Why This Billion Dollar Fund Isn’t Looking for 10-Baggers

We all want to earn extremely high returns. That’s why individual investors are often found playing in smaller end of the market. They jump into speculative explorers or ground-breaking tech start-ups.

There’s nothing wrong with this. But investing purely in tiny stocks with the hope that future earnings will skyrocket lowers your success rate. On average, these stocks generally don’t live up to expectation. Or they might take a lot longer to get there.

That’s why fund managers, Stephen Arnold and Nicholas Cregan aren’t interested in these super high returning stocks. Another obvious reason why they’re not in the market for 10-baggers is because of their size.

The two run the $1 billion-plus equities fund for Evans & Partners Asset Management. They simply cannot jump in and out of stock that might run up so aggressively in the short-term.

It could be said that the aim is more so to avoid losers, rather than pick winners.

I like to think of it like the way amateurs play tennis. The idea isn’t to hit winning forehands and backhands down the line. Doing so would surely lose them the game on unforced errors alone. The far better approach is to simply hit the ball back over the net.

And that’s exactly what Arnold and Cregan are doing.

The two also avoid stocks which are tied to regulation or cycles. ‘It makes great dinner conversation,’ Arnold told the Australian Financial Review. ‘…but if you are only getting one or two right out of 10, it’s not going to lead to great portfolio outcomes.

The equity team is aiming to generate 8–12% over a five to seven year horizon. Nothing too exciting. Three years on, the two have already generated returns of 21.2% before fees.

I would say there’s something to their conservative strategy.

Regards,

Härje Ronngard,

Junior Analyst, Markets & Money

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Harje Ronngard is a Junior Analyst at Markets and Money. With an academic background in finance and investments, Harje knows how simple, yet difficult investing can be. He has worked with a range of assets classes, from futures to equities. But he’s found his niche in equity valuation. It’s not good enough to be right on average when it comes to investing. The market is volatile and it only takes one bad day to ruin your portfolio. You don’t want to end up like the six foot man that drowned in the river that was five foot deep on average. It’s why Harje is constantly reminding investors of their downside risk here at Markets and Money. He does so by simply asking just two questions.  What is it worth? And how much does it cost? These two questions alone open up a world of investment opportunities which Harje shares with Markets and Money readers. Right now Harje is focused on managing research and investments over at the Legacy Portfolio. An investment publication designed to significantly grow investor’s wealth over time with deeply undervalued businesses. Harje also contributes his insights in Total Income, headed by income specialist Matt Hibbard. Harje loves cash-rich businesses, so he feels right at home amongst Matt’s high yielding income plays.


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