Telstra Group Ltd (ASX: TLS) shares play a relatively minor role in the overall ASX share market. But one fundie has made it a large position in their portfolio.
In the Vanguard Australian Shares Index ETF (ASX: VAS) portfolio, which tracks the S&P/ASX 300 Index (ASX: XKO), the ASX telco share was less than 2% of the VAS ETF portfolio at the end of August 2024.
In the Investors Mutual (also called IML) Australian Share Fund portfolio, Telstra shares had a 7.3% weighting. Only CSL Ltd (ASX: CSL) and Commonwealth Bank of Australia (ASX: CBA) had larger allocations than Telstra, with position sizes of 10.9% and 8.6%, respectively.
Why do IML like Telstra shares?
Talking to the Australian Financial Review, IML portfolio manager Darren Moore said the current Telstra position size is one of the highest concentrations the fund has had during its ownership of Telstra shares.
Moore noted that Telstra has the biggest scale and a "superior network", which allows the telco to charge higher prices because of its commanding position.
Moore also said:
We had a price war a few years back, and then the industry consolidated, and there's only really three players. Optus and Vodafone barely make any money in mobile despite billions of investment. To justify further investment, they still need to earn a return, and that's why we're seeing mobile prices starting to lift.
They've been going up for the past three years, so I think most people will be probably surprised that Telstra's earnings growth over the past three years is up over 30 per cent.
How does the fund manager pick stocks?
Moore explained that Investors Mutual first focuses on a business' quality and then determines whether it's priced cheaply or not.
The fund manager believes that if an ASX share is higher quality then it should have a higher valuation, but value investors can also own those sorts of businesses.
Telstra is the type of business that attracts IML in this environment, even if it hasn't delivered strong returns recently because the market tends to ignore more resilient companies.
Moore said:
Our investment approach favours companies which are less impacted by economic stresses. When we're in more upbeat and exuberant times, the market is much more excited about the themes of the day; right now, it's anything artificial intelligence or tech-related.
History shows us that the cycle always turns, and when investors' sentiment turns, the market regains its love and appreciation of businesses with those more resilient characteristics.
Telstra shares seem to be one of the investments in which the IML investment team has a high level of confidence, including the telco's ability to compound earnings in the next few years.
