A leading fund manager, being Eley Griffiths, has revealed one top ASX share that it thinks is worth owning.
Eley Griffiths is one of the fund managers that is taking part of the Future Generation initiative. This is where two listed investment companies (LICs) have been set up for philanthropic purposes.
Future Generation Investment Company Ltd (ASX: FGX) donates 1% of its net assets each year to youth charities, whilst Future Generation Global Invstmnt Co Ltd (ASX: FGG) donates 1% of its net assets each year to youth mental health charities.
The Future Generation LICs invest in the funds of fund managers, like Eley Griffiths, who work for free so that the donations can be made. There are no management fees or performance fees.
How does Eley Griffiths invest?
It has a number of different funds. One of those funds is the Eley Griffiths Group Emerging Companies Fund. This fund has a consistent record of outperformance of the S&P/ASX Small Ordinaries Accumulation Index.
At 30 September 2020, over the prior year the fund (which invests in ASX shares) had outperformed the index by 15.2%, over the past two years it had outperformed by an average of 12.5% per annum and over the past three years it has outperformed by 12.2% per annum. Since inception in March 2017, it has delivered average returns per annum of 20.5%, outperforming the index by an average of 13.1% per annum.
Eley Griffiths Group says that it has a disciplined investment process and a belief that portfolios are built from bottom-up stock picking whilst being influenced by top-down considerations.
The backbone to the investment philosophy combines a price-for-growth valuation metric with a formal assessment of management and industry structure. The fund manager says this process generates buy and sell signals.
Fund manager's thoughts on the share market
Eley Griffiths believes the global economy has moved to a recovery phase, commencing in China and spreading outward as consumers normalise in a coronavirus world and businesses begin to invest again. In the short term, passage of the US stimulus bill and the US presidential election may weigh on sentiment.
The fundie also thinks that stock market valuations are full but not excessive and prevailing equity risk premiums continue to reinforce the case for enlarged equity allocations versus that of bonds and fixed interest.
What's the ASX share idea?
One high conviction holding of Eley Griffiths' is Reject Shop Ltd (ASX: TRS). The fund manager said: "the ASX share sits at the early stages of a planned multi-year turnaround. New management have a reset balance sheet, strong brand and an operating model awaiting refinement. We have identified several levers where value for shareholders should be unlocked."
The Reject Shop share price has gone up by 176% since the price bottomed on 27 March 2020 due to COVID-19.
In FY20 the ASX share reported that its FY20 sales grew by 3.4% with comparable store sales growth of 3.5%. In the first half comparable sales rose 0.5% and in the second half it rose 7.1%.
Before AASB 16, FY20 earnings before interest, tax, depreciation and amortisation (EBITDA) grew by 30.1% to $23.7 million. It generated $4.5 million of earnings before interest and tax (EBIT), up from a loss of $23.3 million in FY19, and it made $2.7 million of net profit after tax (NPAT), up from a $16.9 million loss in FY19.
At the end of FY20 it had $92.5 million of cash on the balance sheet and no drawn debt. It generated free cashflow of $61.6 million, up from a $1.9 million outflow in the prior corresponding period.
In FY21 the company will be focused on EBIT growth with cost reductions through business simplification and operational efficiency.
