How Lennox Capital's investment process has delivered double-digit growth for investors

Former Macquarie Group small-cap stock pickers James Dougherty and Liam Donohue co-founded Lennox Capital in 2017 and the pair have posted strong returns for investors ever since. 

In this video, Sydney-based Dougherty sits down with Livewire to talk through the fund's structure and his investment process in finding the best long-term growth stocks for the Lennox Australian Small Companies Fund. 

"As an active fund manager you need to have an edge to outperform the market. Our edge lies in being able to forecast the long term value of businesses," says Dougherty. 

"We stick to the process and use [market] downturns as an opportunity to capture mispriced opportunities, so in the long term you should be able to make good money."

For the five years to March 31, the fund has returned a compound 14.5% per year net of fees and typically invests in around 30 small-cap Australian stocks on a long-only basis. 

However, Dougherty says one of Lennox's key principles is to only buy businesses within its research and investment team's area of competence. 

For example, this means the stock pickers don't even bother looking at resource stocks, given miners are price takers reliant on hard-to-forecast commodity prices. 

They would also avoid other areas of the market where it's tough to forecast future profit growth, as companies are too early in their business plans, or in areas so complex that it's hard to get an edge. 

"Warren Buffett said stay within your sphere of competence meaning figure out what you're good at and stay within that," says Dougherty. 

Stock selection as a consistent process

On the other hand, Lennox has picked many share market winners over the years. Some of the sectors it likes to focus on include technology, healthcare, industrials, and other future-facing industries. 

"The key driver behind performance is stock selection, over the long term macro-economic head or tail winds don't have much of an impact on stock performance," says Dougherty. 

The stock picker says one of Lennox's best-performing companies over the last five years was investment platform Hub24 (ASX: HUB). Over that period, the stock is up around 693% as the Hub24 platform wins more funds under administration from investors and financial advisers. 

"The market was missing that there was significant structural change occurring in their industry that was going to have a significant impact on their earnings," says Dougherty.

"A tech business like Hub then enters a virtuous circle, where they start taking market share with revenue growth and because there's good operating leverage in a business like that, it produces more earnings. So, they reinvest in the product and then the competitive advantage increases as they can make the product stronger."

Long-term outlook

Some of the other stocks the fund holds include Aussie Broadband (ASX: ABB), Botanix Pharmaceuticals (ASX: BOT), OohMedia (ASX: OML) and Integral Diagnostics (ASX: IDX).

"We're ultimately trying to find that small company that will turn into this multi-year growth generator and hopefully a household name," says Dougherty. 

The fund manager also tells Livewire that headlines around trade wars or other potential downturns in share markets do little to change the fund's investment process, as it aims to unearth share market winners irrespective of the world's latest problems. 

The fund also aims to hold its winners for at least three years to leverage the benefits of compound growth over longer time frames. 

"Increased volatility is where we can find those investments that ultimately provide really strong returns over the medium to long term, so we don't change are process based on what a government might announce in the next week," he says.

If you want to find out more about the Lennox Australian Small Companies Fund, please watch the video above to hear Dougherty explain more. 

Managed Fund

Lennox Australian Small Companies Fund

Australian Shares

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