The impact of the hostilities in the Middle East on equities was sharp and widespread, with the ASX All Ordinaries down -7.3% in March. The Fund delivered a challenging return of -8.2%. Our holdings in Ampol, IAG and Telstra performed their defensive roles well. However, the widespread sell off was exaggerated by forced sales from significant active manager mandate losses coinciding with weak global markets.
CIO and Senior Fund Manager
Senior Fund Manager
Senior Fund Manager
The Pengana Australian Equities Fund aims to enhance and preserve investor wealth over a 5- year period via a concentrated core portfolio of principally Australian listed securities. The Fund uses fundamental research to evaluate investments capable of generating the target return over the medium term. Essentially, we are in the business of seeking to preserve capital and make money – we are not in the business of trying to beat the market. We remain focused on acquiring and holding investments that offer predictable, sustainable and well-stewarded after-tax cash earnings yields in excess of 6% that will grow to double digit levels as a percentage of our original entry price in five years. We believe that building a well-diversified portfolio of these “gifts that keep on giving” represents a meaningful way to create and preserve financial independence for our co-investors.
1. Net performance figures are shown after all fees and expenses, and assume reinvestment of distributions. The benchmark of cash rate plus 6% p.a. is included in the chart as it relates to the Fund’s investment objective and performance fee. The Fund may invest up to 100% of its assets in equity securities. The greater risk of investing in equities is reflected in the addition of a margin above the cash rate. No allowance has been made for buy/sell spreads. Please refer to the PDS for information regarding risks. Past performance is not a reliable indicator of future performance, the value of investments can go up and down.
2. Inception 1st July 2008.
3. Annualised standard deviation since inception.
4. Relative to ASX All Ordinaries Index. Using daily returns.
*(including GST, net of RITC) of the increase in net asset value subject to the RBA Cash Rate & High Water Mark. For further information regarding fees please see the PDS available on our website.
COMMENTARY
The market decline in March was led by the IT and Materials sectors, but the pain was felt broadly, with only Energy meaningfully up. The Telecommunications, Consumer Staples and Utilities sectors were stable.
The Fund benefited from its exposure to Ampol, where we are attracted to the opportunity for more normal refining margins, positive outcomes from negotiations with the government and an increasing focus on the strong performance of the company’s core retail business. Since the start of the war, Asian refining margins have escalated from U$15 to U$64, and Australia’s fuel security has become a top priority. IAG and Telstra were also positive contributors thanks to their defensive, domestic earnings.
Most challenging for the Fund was the fall in defensive stocks like Evolution Mining, Amcor and BHP. Whilst the gold price fell 10.8% due to rising Australian dollar and bond yields, gold equities fell 23.4% due to profit taking and above mentioned mandate changes. It is worth noting that we have been consistent sellers into strength of our Evolution Mining holdings, prudently maintaining our exposure at acceptable levels. We remain positive on the company’s ability to generate a healthy after tax cash earnings yield as a diversified low cost gold mining company, with a net cash balance sheet and exposure to both copper and gold prices.
Amcor is a stable business supplying packaging to FMCG companies. Resins make up a significant part of the company’s cost of sales, and fears about the oil price impact on the cost of these resins overlooks Amcor’s ability to pass through these rising costs to their customers. While we do anticipate additional working capital requirements in the short term, this should unwind as the pricing environment moderates. The company remains attractive on sub 10 times cash earnings.
BHP was also not immune to the wide sell off, with investors choosing to focus on the implications of potential diesel supply disruptions to operations rather than the obvious demand drivers for copper in a world facing oil supply issues. Its twin pillars – at scale production of copper and iron ore – coupled to a fortress style balance sheet and healthy cash flows underpin an undemanding valuation.
With the benefit of hindsight, we may have started deploying some of our cash surpluses too early. In March, we continued to build on our position in Orica, where the nervousness over disruptions to ammonium nitrate supply chains and customers’ mining operations presented an opportunity. We added Macquarie Bank, giving us exposure to one of the best exponents of market volatility globally at a reasonable price. We added to our Aristocrat Leisure holdings, taking advantage of lower share prices to build our exposure to robust, defensive cash flows. We trimmed Ampol and Telstra into strength.
The quarter ended with the Fund down -5.2% for the three months to March versus the ASX All Ordinaries Accumulation index at -2.7%, and our core objective of the RBA cash rate +6% returned +2.3%. Cash levels remain prudent at 6%. The Funds average after tax cash earnings yield remains comfortably above 7%. Historically, this has always indicated attractive buying levels.
The team are confident that we have deployed cash into companies whose cash flows will support achieving the return targets we have set, regardless of what the overall market does from here. We continue to focus on high-quality businesses led by proven management teams and supported by resilient cash flows, and see further opportunities in the current volatility.