This month we take a closer look at one of Australia’s best performing smaller company managers, Lennox Capital.
The company have partnered with Fidante Partners who look after administration and distribution of the fund. The founding principles James Dougherty and Liam Donohue own 60% of the company and have worked together since 2005. James and Liam were the portfolio managers of the Macquarie Australian Small Companies Fund and the Macquarie Emerging Companies Fund. Lennox has grown to $200m quickly since its establishment in 2017.
What’s the fund?
The fund is a specialist smaller company exposure with seeking to outperform the ASX Small Ordinaries Accumulation Index through bottom up stock selection.
The managers of Lennox have quite a strong track record. At Macquarie they achieved a return of 19.70% per year over 3 years and over 5 years 13.88%. It is this time spent focusing on the Australian market and having the skill to generate alpha that we believe sets Lennox Capital apart, as we believe small Companies in Australia will continue to grow in the years ahead but are generally underrepresented in most portfolios.
Where does it fit in your portfolio?
We believe it fits the requirements of the Value Bucket as its underlying investment philosophy is to identify Australian companies’ ex ASX 100 Index with a market capitalization of roughly $150m. The team focuses on purchasing an undervalued company that will benefit from substantial earnings growth.
The Lennox Capital Australian Small Companies Fund uses both qualitative screening and in-depth fundamental research to identify investment opportunities. Combine this with a robust investment process which where key insights are gained through deep-dive research ‘on the ground’. Lennox’s research process is driven by fundamental, in-depth and comprehensive analysis of a business’ operations. Lennox apply this practically in two ways
– external research (site visits) and internal research (detailed financial modelling). The process culminates in the production of Lennox’s forecasts for future earnings. These are ultimately used to assess the attractiveness of the business using a range of valuation metrics. The portfolio is a collection of the investment team’s best bottom up ideas. It holds a concentrated number of securities that Lennox believes have medium term valuation upside as well as minimal near-term earnings risk. The portfolio is managed with strong adherence to Lennox’s risk framework and investment objectives. The investment team ensure the portfolio is appropriately diversified.
Exposure to any one security and thematic are limited and liquidity within the portfolio is actively monitored. It holds between 20 and 40 individual companies. An investment is sold after it breaches any one of three reasons. It will be reduced as it approaches the team’s investment target, there is a breakdown of investment thesis or the company becomes sub-investment grade. We think this sell
discipline ensures maximum returns from stocks. We believe Lennox Capital Australian Small Companies Fund is best placed to provide outsized returns and exposure to stocks outside of the ASX 100 that otherwise is difficult to do. The manager charges a fee of 1.10% plus 15% of outperformance above the benchmark.
What does it invest in?
Every business that is considered an investment opportunity is assessed using Lennox’s proprietary quality screening tool. Businesses are assessed on 4 key factors: the ability of management, sustainability, quality of earnings and industry dynamics. Only businesses that pass Lennox’s quality screen and for which they believe they can confidently forecast future earnings are eligible for further research. Some of the best performing stocks have been A2 Milk, Wisetech Global, Altium and IDP Education. The current portfolio includes holdings in Adairs, Megaport, Austalian Finance and Collins Foods.
How has it performed?
Since inception the Lennox Australia Small Companies fund has returned 14.54%. The short- term performance has been below the benchmark adding 18.68% over the last 12 months as at 31 December 2019 compared to the index which added 21.36%. Since inception the fund has made 14.54% per annum beating the benchmark return of 10.76%. The fund’s strong short-term performance has come from its approach to selecting investments.
What income does it provide?
There is a common misconception from investors that managed funds will provide regular income each year. However, the income is determined by the success of the underlying investments with only realised capital gains or dividends received being distributed at 30 June each year. Investors should not expect regular income and will see the unit price of the fund increase throughout the year, than fall when a distribution is paid in July.