The Motley Fool

Top ASX manager shares his checklist on protecting portfolios in downturns

Andrew Mitchell, a leading ASX portfolio manager from Ophir Asset Management, has shared his checklist on how to protect portfolios in a downturn.

I reckon he is worth listening to because the two Ophir funds have been some of the best performers over the past few years. Net of all fees, since inception the Ophir Opportunities Fund and the Ophir High Conviction Fund have returned 25.8% and 20.2% per annum respectively.

It has managed to deliver this performance by investing in some of the best growth shares like Afterpay Touch Group Limited (ASX: APT), Pro Medicus Limited (ASX: PME), Breville Group Ltd (ASX: BRG) and Webjet Limited (ASX: WEB).

Ophir will soon be listing the high conviction fund onto the ASX as a listed investment trust (LIT), I’ll be quite interested in investing in it.

Here are four things Mr Mitchell says investors should focus on:

Balance sheet

Ophir avoids highly-geared businesses and instead goes for companies that can self-fund their near-term obligations.

Good balance sheets avoid emergency capital raisings in market distress and that also provides the option of making acquisitions when competitors could be forced sellers.

Quality of the business

Higher quality businesses can demonstrate a resilience of earnings regardless of what’s going on in the economy and won’t face headwinds in a global recession.

Of course, earnings growth may slow but high quality businesses are unlikely to go bankrupt.

In market uncertainty Mr Mitchell said that Ophir will focus on businesses with resilient or non-correlated to broader market uncertainty.

Don’t overpay

Business quality doesn’t come cheap except during market volatility and distress.

Returns are always decided on the price you pay for businesses. No business is a buy at any price, your money should be invested sensibly at good prices for quality businesses.

Be mindful of liquidity

It’s only when the market gets volatile that liquidity becomes an issue. It’s in uncertain times that we might most desire liquidity.

Small caps generally suffer the most in market downturns because of tight liquidity.

However, I think it could be useful to point out that the underlying value of the small business may not change – just that investors find it difficult to trade shares.

Foolish takeaway

I agree wholeheartedly with Mr Mitchell’s points. In-fact, if you focus on those things in good times as well as through volatility then you should be able to generate market-beating returns over the long-term.

Some of the shares that I think fit the bill include Costa Group Holdings Ltd (ASX: CGC) and REA Group Limited (ASX: REA).

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Tristan Harrison owns shares of COSTA GRP FPO. The Motley Fool Australia's parent company Motley Fool Holdings Inc. recommends Pro Medicus Ltd. The Motley Fool Australia owns shares of and has recommended COSTA GRP FPO and Pro Medicus Ltd. The Motley Fool Australia owns shares of AFTERPAY T FPO. The Motley Fool Australia has recommended REA Group Limited and Webjet Ltd. 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 Scott Phillips.