Wilson.
The company has four equity funds currently listed on the ASX, with WAM Capital Limited (ASX: WAM) being the biggest and most popular amongst investors.
With the exception of WAM Leaders Ltd (ASX: WLE) (which has only been listed since May), each fund has significantly outperformed the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) over the last one, three and five-year periods.
Although each fund has a slightly different investment strategy, the common objective among all of the funds is to find undervalued growth companies.
This sounds like a pretty reasonable objective and one that most investors would strive for.
I thought it would be interesting, therefore, to see what shares are in favour with the fund manager from its latest investment update.
A number of top-performing shares immediately stood out including:
Smartgroup Corporation Ltd (ASX: SIQ) – Smartgroup is one of Australia's leading providers of salary packaging and novated leases. As the chart below highlights, the company has done a remarkable job of increasing the number of salary packages under management through a combination of new contract wins, organic growth and acquisitions.
This has translated into strong earnings growth and a share price that has increased by 173% over the past 12 months. While I wouldn't be a buyer at the current share price, this is definitely a stock investors should keep an eye on.
Nick Scali Limited (ASX: NCK) – The premium furniture retailer is a top holding for two of the managers' funds and is one stock that I think looks attractively priced. The company recently upgraded its full year guidance following stronger-than-expected sales and has successfully managed to maintain its operating margins, despite the fall in the Australian dollar. The shares are trading on a price-to-earnings ratio of 15, which appears good value especially if the company can maintain its sales momentum into FY17.
Vocus Communications Limited (ASX: VOC) – There is a lot to like about Vocus, and the telecommunications sector more generally, thanks to the roll out of the NBN and the huge uptake of digital devices. The recent merger with M2 Group should provide the company with additional scale benefits and leverage to compete with the likes of Telstra Corporation Ltd (ASX: TLS) and TPG Telecom Ltd (ASX: TPG). The shares are not cheap by conventional measures, but I expect the company to continue to justify this valuation with above average earnings growth.
Foolish takeaway
It's pretty clear from looking through the top holdings of each fund that the manager believes that the best value remains in the small-to-mid cap sectors. On top of this, the manager is significantly underexposed to the resources and energy sectors which I believe gives a good indication of where investors can expect to generate the best returns.
