Ask a Fund Manager
The Motley Fool chats with fund managers so that you can get an insight into how the professionals think. In part 1 of this edition, Sam Granger, Founder of Equanimity Partners, explains the benefits of holding a smaller portfolio and reveals this year's top-performing share in the Equanimity High Conviction Fund.
Motley Fool: How would you describe your fund to a potential client?
Sam Granger: The Equanimity High Conviction Fund provides exposure to a concentrated portfolio of 10 to 15 outstanding businesses which we judge to have exceptional risk/reward characteristics.
We have a flexible mandate that allows us to search very broadly for potential winners, and then we conduct extremely thorough independent due diligence to whittle down this opportunity set into a small number of our very best ideas.
The fund has been running for almost 5 years and has been compounding investors' capital at 20.0% per annum, net of all fees, since inception.
MF: What advantages do you see with the concentrated investment approach of holding only 10-15 shares?
SG: If you have more capital in your very best opportunities you clearly have the potential to earn higher returns, provided your analysis is correct, of course. Concentration also gives us the time to do very deep fundamental research without the distraction of marginal ideas.
MF: Would more diversity from owning a larger number of shares reduce volatility?
We believe there is a trade-off between the higher returns on offer in a concentrated portfolio and the associated higher levels of volatility that a concentrated portfolio creates. We're happy to accept this trade-off because over the long term we don't view owning 10 to 15 exceptionally high-quality businesses as particularly risky.
At the moment we have 12 holdings.
MF: You established the Equanimity High Conviction Fund in May this year after executing a management buy-out from Totus Capital, where you helped establish the fund in 2017. What was your rationale here? And has anything changed with the fund?
SG: That is correct. I originally established the fund in partnership with Totus Capital in January 2017, and then purchased Totus Capital's share of the business in 2021.
The rationale for this was that I wanted independence, the challenge of running my own business, and the ability to devote all my time to the High Conviction Fund. Independence has enabled me to spend more of my time focused on investment research, which now occupies 95 per cent of a normal day for me.
Ben McGarry, the founder of Totus, was extremely gracious in allowing me to buy him out of his share of the business, which ensured a great deal of continuity for our investors.
The only thing that really changed was the name of the fund.
MF: You hold both large and small-cap shares. What are the pros and cons of investing in small caps compared to blue chips?
SG: Small caps are currently around 20% of our portfolio and have historically been an important driver of our returns. The allure of small caps is that you can discover underresearched businesses at attractive prices before their quality is fully recognised by the broader market. The negatives are that often the liquidity in the shares is poor and the business models are less proven.
Our portfolio started out with a very significant focus on small caps, but this exposure has actually been coming down through time.
MF: What sectors look promising to you in the year ahead?
SG: We're focused on the bottom-up analysis of businesses rather than being thematically or sector-driven. And we generally take a 3-to-5-year view on the performance of the businesses we own rather than a single year.
With that said, we are finding more attractive opportunities in offshore markets and have bought very little in Australia over the past 12 months. We are generally finding better risk/reward in the larger and more established blue-chip businesses offshore and are finding the valuations in small-cap Australia quite demanding.
The Australian market is actually quite expensive for high-quality businesses. Those that are listed here tend to attract a massive premium. Over the last 2 years or so, I've been finding better opportunities offshore.
MF: What's been your best investment for the fund over the past year?
SG: Alphabet Inc (NASDAQ: GOOG) has been our best. That's currently up 69% year-to-date. The business is an extraordinary collection of competitively advantaged assets with structural tailwinds for growth as commerce continues to shift online.
Key assets in the Alphabet stable include Google Search, YouTube, Android, Google Cloud Platform, and Google Maps. We first purchased our position in Alphabet almost four years ago and continue to be happy shareholders today.
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Tune in tomorrow for part 2 of our interview, where Equanimity Partners Sam Granger profiles 3 international shares with strong growth outlooks.
(You can find out more about the Equanimity High Conviction Fund here.)
