Understanding what you are investing in

Stephen Bennie

Castle Point Funds

With Stephen Bennie, Co-Founder – Castle Point


Q1: How would you describe your investment style? And what does this mean in the type of companies you invest in?

At the heart of our investment style is being long-term investors. Typically, we will hold a position for 5 years, if not longer, and over that time we are looking for a very significant uplift in earnings and consequently a much higher share price.

The two types of companies that, in our view, offer the greatest potential increase in earnings over that timeframe are Value and Quality. With Value the big uplift in earnings is typically a recovery to more normal earnings from a low base, often termed “turnarounds”. With Quality the big earnings boost often comes from a company successfully growing into new markets or bringing new products to market. In industry speak, our portfolios tend to “bar bell” Quality and Value companies.

Q2: How many shares do you typically have within each of your funds/portfolios?

In the Ranger Fund, our high conviction benchmark-unaware fund, we will typically hold shares in 15 to 20 companies.

In the Trans-Tasman Fund that seeks to provide a return higher than the S&P/NZX 50 index, we will typically have 25 to 35 companies.

Our 5 Oceans Fund is a highly diversified balanced fund that holds investments in bonds and equities, (both local and international) and some derivatives to manage downside risk. As a consequence, that fund has exposure to several hundred different investments.

Q3: For your most popular funds, tell us about your most overweight positions in your portfolio and what you like about these companies

Currently one of our largest positions is OFX Group, a cross border payments business which falls into our Quality camp. Individuals and businesses across the globe can use OFX to convert cash into different currencies for travel or business purposes. This is a truly enormous market, even though it is already a substantial business with annual revenues of over $130m, OFX accounts for less than 0.05% of the market. In our opinion OFX has the right team and the right offering to grow their market share considerably over the next 5 years. If they can achieve that, then earnings have the potential to grow considerably which should drive significant share price gains.

Another large position is The Reject Shop which runs a chain of discount shops across Australia, think of an early Warehouse store. The Reject Shop falls into our Value camp. This business was effectively blown up by the previous CEO who attempted to convert the stores into a more upmarket offering. When that proved disastrous, a new CEO was appointed in 2019, and a “turnaround” opportunity was created. Our view is that the full benefit of the work done by the new team in repositioning the stores back to their discount roots and dramatically improved inventory management will become apparent as foot traffic returns to malls and shopping centres across Australia. At that stage The Reject Shop should deliver a big earnings boost as it returns to more normal levels of profitability.

Q4: Have you outperformed the index over a 10-year period for your most popular funds?

We are in our ninth year of running funds at Castle Point, but we are currently running ahead of performance objective for all three funds in terms of 3-year, 5-year and since inception returns.

Q5: What companies don’t you like investing in?

ESG is an important part of our research process, we don’t like companies that cause environmental or social harm.

We tend to avoid “black box” companies where the complexity of the business model leaves investors having to trust management. We prefer simple, easy to understand businesses.

We don’t like high levels of bank debt, in those situations’ decisions tend to be made that favour the banks not shareholders. Also, they can just go bust.

We tend to be wary of businesses that are operating in industries that are in structural decline or are ripe for massive disruption.

As a general rule we avoid agricultural companies, while the good times can be great the bad times are awful. There always seems to be a weather event, or a pest problem or a collapse in prices, just around the corner.

We don’t favour resource companies; their earnings are more a function of commodity cycles which doesn’t fit into our framework of Value or Quality.

Disclaimer

The following commentaries represent only the opinions of the authors. Any views expressed are provided for information purposes only and should not be construed in any way as an offer, an endorsement or inducement to invest. All material presented is believed to be reliable but we cannot attest to its accuracy. Opinions expressed in these reports may change without prior notice. Castle Point may or may not have investments in any of the securities mentioned.

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Castle Point has taken all reasonable care in the preparation of these articles, however accepts no responsibility for any errors or omissions contained within. Past performance is not necessarily an indication of future performance. Opinions expressed in these articles are our view as at the date of issue and may change

Stephen Bennie
Partner
Castle Point Funds

Stephen has over 25 yrs investment experience & co-founded Castle Point, a NZ boutique fund manager, in 2013. Prior to that he worked at funds management companies in Auckland, London & Edinburgh. Castle Point WINNER FundSource Boutique Manager 2019

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