The head of Perennial Investment Partners’ growth funds has targeted a zero weighting in BHP Billiton on the back of the resource giant’s high-risk, lower return expansion strategy.
Perennial head of growth Lee Mickelburough said BHP Billiton’s revised growth strategy missed the mark in terms of return on investment capital (ROIC).
“I view it as essentially a play on China growth,” Mickelburough said of the diversified miner.
“If you’re bullish on China growth, you buy it,” he told financial planners and other financial services industry participants at a seminar.
He said the Perennial growth team liked the China theme but was no longer enamoured with BHP Billiton.
“BHP are in the process of looking at four major, what they call, mega-projects, which are investments that we think are going to earn return on investment capital over the next seven to 10 years when the money comes in, in the low single digits — maybe double-digit returns — versus the high-return investment that they have today,” he said.
He added that the move was a deliberate dilution of ROIC over the next 10 years, although BHP had said it would aim to double its iron ore tonnage by the year 2017.
“We take the view that we don’t like that investment approach,” Mickleburough said.
“We think it’s high risk and it’s an empire-building, growth-for-growth’s-sake issue.”
Instead, Perennial’s growth team advocates a basket of stocks made up of iron ore miner Fortescue Metals Group, oil and gas producer Santos, liquefied natural gas company Oil Search, and copper and gold producer Panaust.
Weightings are 2 per cent in Panaust and 5 per cent in each of the other stocks, making for an overweight resources position of 13.9 per cent.
“We can almost replicate what we have with BHP and skew it towards our preferred commodities.”
Mickelburough and his team manage the Growth Australian Shares Fund, the Growth High Conviction Shares Fund and the Socially Responsive Shares Fund.
As of 31 January 2012, the latest data available, the Growth Australian Shares Fund had an 11.5 per cent weighting in BHP Billiton. Perennial has about $18 billion in funds under management.
