The Ellerston Australian Share Fund had a tough May, the fund falling 2.9 per cent compared to a gain of 1.1 per cent in its benchmark S&P/ASX 200 Accumulation Index.
The fund remains ahead of its benchmark for the financial year to date, up 10.3 per cent.
Although it had some good winners for the month — including overweight positions in BlueScope Steel Limited (ASX:BSL) and Nufarm Limited (ASX:NUF) — the fund was dragged down by some hefty losses in companies including JB Hi-Fi Limited (ASX:JBH) and Healthscope Ltd (ASX:HSO).
Ellerston was not alone in liking JB Hi-Fi shares, with the new Airlie Australian Share Fund recently naming the retailer as one of its stocks in focus.
Shaken but not stirred, Ellerston added to its already chunky positions in these three beaten-down ASX 200 companies.
1. Treasury Wine Estates Ltd (ASX:TWE)
The Treasury Wine Estates share price fell almost 10 per cent after a report in the AFR said the wine producer is "facing a supply glut of its own making in China."
Ellerston said their long-term conviction on Treasury Wine Estates share remains underpinned by the improvement of the wine cycle, the TWE portfolio of premium brands, excellent volumes of luxury inventory, unique access to the world's largest wine markets, and the company's superior earnings growth profile.
Ellerston said they expect earnings to grow by 25 per cent compounded for the next 3 years. The fund used the aggressive TWE share price sell-off during the month as an opportunity to increase its position in Treasury Wine Estate shares.
2. Link Administration Holdings Ltd (ASX:LNK)
The Link Administration share price fell 17 per cent in May after it said the Federal Budget's proposed changes to the treatment of inactive superannuation accounts could cost the company as much as $55 million in lost revenue.
The policy proposed a transfer to the ATO of accounts that had balances less than $6,000 and with no contributions for 13 months or more.
Ellerston remains attracted to Link because it remains the lowest cost funds administration provider.
The fund believes that the long-term growth story in Funds Administration remains intact, and that rising regulatory uncertainty should lead to increased demand for low-cost outsourcing over time.
Whilst there are risks, including increased competition and regulatory uncertainty, Ellerston feels they are now reflected in the lower Link Administration share price.
Ellerston said the earnings growth profile on current consensus (FY19: +16.3% and FY18-FY20 EPS CAGR of over 11%) is compelling and valuation upside is attractive.
3. Graincorp Ltd (ASX:GNC)
The Graincorp share price fell 10 per cent in May after reporting a severe contraction in earnings caused by the adverse weather conditions that plagued Australian crops.
Ellerston said that while the impact of the weather is clearly disappointing and impacts a key leg of the earnings tripod, their investment thesis on GrainCorp shares remains unchanged, saying the fund will remain patient until this plays out.
Ellerston believes the share market is discounting the significant growth potential in the Malt business, saying they can justify the company's current market cap of around $1.75 billion on its malt business alone. The Storage and Logistics, Marketing, and Oils businesses are virtually thrown in for free, the fund said.
