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Australian Equities Fund

A portfolio of Australian businesses with transparent and resilient business models

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February 2021 - Monthly REPORT

Crisis silver lining - resilient business models and competent management validation

SUMMARY

The Fund generated a return of 0.3% during February 2021. In comparison, the Market was up 1.4% for the same period while the RBA cash rate continued to be at record lows and virtually flat.

The Fund’s main contributors during February were Credit Corp, RIO, SG Fleet, NAB, and Flight Centre whilst Evolution Mining, Resmed and Waypoint REIT were the main detractors. The Fund added to existing positions in Amcor, ANZ, and Fortescue. We sold our positions in Westpac and Cleanaway and trimmed our holding in Credit Corp. Cash levels at month-end were 7%.

PORTFOLIO

Top Holdings (alphabetically)

Accent Group Australia Consumer Discretionary Credit Corp Australia Financials CSL Australia Health Care NAB Australia Financials Rio Tinto Australia Materials SG Fleet Australia Industrials Super Retail Group Australia Consumer Discretionary Telstra Australia Communication Services Waypoint REIT Ltd Australia Real Estate Woolworths Australia Consumer Staples

Sector Breakdown

Capitalisation Breakdown

Country Breakdown

Custom Sector Breakdown

PERFORMANCE

Performance Table

NET PERFORMANCE FOR PERIODS ENDING 28 Feb 20211
1 Month1 Year3 Years P.A.5 Years P.A.10 Years P.A.SINCE INCEPTION
Fund 0.3%7.2%5.0%7.9%8.9%9.6%
RBA Cash Rate 0.0%0.2%0.9%1.2%2.1%2.6%
ASX Accumulation All Ordinaries Index 1.4%9.6%8.1%11.2%7.8%6.4%
1 Month1 Year3 Years P.A.5 Years P.A.10 Years P.A.SINCE INCEPTION
Fund
0.3%
7.2%
5.0%
7.9%
8.9%
9.6%
RBA Cash Rate
0.0%
0.2%
0.9%
1.2%
2.1%
2.6%
ASX Accumulation All Ordinaries Index
1.4%
9.6%
8.1%
11.2%
7.8%
6.4%

Performance Chart

NET PERFORMANCE SINCE INCEPTION2

COMMENTARY

The February reporting season provided a few unusual insights due to the economic impact of COVID-19. In particular, it confirmed our underlying investment theseis regarding the resilience of several business models. As often described in these newsletters we are constantly on the lookout for “good businesses” defined as those that hold the balance of power over their stakeholders.

The events of the past year – bushfires, pandemic induced lockdowns, border closures and enormous government stimulus – not only generated very large forecast risk around future company earnings and cashflows but also clarified “who has the power” in many of the portfolio’s holdings. Several themes played out during 2020 that demonstrated the efforts expended by competent management teams on bolstering already robust businesses.

Omnichannel Retail

Our long-held investment in Accent, the dominant footwear company (averaging approximately 1.5 million pairs of shoes a month), is a good example. The company has developed its retail distribution network to ensure customers enjoy seamless transactions either by visiting the physical stores, the online digital properties or even a combination of both.

The company was astute in leveraging its scale and traffic generating ability to optimise rental outcomes – securing sites at attractive rents while helping landlords focus on rebuilding their occupancy levels – and is driving an accretive store rollout program.

Accent’s combination of “click and despatch” as well as “endless aisle” capabilities out of their more than 500 physical stores and significant branded websites generate remarkable logistical efficiencies, making them almost channel agnostic from a cost perspective.  This capability goes some way to making them “lockdown proof”.

Several other companies in our portfolio benefitted from this thematic including Woolworths and Super Retail Group. Gaming services company Aristocrat could also fall into this category given their decline in revenue from the sale of gaming machines was mitigated by the strong growth in digital gaming revenues.

Optionality for capital deployment

Two companies in our portfolio clearly demonstrated this capability.

Credit Corp’s ability to allocate capital between its three division – domestic debtors ledgers, domestic consumer loan book and the US debtors ledgers, facilitated an important discipline around the prices paid for loan books in the domestic market. Several local competitors succumbed to the pressure of paying for books in an over-priced market to keep their collection teams fed. Credit Corp’s optionality allowed it to focus instead on its consumer loan business as well as the US market. Over the last six months it was rewarded for its discipline by being offered two large competitor books at very attractive prices.

