5 shares this top performing fund manager is betting on

Credit: Sirtex Medical

Since its inception in 2008, the Smallco Broadcap Fund has been one of Australia’s best-performing funds with an average annual return of 20%.

The fund delivered a return of 9.3% for the 2015/16 financial year, and while that was lower than its longer term record, it still managed to outperform the S&P/ASX 300 Accumulation index by 8.4%. This is an excellent result and one most investors would be very pleased with.

Investors might be interested to know that the manager uses fundamental analysis to identify undervalued shares and has the ability to invest up to 40% of its assets outside of the top 100 stocks on the ASX. The fund also rarely invests in mining stocks and tends to avoid any company that is not yet profitable.

The fund’s strategy has proven to be very successful over a long period of time, so I think it is a worthwhile exercise for investors to identify what type of stocks the fund might be holding at a given point in time.

With that in mind, Smallco highlighted the following five shares as the Broadcap Fund’s top holdings from its latest quarterly update:

  1. Commonwealth Bank of Australia (ASX: CBA) – This is an interesting holding because the major banks have not had a smooth run over the past 12 months and still face a number of short-term headwinds. Despite this, Commonwealth Bank is still the highest quality bank of the big four and is very well placed if credit conditions begin to improve. The shares also offer an attractive dividend yield of 5.6%.
  2. Westpac Banking Corp (ASX: WBC) – Westpac is probably the second-best placed bank to deliver attractive long term returns to shareholders. Interestingly, the manager has avoided Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd. (ASX: NAB) even though they appear the cheapest and offer the highest dividend yields. In this case, the manager has decided to stick with quality and there could also be a lesson there for investors.
  3. Webjet Limited (ASX: WEB) – The online travel agent has gone from strength to strength over the past 12 months thanks to the combination of strong organic growth and a clever acquisition that will complement its existing offering. Although the shares have climbed more than 86% over the past 12 months, the company’s positive growth outlook should continue to support the share price from here.
  4. oOh!Media Ltd (ASX: OML) – The outdoor advertising sector has been rocketing higher over the past 12 months thanks to the strong uptake of digital billboards and advertising campaigns. oOh!Media shares have more than doubled over the past 12 months and look like a good long-term option if growth in the sector is maintained.
  5. Sirtex Medical Limited (ASX: SRX) – It has been a bumpy 12 months for the Sirtex share price with investors showing concern around key management changes and a slowing in dose sales growth. Despite this, the biotechnology company has still managed to deliver fairly strong growth and has a number of pivotal clinical trials concluding over the next 12 months.

The chart below highlights the fund’s most recent sector allocation and I think there are two points that immediately stand out – the fund is significantly under-exposed to the mining sector and has a relatively high allocation to cash.

Source: Broadcap Fund June 2016 Quarterly Update

Source: Broadcap Fund June 2016 Quarterly Update

The large allocation to cash could be an important point for investors as it suggests the manager does not believe that the market is currently offering a high number of opportunities for value investors.

Despite the fund's high allocation to cash, I still think investors should consider these three blue chip shares chosen by The Motley Fool's analysts as they look like pretty good value right now.

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Motley Fool contributor Christopher Georges owns shares of Sirtex Medical Limited. 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.

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