What it takes to make the cut in a 15-stock portfolio

My colleague, Vishal Teckchandani, and I recently worked on a wire comparing large-cap Aussie equities – the likes of BHP, CSL, Woodside, and Qantas – to a global twin. You can check it out below.

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8 ASX large-caps vs their global twins: Which is the better buy?

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The purpose of the exercise was to point out that Aussie investors’ strong home bias does not always serve us so well. As the wire uncovered, often there are better alternatives offshore.

The next part of the problem, however, is sorting through the 55,000-odd listed companies in the world and putting together a suitable portfolio – no wonder we simply stay at home most of the time.

Fortunately, there are a few fund managers who have done the work for us – one of whom is Stephen Arnold, Chief Investment Officer at Aoris Investment Management.

Arnold was one of the first people I interviewed when I started at Livewire, and straight away I was drawn to his high conviction, highly concentrated approach – no more than 15 of the world’s best "quality compounders", as Arnold calls them.

So, with markets going sideways recently, I was keen to catch up and see how the Aoris portfolio has been holding up and find out which stocks continue to make the exclusive cut. 

The Aoris International Fund B delivered 3.29% in April versus -1.84% for the MSCI AC World Accumulation Index ex Aust - showing that a concentrated approach can hold up during times of market stress. Over 5 years, the Fund has delivered 17.94% per annum versus 14.50% for the index. 

You can read a short summary of the interview below, but for the full experience, make sure to watch the video. 

The case for resilience

At the heart of Aoris’ strategy is the desire to own businesses that are “resilient to the external environment.” Arnold explained; 

“We always want to own businesses where what we’re reading on the front page of the paper matters as little as possible – whether that’s commodity prices, geopolitical events, housing cycles, interest rates or government policy.”

He gave the example of L’Oréal (EPA: OR), one of the portfolio’s holdings, which “operates across the beauty spectrum, every distribution channel and every country in the world.” 

Arnold noted that this breadth means the company can weather weakness in one region by leaning on strength in another – “that creates a much more robust, resilient, but also powerfully growing profile through time.”

What it takes to make the cut

Arnold’s portfolio holds a maximum of 15 stocks, a structure that he believes enhances, rather than limits, performance during times of stress. 

“It allows us to set our quality criteria very high… to know our portfolio businesses very well in ways that wouldn’t be possible if we owned 40, 50 or 80.”

So what qualities make a business Aoris-worthy? 

“We want winning, growing businesses,” he said. “They must be leaders in their market, outgrowing that market. They should have breadth – operating in many end markets – and a strong balance sheet. And the mindset of management really matters: the culture, the organisational DNA, the value set of the business.”

Currently, the Aoris portfolio holds 14 names, down from the usual 15. “We sold two and bought one this year. I don’t think it’ll be long before we’re back at 15,” said Arnold.

One sale was MSCI Inc (NYSE: MSCI), which Aoris had bought on weakness 12 months ago. “We sold it early this year at what we felt was more than a fair value.” 

Fastenal (NASDAQ: FAST), a US industrial distributor, was the other exit. In its place, Aoris added to existing positions, including Microsoft (NYSE: MSFT), which Arnold said was “unusually cheap” at the time.

Winners, workhorses and hidden gems

Asked about the longest-held position in the portfolio, Arnold named Amphenol (NYSE: APH), a Connecticut-based business supplying electronic connectors and sensors across industries from automotive to data centres.

“It’s got a long history of growing about twice the rate of their end markets,” he said. 

A third of Amphenol’s revenue now comes from the booming data centre market, which Arnold said grew “more than 100% in the March quarter.”

Accenture (NYSE: ACN) was another noteworthy name, a core position despite recent weakness. “It remains very relevant to solving customer needs – cloud, data, security, AI – and it continues to take market share.”

While Aoris owns some global household names like Microsoft and Visa (NYSE: V), Arnold highlighted Relx (NYSE: RELX), a UK-based provider of data and analytics to professional markets. 

“Even in a choppy environment, they’re seeing accelerating growth,” he said. 

“AI is making their tools more valuable. For example, legal practitioners can now interrogate their databases more efficiently. That’s driving demand.”

Lessons from seven years at the helm

Reflecting on seven years managing the Aoris strategy, Arnold stressed the importance of avoiding the temptation to predict the future.

“We don’t try to look around corners with confidence,” he said, citing the rapid shifts in the electric vehicle landscape as a cautionary tale. 

“Owning businesses growing in established markets and staying away from rapid change has proven to be a good decision.”

Another key learning? Even great businesses can fade. 

“Many great businesses from 10 years ago are no longer great. We’re hypervigilant for signs of complacency, impatience, arrogance or aggression – things that can set a business on the path to fade.”

That mindset underpins Aoris’ fully invested stance, even during tough markets. “We want businesses that turn difficult periods into opportunities to take market share,” said Arnold. 

“That can be a real source of confidence for us as investors.”

He also drew an unlikely investing lesson from Joe Aston’s book, The Chairman’s Lounge, which he read over summer. 

“It’s a good message about corporate destruction. Qantas had great assets but damaged itself. It reminds us to be vigilant about businesses taking customers for granted.”

Arnold’s conviction remains steadfast: “Right now, we feel good about what we own, what we’ve been learning, and the prices we own them at.”

Investors can access the Aoris strategy directly via two ASX-listed ETMFs: ASX: BAOR (Unhedged) and ASX: DAOR (Hedged).