Similarly, Resmed was able to pivot its production capacity to supply ventilators to hospitals globally during the peak infection rates of the pandemic. The company also benefitted from the recurring nature of its mask division, particularly as the focus on respiratory health focused consumers on the benefits of a faster replacement cycle. These factors more than mitigated the temporary interruption to new patient demand for flow generators.

Operating Leverage

As greedy shareholders we typically love companies with operating leverage, particularly when revenues are moving in the right direction. Essentially this means a greater percentage of every new dollar of sales falls to the bottom line as the top line grows.

During 2020 those companies with resilient revenue streams generally benefitted from a strong tail wind of cost efficiencies due the wide acceptance of belt tightening – a pause in new hires, new projects, wage increases, promotional activity as well as sharply reduced travel costs.

We recognise that this may be temporary however many companies have taken advantage of the crisis to eliminate unproductive spending.

Resmed, CSL, and Amcor are good examples of companies with operating leverage, with robust revenue growth translating into earnings growth several times higher.

Supply chain strain

An important negative manifestation in the domestic economy relates to the difficulties associated with sharp changes to end user demand on supply chains. For example, the shortage of computer chips (it seems massive computer demand – both work and gaming – has absorbed significant supply) has resulted in manufacturing bottlenecks for the new motor vehicle industry – creating long delays and shortages particularly in Australia. SG Fleet is a strong beneficiary of this as residual values for used cars affects their profitability positively.

Freight costs are sharply higher everywhere. One unanticipated shortfall arising from the fact that cargo carried in the holds of passenger planes was a significant load carrier for the logistics industry. We have contemplated its impact on inflation generally.

Unsustainable Revenue drivers

Probably our biggest challenge as investors is in managing the forecast risk around future company cashflows given the enormous variances in company revenues and profits due to the pandemic, changes in consumer behaviour and government stimulus. Remember that the main reason we look at historic numbers is to use them as a base for predicting future cashflows.

While some clarity should begin to emerge as we cycle through the elevated/depressed (depending on the company) comparisons from the start of the pandemic, the imminent end to Job Keeper will have its own implications. Discerning the underlying trends from the noise will remain difficult for some time.

In summary, recent events have solidified our assessment of the resilient business models within our portfolio. (and potentially of competent management as well). Fortuitously our companies – by and large – have escaped relatively unscathed with business models and balance sheets in good shape. Importantly, while there are many additional companies we could have selected for our portfolio, most have been excluded on the basis of valuation.  Given the recent gyrations around the cost of money, we feel it prudent to have a well-diversified collection of businesses that represent growing annuity streams off an attractive after-tax cash earnings yield.

PERFORMANCE TABLE

FUND PERFORMANCE (A$, NET OF FEES)
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)
Year Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun FUND FYTD RBA CASH RATE FYTD ASX ALL ORDS FYTD
2020/2021 1.5%2%-2%1.5%10.2%2.3%-0.9%0.3%27.7%0.2%30.2%
2019/2020 3.2%0.6%1.4%-0.5%3.5%-3.3%2.3%-3.5%-19.5%8.5%6.2%0.1%-3.9%0.7%-7.2%
2018/2019 1.3%3.4%-2.5%-8%-1.6%-2%2.4%3.4%-1.1%2.9%4.9%1.2%3.6%1.5%11%
2017/2018 0.6%1%0.1%1.9%3.2%0.1%1.5%-1.3%-3%-0%2.5%1.5%8.1%1.5%13.7%
2016/2017 6.1%2.3%0.3%-3%-0.3%3.4%-0.8%0.7%1.8%1.7%-4.7%2.7%10.2%1.5%13.1%
2015/2016 3.3%-4.2%-0.6%4.1%3.4%0.2%-1.8%-3.2%3.1%0.7%4.6%-1.6%7.7%2%2%
2014/2015 1.9%1.5%-2.4%2.5%0%1.4%2.6%4%1.3%-1.7%1.1%-3.5%8.9%2.4%5.7%
2013/2014 2%2.3%1.4%2.3%-1.2%1.3%-2%1.4%-0.4%1.2%1.5%-1%9.1%2.5%17.6%
2012/2013 2.9%2.5%0.2%2.4%2.8%1.8%5.2%4.4%0%3.5%-1.3%-2.5%24%3.1%20.7%
2011/2012 -3.1%1.4%-2.4%4.7%-2.4%1%2.9%3.6%4.2%0.7%-1.1%-1.1%8.3%4.4%-7%
2010/2011 5.1%1.1%3.6%1.8%-0.1%3%0.7%1.5%1%0%-0.8%-0.5%17.4%4.7%12.2%
2009/2010 3.5%6.1%3.8%1.2%1%2.5%-3.6%1.1%3.6%-0.2%-4%-2.5%12.5%3.7%13.8%
2008/2009 -1%3.5%-4.7%-9%-5.3%3.9%0.2%-1.4%7.9%4.4%2.1%3.8%3%4.8%-22.1%

