Wholesale Australasian equities boutique, Discovery Funds, has raced to almost a third of its soft-close target of $300 million just one year after launch.
Founded last September by former Pie Funds portfolio managers, Chris Bainbridge and Mark Devcich, Discovery ended its inaugural year with circa $90 million under management on the back of strong performance and word-of-mouth inflows.
Bainbridge said the concentrated portfolio of about 20 Australasian small-to-mid cap stocks was up 44 per cent for the 12 months to end of September versus the benchmark NZ dollar-hedged S&P/ASX Small Ordinaries Accumulation Index return of 1 per cent or so.
“We launched with about $10 million – including $6 million of our own money,” he said. “Now we have over 100 high net worth investors in the fund.”
Under a tightly defined strategy, Discovery will close the fund to new investors once assets under management reach $300 million – a level that Bainbridge said enables the manager to preserve the nimbleness necessary to outperform in the less-explored, lower liquidity end of the market.
Devcich said the significant outperformance to date reflected the fund’s unusually concentrated approach that has seen the top five stocks in the portfolio represent up to 40 per cent of total assets: 60 per cent is invested in the 10 largest holdings.
“We also have around 85 per cent of the fund invested in Australian stocks,” he said. “And we’ve reduced our cash holdings from between 20 to 30 per cent in the first six months to just 10 per cent over the last six months as we’ve found more opportunities to deploy capital.”
Discovery has a reasonably high turnover in a “dynamic” strategy predicated on selecting companies the portfolio managers expect will re-rate higher as results unfurl – and selling if valuations hit targets, allowing the fund to “recycle” into new themes.
According to Devcich, Australasian small-to-mid caps remain a good place for stock-pickers despite the “lack of tailwinds” for the sector over the last five years.
But he said with rates now likely at a peak, increased migration into Australia and NZ and a potential export boost from lower currency levels against the US dollar, opportunities are on the rise too.
In spite of a stellar first-year performance, Bainbridge said the two founders are well aware that sustaining returns for longer periods is a more difficult task as funds under management grow.
“Managers often do well in their first year but we’re out to do this over the long term,” he said. “But we have structured the whole business around performance by focusing on just one fund, and a handful of ideas as well as alignment with investors by having most or our net worth in the fund too.”
Bainbridge and Devcich were key players in the Pie early success story, leaving the boutique in March and August 2022, respectively, after serving about a decade each with the firm.
Pie launched in 2007 with an Australasian small caps focus but has since diversified into other asset classes (and KiwiSaver with the Juno scheme) while accumulating more than $2 billion in assets under management. Last month Pie also reopened two of its flagship Australasian small cap funds – strategies at one stage run by Bainbridge or Devcich – after hard-closing the vehicles a couple of years ago.
While Discovery is a wholesale-only portfolio investment entity fund, it also features a corporate trustee (Public Trust) with Adminis providing custody, registry and administration.