Difficult to replicate assets with an entrenched market position the key to performance

From
Callum Burns

Callum Burns

Companies that hold assets which are difficult to replicate, such as brands, licenses, patents, distribution rights, logistical capability and a captive client base, and operate these difficult to replicate assets with the objective of entrenching their products in the marketplace, should be in the sights of investors and advisers looking for superior medium-to-long term performance, says Callum Burns Portfolio Manager from SG Hiscock & Company (SGH).

Mr Burns says SGH ICE, the recent winner of the Morningstar undiscovered fund award, invests in ASX listed companies that have (or will have) a business franchise that meets this criteria. The features of a business franchise include:

  • It is a good business
  • It possesses a sustainable competitive advantage
  • It is difficult for clients to discontinue using the product or service
  • Often has pricing power, ie. can increase their product prices with minimal negative impact on the customer base.
  • Possesses a moat around the business

“These industrial companies typically deliver more certain earnings growth,” Mr Burns says.

“The core premise is to identify stocks that have a sustainable competitive edge, and assets that are difficult to replicate, and for this to be demonstrated by consistent and secure earnings growth.”

David Myers National Sales Manager at Equity Trustees, responsible entity for the SGH ICE fund, said: “We believe the fund invests in the safe end of small caps, so can make up a reasonable portion of the broader Australian equities asset class in an investor’s portfolio.”

The top five holdings in the SG Hiscock ICE fund are National Storage REIT, Resmed, GBST, Cover More and AMP.

Key contributors to performance for February were Carsales, Sky Network Television, AMP, Cover-More and Seek

“Although it was the winner of the Morningstar Australia Fund Manager of the Year: Undiscovered Manager Category for 2014, the SGH ICE fund is eight years old, and has been proven over some of the most testing market conditions in decades. It has provided investors with a net return of 11.7 per cent a year since inception, compared to 2.1 per cent a year. for the Small Cap Industrial Index and 5.6 per cent a year for the ASX 300 Accumulation Index,” Mr Burns said.

It holds a portfolio of approximately 30-50 predominantly ASX listed securities.

In naming the fund the winner of the Undiscovered Manager category last month, Morningstar Australia said: “SGH ICE Portfolio Manager Callum Burns’ creative approach to small-cap investing involves scouring the market for companies with the traits of a quality franchise, which possess entrenched market positions, assets hard to replicate, and pricing power ability. The combination of Burns’ shrewd insights and the well-reasoned approach make SGH ICE deserving of wider attention.”

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