2023/2024

Jul 3.3%
Aug -0.7%
Sep -3.7%
Oct -3.3%
Nov 3.9%
Dec 5.1%
Jan 2.4%
Feb -0.7%
Mar 3.2%

2022/2023

Jul 6.4%
Aug -0.1%
Sep -6.1%
Oct 2.7%
Nov 3%
Dec -2.3%
Jan 6.1%
Feb -1.2%
Mar 0%
Apr 2.7%
May -2.3%
Jun 1.2%
FUND FYTD 10%
RBA CASH RATE FYTD 2.9%
ASX ALL ORDS FYTD 14.8%

2021/2022

Jul 0.3%
Aug 3%
Sep -0.4%
Oct -1.1%
Nov -0.6%
Dec 1%
Jan -6.7%
Feb 1.3%
Mar 1.9%
Apr -0.6%
May -3%
Jun -7%
FUND FYTD -12%
RBA CASH RATE FYTD 0.2%
ASX ALL ORDS FYTD -7.4%

2020/2021

Jul 1.5%
Sep -2%
Oct 1.5%
Nov 10.2%
Dec 2.3%
Jan -0.9%
Feb 0.3%
Mar 3.1%
Apr 3.6%
May 2.6%
Aug 2%
Jun 1.1%
FUND FYTD 27.7%
RBA CASH RATE FYTD 0.2%
ASX ALL ORDS FYTD 30.2%

2019/2020

Jul 3.2%
Aug 0.6%
Sep 1.4%
Oct -0.5%
Nov 3.5%
Dec -3.3%
Jan 2.3%
Feb -3.5%
Apr 8.5%
Mar -19.5%
May 6.2%
Jun 0.1%
FUND FYTD -3.9%
RBA CASH RATE FYTD 0.7%
ASX ALL ORDS FYTD -7.2%

2018/2019

Jul 1.3%
Aug 3.4%
Sep -2.5%
Oct -8%
Nov -1.6%
Dec -2%
Jan 2.4%
Feb 3.4%
Mar -1.1%
Apr 2.9%
May 4.9%
Jun 1.2%
FUND FYTD 3.6%
RBA CASH RATE FYTD 1.5%
ASX ALL ORDS FYTD 11%

2017/2018

Jul 0.6%
Aug 1%
Sep 0.1%
Oct 1.9%
Nov 3.2%
Dec 0.1%
Jan 1.5%
Feb -1.3%
Mar -3%
Apr -0%
May 2.5%
Jun 1.5%
FUND FYTD 8.1%
RBA CASH RATE FYTD 1.5%
ASX ALL ORDS FYTD 13.7%

2016/2017

Jul 6.1%
Aug 2.3%
Sep 0.3%
Oct -3%
Nov -0.3%
Dec 3.4%
Jan -0.8%
Feb 0.7%
Mar 1.8%
Apr 1.7%
May -4.7%
Jun 2.7%
FUND FYTD 10.2%
RBA CASH RATE FYTD 1.5%
ASX ALL ORDS FYTD 13.1%

2015/2016

Jul 3.3%
Aug -4.2%
Sep -0.6%
Oct 4.1%
Nov 3.4%
Dec 0.2%
Jan -1.8%
Feb -3.2%
Mar 3.1%
Apr 0.7%
May 4.6%
Jun -1.6%
FUND FYTD 7.7%
RBA CASH RATE FYTD 2%
ASX ALL ORDS FYTD 2%

2014/2015

Jul 1.9%
Aug 1.5%
Sep -2.4%
Oct 2.5%
Nov 0%
Dec 1.4%
Jan 2.6%
Feb 4%
Mar 1.3%
Apr -1.7%
May 1.1%
Jun -3.5%
FUND FYTD 8.9%
RBA CASH RATE FYTD 2.4%
ASX ALL ORDS FYTD 5.7%

2013/2014

Jul 2%
Aug 2.3%
Sep 1.4%
Oct 2.3%
Nov -1.2%
Dec 1.3%
Jan -2%
Feb 1.4%
Mar -0.4%
Apr 1.2%
May 1.5%
Jun -1%
FUND FYTD 9.1%
RBA CASH RATE FYTD 2.5%
ASX ALL ORDS FYTD 17.6%

