The fund’s secret sauce for picking ASX shares for massive gains

Portfolio managers Mark Devcich (left) and Chris Bainbridge. Image source: Discovery Fund

Ask a fund manager

The Motley Fool chats with the best in the business so you can get an inside look at how the pros think. In this edition, Discovery Fund portfolio managers Chris Bainbridge and Mark Devcich explain how they select ASX stocks to include in their exclusive high conviction portfolio.

Investment style

The motley fool: How would you describe your fund to a potential client?

Chris Bainbridge: We are a high conviction active manager that seeks exceptional performance and we do this by having one fund, the Founders’ Fund, which invests in up to 20 of the best listed companies on the ASX and NZX.

MF: What is the investment philosophy?

CB: At a really high level and to keep it super simple, we’ve called it the Founders’ Fund for a reason. We aim to invest in founder-led companies, high returns on investor capital, with a catalyst to realize our variant of the business. We are looking for the three aspects.

We tried to take a three- to five-year time frame, but often we find that companies realized our valuation in a much shorter time frame.

MF: You mentioned it’s a high conviction fund, so how many shares do you hold at any given time?

CB: We aim for around 20 in the portfolio and it is fairly concentrated within the top 10 names.

We believe that if you choose an active manager, you choose them for their stock-picking ability, and you want to be able to express that ability as much as you can, and it really comes down to concentration. It’s good to have a lot of good ideas – so when you have one, you want to make it count.

MF: It’s been pretty turbulent for stocks over the past year. Where do you think it’s all going this year?

Mark Devcich: It’s not something we spend a lot of time thinking about where the market is going, as it’s obviously very difficult to predict, especially in the short term.

But we feel relatively more constructive in Australia compared to the Kiwi market. We are only invested in the NZX and ASX, but clearly more doomed around Australia, given strong commodity prices, restarting immigration, international education and also the pool of funds generated from mandatory superannuation.

So we feel Australia is doing relatively well compared to the rest of the world. Markets can be volatile, choppy, they can even hit lower from here on a global basis, but we feel Australia is one of the bright spots around the world in terms of its equity markets and its economy over the next 12 months.

Tomorrow: Chris and Mark’s two best ASX stocks to buy right now