How to identify winning growth stocks (and 2 that Michael Wayne has recently been buying)

Ally Selby: The fund's been running for about a year now. How's it performed so far?

Michael Wayne: We're coming up to the 12-month anniversary. And so far, fortunately, we've had a particularly good start, which is always a nice thing. The portfolio, looking at the live data as of today, is about 14% higher versus the market's slightly above 9%. And that's in a year where we've carried a fair amount of cash as well. So the cash drag has been significant, which in retrospect is a little bit unfortunate. However, we are by no means under any illusion that one year makes a long-term track record. We've still got a lot of hard work to do, but it is nice to get off to a good start.

Key learnings from the past 12 months 

Ally Selby: What are some of the key learnings you've taken away from the past 12 months?

Ally Selby: Let's stick with your strategy. What are some of the pillars of your investment process? What's your secret sauce?

Michael Wayne: The secret sauce... Look, I'm not sure there's a secret sauce per se. A lot of people engender ideas of supercomputers, and algorithms placing hundreds and thousands of trades per day or month. But our investment strategy is very logical. We're very process-driven. So, we identify certain themes and different changes in the economic landscape. And then once we've done that, we look to identify the sectors of the economy that are booming and benefiting from those shifts. So you can think about, for instance, the ageing population and the benefits to healthcare, the use of technology and the thirst for data and information and how that's going to benefit the technology space.

Ally Selby: I definitely don't know anything at all about cricket, but I do know a thing or two about investing. I know that the fund is invested in small and mid-cap stocks. Why do you believe there's opportunity within this area of the market right now?

Michael Wayne: So if we look at the first slide here, what I've done is I've broken down the different segments of the ASX, looking at the performance from 2014 to 2024 year to date. These returns are the total returns, so the capital growth plus the dividend income paid over that last 10-year period. And what we can see is over that last 10-year period, the small caps indices have returned 85.6%. The ASX top 20, so the largest household names that people are familiar with, increased 113.5%. The ASX 200 more broadly increased 123.5% over that 10-year timeframe. And then finally, we have the S&P ASX mid-caps, which over the same timeframe has dwarfed all other segments of the market to increase by 202.6%. There's been a clear outperformance by the mid-cap part of the market.

Michael Wayne: So we're index unaware when it comes to building our portfolios. We are unconstrained in that respect. We're also high conviction. We'll happily be index-unaware when picking different businesses to invest in. We're also style agnostic. We don't have a preference for growth or value. Effectively, what we're trying to identify is the best growth stocks, the best value stocks, the best small caps, and the best large caps. So we're very malleable, very flexible in the way that we can go about investing in the market. So I think it can be a disservice for the fund manager and also the investors to be pigeonholed into one area or another. So having that flexibility for us, we think, allows us to tap the parts of the market that are offering the best propositions at any given point in time.

Ally Selby: It sounds like quite a broad exposure. Are there any market conditions where you feel like this fund would not perform that well?

Michael Wayne: Yes, because we're unconstrained and because we're high conviction, from time to time, we might have a lot of exposure to one particular sector. Nothing is stopping us from having 30-40% of the fund in technology stocks, for instance. Likewise, nothing is stopping us from having zero exposure to things like utilities. From time to time, there'll be months when we outperform by a large proportion given the benefits that might play out in one particular sector. But likewise, there might be periods where a certain sector is out of favour or a certain style of investing is out of favour. And if that were to play out, yes, that would be adverse for the portfolio in the short term. But again, we're taking a very long-term view. We're very disciplined in that. And we have the capacity as well to hold large cash positions. So if we do see the markets being a little bit choppy or valuations becoming too extreme, then we have the capacity to build cash, sit on the sidelines and wait for opportunities to present themselves again.

Ally Selby: Let's get a little bit more granular now. What have been some of the best-performing positions in the portfolio over the last 12 months?

Michael Wayne: So there have been two particularly good positions, but we've been very fortunate that the breadth of the performance across the portfolio holdings has been very good. There's only really been one stock, which has been down more than 10%. But the best performer in the fund and the biggest contribution has come from Audinate (ASX: AD8). You would probably know from Livewire, I've been going on about this business for a couple of years now, but over the last 12 months, it's really started to play out for that company. And we expect that the business will be able to continue to deliver in the months and years going ahead. So we're very excited about that particular company. Ally Selby: Okay. And on the other side of that, what's been the worst? You talk about a stock being down 10%. What was that company?

Michael Wayne: So the one stock that we've had, which has been down more than 10%, is Allkem, or now Arcadian (ASX: LTM), in the lithium space. So that's been the worst performer. We've been a little bit premature in jumping back into that lithium space after the big selloffs have been playing out across not only the underlying commodity but the share prices of lithium producers as well. Fortunately, it's a position of around 1% in the portfolio. So we look to ease our way into that position. And the idea is that over time, we can look to add to that. But that's been by far in the way, the worst absolute return performer in the portfolio.

2 stocks Michael Wayne has been buying during reporting season 

Ally Selby: We're in the midst of reporting season right now. Have you been making any additions to the portfolio during this month? Is there anything that you're feeling particularly bullish on right now?

Michael Wayne: So, one of the stocks we've been adding to in the lead-up to its report was GQG Partners (ASX: GQG), the fund manager. This is a company that's got very high-quality fund managers rather than one specific fund management star. The business has seen very strong fund inflows in recent times, with dividend per share growth being very impressive. And in an industry that has generally struggled, being an equity fund manager, they've been a shining light. And in many cases, they traded a big discount to many of their listed peers globally. So that's one particular business that we like and have been adding to recently.