2012/2013

Jul 2.9%
Aug 2.5%
Sep 0.2%
Oct 2.4%
Nov 2.8%
Dec 1.8%
Jan 5.2%
Feb 4.4%
Mar 0%
Apr 3.5%
May -1.3%
Jun -2.5%
FUND FYTD 24%
RBA CASH RATE FYTD 3.1%
ASX ALL ORDS FYTD 20.7%

2011/2012

Jul -3.1%
Aug 1.4%
Sep -2.4%
Oct 4.7%
Nov -2.4%
Dec 1%
Jan 2.9%
Feb 3.6%
Mar 4.2%
Apr 0.7%
May -1.1%
Jun -1.1%
FUND FYTD 8.3%
RBA CASH RATE FYTD 4.4%
ASX ALL ORDS FYTD -7%

2010/2011

Jul 5.1%
Aug 1.1%
Sep 3.6%
Oct 1.8%
Nov -0.1%
Dec 3%
Jan 0.7%
Feb 1.5%
Mar 1%
Apr 0%
May -0.8%
Jun -0.5%
FUND FYTD 17.4%
RBA CASH RATE FYTD 4.7%
ASX ALL ORDS FYTD 12.2%

2009/2010

Jul 3.5%
Aug 6.1%
Sep 3.8%
Oct 1.2%
Nov 1%
Dec 2.5%
Jan -3.6%
Feb 1.1%
Mar 3.6%
Apr -0.2%
May -4%
Jun -2.5%
FUND FYTD 12.5%
RBA CASH RATE FYTD 3.7%
ASX ALL ORDS FYTD 13.8%

2008/2009

Jul -1%
Aug 3.5%
Sep -4.7%
Oct -9%
Nov -5.3%
Dec 3.9%
Jan 0.2%
Feb -1.4%
Mar 7.9%
Apr 4.4%
May 2.1%
Jun 3.8%
FUND FYTD 3%
RBA CASH RATE FYTD 4.8%
ASX ALL ORDS FYTD -22.1%

PROFILE

Platform Availability

  • AMP MyNorth
  • Asgard Element (Masterfund)
  • Asgard – E Wrap, Master Trust, Infinity
  • AET Wholesale Access Fund
  • BT Panorama
  • BT Wrap
  • Colonial First Choice
  • Centric IDPS
  • First Wrap
  • FNZ
  • HUB24
  • IOOF Pursuit
  • IOOF
  • Macquarie Wrap
  • MLC Wrap
  • Mason Stevens
  • Navigator
  • Netwealth
  • OneVue
  • Omniport(lifespan)
  • Powerwrap
  • Praemium
  • uXchange

STATISTICAL DATA

PORTFOLIO SUMMARY
VOLATILITY3
11.5%
NUMBER OF STOCKS
35
BETA4
0.63
MAXIMUM DRAW DOWN
-23.1%

FEATURES

  • APIR CODE PCL0005AU
  • REDEMPTION PRICEA$ 1.8458
  • FEES * Management Fee: 1.025%
    Performance Fee: 10.25%
  • Minimum initial investment A$10,000
  • FUM AT MONTH END A$ 920.68m
  • STRATEGY INCEPTION DATE 1 July 2008
  • BenchmarkThe RBA Cash Rate Target plus Australian equity risk premium.

Fund Managers

Rhett Kessler

CIO and Senior Fund Manager

Anton du Preez

Deputy CIO and Fund Manager

Description

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.

EXPLORE OUR FUNDS

Harding Loevner International Fund
Harding Loevner International Fund
Axiom International Fund
Axiom International Fund
Axiom International Fund (Hedged)
Axiom International Fund (Hedged)
Australian Equities Fund
Australian Equities Fund
High Conviction Property Securities Fund
High Conviction Property Securities Fund
Global Small Companies Fund
Global Small Companies Fund
WHEB Sustainable Impact Fund
WHEB Sustainable Impact Fund
Emerging Companies Fund
Emerging Companies Fund
High Conviction Equities Fund
High Conviction Equities Fund
Pengana International Equities Limited (ASX: PIA)
Pengana International Equities Limited (ASX: PIA)
Private Equity Trust (ASX: PE1)
Private Equity Trust (ASX: PE1)
Alpha Israel Fund
Alpha Israel Fund
Pengana Diversified Private Credit Fund
Pengana Diversified Private Credit Fund
CONTACT INVESTOR SERVICES
INVEST NOW

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.