Fund manager DNR Capital has used the equity market volatility of the past few months to take profits from holdings that have held up well and added to positions in “de-rated” companies.
In the latest monthly report for its Australian Equities High Conviction Fund, DNR says it has reduced its positions in Brambles, Woolworths and MYOB Group.
It also reduced its position in Westpac, but for a different reason. It is concerned about the Australian housing market trend and the impact a prolonged correction in house prices might have on the banks.
Over the past few months it has bought several “de-rated growth opportunities” and “de-rated value opportunities”. The growth opportunities include Treasury Wine Estates and REA Group, which DNR describes as high quality growth companies. “We are rebuilding our positions on 20 per cent pullbacks,” it says.
The value opportunities include James Hardie Industries, locally listed UK banking group CYBG, WorleyParsons and Link Administration Holdings.
DNR says: “The market is becoming overly risk averse and pricing stocks with cyclical exposures at deep discounts. This market dislocation is creating selective opportunities.”
Overall, it is underweight “bond proxies”, such as real estate investment trusts and utilities, underweight banks and domestic consumer stocks due to higher consumer debt levels, overweight diversified financials and diversified resources and overweight companies exposed to infrastructure spending, such as Lendlease and Macquarie Group.
Its note on James Hardie says it is a leading supplier of building materials in Australia, the US and Germany. Its price has been soft because of concerns about a slowdown in US housing starts.
“We think this concern is overstated, given James Hardie earns a significant portion of its earnings from the renovations and repairs market and it will continue to win share. The stock is trading at a deep discount to historical levels and offers a strong growth outlook,” it says.
Its note on Link says the company has had a difficult year because of the impact of Budget changes on its earnings. Low balance superannuation accounts will be transferred from super funds to the ATO and this may reduce Link’s administration fee revenue by as much as $55 million.
DNR says Link is taking steps to offset this earnings pressure. It believes market forecasts are worst case and the actual outcome will be better. It also has a positive view of Link’s most recent acquisition, the digital property exchange PEXA.
DNR has struggled to beat its benchmark in recent months, with returns over three, six and 12 months below the S&P/ASX 200 Accumulation Index. However, its long-term performance is well ahead of benchmark.
Since the fund was launched in June 2015 it has returned an average of 7.9 per cent a year (net of fees), compared with the index return of 5.9 per cent over the same period.