Fund managers have a habit of buying so many stocks that their portfolios start to resemble the underlying index in makeup and returns – but some funds make a conscious effort to be different. Some funds, like the Perpetual Concentrated Equity Fund, take bigger bets on fewer stocks. These stocks are what they call their “higher conviction” stocks.
TheBull decided to track down the stocks that higher conviction funds are targeting.
Over the past year the Perpetual fund has returned 9 per cent after fees. And as at May 2011, the fund’s largest overweight position was coal miner Coal & Allied Industries, followed by Australia’s largest retail bank Commonwealth Bank and chemicals and explosives manufacturer Orica. Another big stock bet is New Hope Corporation.
Interestingly, the fund does not hold any shares in Wesfarmers or Newcrest Mining. And Perpetual thinks that Commonwealth Bank is the pick of the banks, due to its large retail client base.
In its recent note, the managers of the fund expressed concern over the strength of the Australian dollar and increasing interest rates putting pressure on the earnings of many Australian companies. “In this environment, the market tends to favour quality companies with strong balance sheets that are well placed to withstand any future shocks,” it noted.
Coal & Allied Industries (CNA) is a major coal producer in the Hunter Valley region of NSW, and is majority owned by resources giant Rio Tinto Ltd.
Its Hunter Valley operation is a multi-pit open cut mine, producing 11 million tonnes of thermal coal and semi-soft coking coal per annum for international markets. The company also operates Mount Thorley Warkworth and Bengalla.
Perpetual notes: “Coal & Allied has sound management, quality assets and continues to benefit from growing global demand for coal.”
The share price of Coal & Allied has risen 317 per cent since 1 January 2003. However after hitting a high of $135 back in February this year, the share price has performed poorly, falling by almost 19 per cent in the past 6 months.
The big risk for Coal & Allied is the high Australian dollar, impacting earnings. The company suffered a $221 million drop in total revenue compared to 2009 due to the strengthening of the Aussie dollar against the US dollar. In its annual report, management blamed the high Aussie dollar on more than offsetting the increase in underlying US dollar thermal and semi soft coking coal prices for the year, seriously impacting its bottom line.
New Hope Corporation (NHC) is another bet for Perpetual, which notes: “We continue to like New Hope as it has a large cash balance.”
Unlike Coal & Allied, the share price of New Hope has continued to hold up over the past year, rising by almost 14 per cent. However during the past 6 months, the share price has exhibited fairly unnerving volatility – and is up just 1.4 per cent for the half year.
New Hope operates open cut mines at Acland on the Darling Downs, and at Rosewood near Ipswich. Over half of its thermal coal is exported to the Asia Pacific markets including Japan, Korea and Chile, with the rest consumed by customers in south-east Queensland.
Perpetual noted that New Hope recently announced a joint venture with Mai-Liao Power Corporation (MPC) to further the exploration and development of the Lenton project, an open cut mine in Central Queensland with 84 million tonnes of coal identified. New Hope Corporation will sell a 10 per cent interest in the Lenton project to MPC for $58 million.
Last month Andrew Pedler, Senior resources Analyst, Wilson HTM selected New Hope Corporation as one of his favourite coal stocks.
Based on tight supply, Pedler expects coal prices to rise on average 30 percent in 2011, in line with the 30 percent gains in 2010. He sees the price of hard coking and thermal coal reaching US$277.5/t and US$130/t respectively.
At US$130/Mt, miners can make healthy margins on thermal coal, said Pedler. He prefers low-cost producers that can continue to bring on new mines and turn a profit should prices drop. New Hope was a standout stock for this reason.
The Perpetual’s top 10 holdings in order of holding are BHP, Commonwealth Bank, Westpac, Coal & Allied Industries, Orica, ANZ, Fosters, Telstra, Rio Tinto and Crown.
Another high conviction fund worth checking out is the Perennial Growth High Conviction Fund. Like the Perpetual fund mentioned above, this fund limits the number of stocks it buys to boost performance.
During June the fund added Australian Infrastructure Fund (AIX) to the trust, and sold out of its shares in fertiliser company Nufarm (NUF), whose shares have plummeted by 50 per cent over the past two years.
Australian Infrastructure Fund holds interests in airports, roads, ports and rail assets around Australia. Over the past 3 months, it share price has retreated some 4 per cent – prompting the Perennial fund to buy up stock.
The purchase was a good one; Australian Infrastructure Fund was the top contributor to the fund in June, up 8 per cent. Perennial noted: “It outperformed, despite several of its airports suffering flight cancellations as a result of the Chilean volcanic ash cloud. Competing airport owner, MAp Group, announced it had received a non-binding and conditional proposal for an asset swap from Ontario Teachers Pension Plan. This reminds investors how attractive long life infrastructure assets are to global sovereign investment funds.” Shares in Australian Infrastructure Fund are up 7 per cent over the last year.
Other holdings for the fund include infrastructure play Asciano Group (AIO) and metal recycler Sims Metal Management (SMS), whose shares have risen by 31 per cent over the past year. Perennial notes: “Sims Metal Management performed strongly; as scrap metal prices globally continued to rise, US scrap volumes improved and competitor Schnitzer Steel Industries Inc. reported a strong result.”
Asciano (AIO) is Australia’s leading transport infrastructure company, with the combination of the Pacific National rail operations and the Patrick ports and stevedoring businesses. Via these two businesses AIO owns and operates a large range of infrastructure assets including ports and rail throughout Australia.
Although AIO shares had been on the slide over recent months – tumbling 16 per cent in the six weeks to May 24th to a 12-month low of $1.49 – two large contract wins has seen a reversal of fortunes for shareholders. Just last week the freight rail company renewed an existing coal haulage contract with Coal & Allied Industries, mentioned above. The contract is for the movement of up to 30 million tonnes of coal per year from July 1.
And two weeks earlier saw the signed of another deal, when it secured a ‘long-term’ contract with BHP Mitsui Coal Pty Ltd to haul 4.2 million tonnes of coal per year in Queensland. Asciano says it will haul the coal from next January via the northern missing link, which will connect the Newlands and Goonyella coal systems when the project is completed in early 2012.
Perennial’s top holdings are James Hardie, Sims Metal Management, CSL, Computershare, OneSteel, Rio Tinto, Oil Search, AMP, National Australia Bank and Asciano.
Please note that TheBull.com.au simply publishes broker recommendations on this page. The publication of these recommendations does not in any way constitute a recommendation on the part of TheBull.com.au.You should seek professional advice before making any investment decisions.