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Monthly REPORT November 2020
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Pengana Australian Equities Fund

  Opportunity abounds in a bifurcated market

Summary

We are delighted to report that the Fund generated its strongest monthly return since its inception of 10.18% during November. The Australian stock market also had an exceptionally strong November, finishing up 10.16%. Interestingly, the RBA cash rate yielded virtually no return for the month, a potential driver of the robust equity returns given the paucity of yield outside equities.

We are delighted to report that the Fund generated its strongest monthly return since its inception of 10.18% during November. The Australian stock market also had an exceptionally strong November, finishing up 10.16%. Interestingly, the RBA cash rate yielded virtually no return for the month, a potential driver of the robust equity returns given the paucity of yield outside equities.

An important differentiator during November was that we witnessed a sharp reversal in the Growth at any price momentum in favour of fundamental value. For some time our prior newsletters have commented on the increasing bifurcation within equities as the “sexy” tech-driven disrupters to attract the majority of investor attention/funds. This thematic has been compounded by the rise (and rise) of Passive Funds which exaggerate the momentum by rewarding past winners for enlarging their index weightings.

This recent volatility in share prices has provided several opportunities to reallocate capital into more attractively priced opportunities. Examples of the Fund’s recent activity include: selling our holdings in New Zealand based Gentailers, Meridian and Contact Energy, as well as Bingo Industries after sharp rallies. We also reduced our holdings in Credit Corp and Aristocrat into strength. We started new holdings in United Malt Group and IAG while also adding to our positions in Super Retail Group, RIO, and Woolworths. We also recently added to our holdings in NAB and ANZ.

Pleasingly our positive contributors included our long held high conviction positions including CreditCorp, NAB, Telstra, Accent Group, and even SG Fleet.

We have also commented that while the temptation to change our methodology has never been greater, we have remained true to our investment process focussed on sustainable after-tax cash earnings yields to preserve capital and generate a reasonable return. It remains our view that a disciplined approach has never been more important, particularly given the siren-like appeal of certain sectors and their accompanying sky-high valuation metrics.

Importantly, after a long period of defensive investing, we are excited about the combination of several positive factors including,

  • Successful navigation of the pandemic by the domestic authorities,
  • The ongoing demand for our commodities particularly the largest – Iron Ore,
  • A particularly well-timed (versus other regions) bumper agricultural season and the surprising net positive impact of a halt in international travel (Australians spend more when traveling abroad than incoming tourists and foreign students).
  • Ultra low-interest rates have renewed confidence in residential property,
  • Stabilising prices and reducing the short/medium term concerns around mortgage and other credit defaults.
  • We have also noticed that highly skilled ex-pats and other nationals are starting to recognise the attraction of Australia as a more permanent residence.

Since March 2020 we have been hard at work putting our cash reserves (as much as 25% of the Fund) and proceeds from our large insurance policy (Puts sold during the Covid induced downdraft) to work in very attractively priced opportunities. We remain excited about the plethora of opportunities. Consequently, we are currently 94% invested.  Significantly we remain focused on Good Businesses with resilient (toilet paper and toothpaste type) business models, run by Competent and Honest management at the Right Price.

We are often asked to explain our investment thesis behind one of our largest positions in the portfolio – Telstra. Essentially the major value components are the Mobile Phone business – 45% and the government-backed recurring revenue stream from the NBN – 35%. The latter represents an inflation adjusted long dated annuity stream (government bond) which appears to have been overlooked given the sharp fall in interest rates and implied lift in valuation. The former comprises the country’s leading supplier of the new oxygen – mobile data with a significant competitive advantage in rolling out the more attractive 5G network. Currently, on a 5.3% fully franked yield we anticipate a stabilisation and then growth in underlying earnings supplemented by additional cashflows as its reported earnings carry much larger noncash depreciation charges.

Our significant position in the financials (NAB, CBA, ANZ, and CreditCorp in particular) has also helped our absolute returns as we anticipated that they would be used as major pillars in supporting the government’s bridge across the Covid Lockdown valley. Furthermore, they appeared to have been priced for major defaults and a medium term impairment to dividends, neither of which appear to have materialised or are likely.

Finally, it is worth commenting on our significant position in Super Group – the discretionary retailer which owns Rebel, Super Cheap Auto, and BGF. While the former two have been remarkably resilient (Rebel, in particular, has prospered) through the pandemic, the surge in domestic spending continues to support healthy double-digit sales growth. By our estimates, even allowing for a conservative retracement of sales growth into 2022 we are comfortable owning the high-quality franchises on an 8%+ after-tax cash earnings yield with no debt on the balance sheet.

In summary, we would like to thank our clients for their ongoing custom. We certainly do not take it for granted. We will continue to focus on maintaining and growing the purchasing power of the funds you have entrusted to our care. We wish you and your families a safe, healthy, and happy festive season and look forward to engaging with you in the New Year.

Top Holdings (alphabetically)

Accent Group Australia Consumer Discretionary
Aristocrat Leisure Australia Consumer Discretionary
Credit Corp Australia Financials
CSL Australia Health Care
Evolution Mining Australia Materials
Mirvac Group Property Trust Australia Real Estate
NAB Australia Financials
ResMed Australia Health Care
Telstra Australia Communication Services
Waypoint Reit Ltd Australia Real Estate
Accent Group
Consumer Discretionary Australia
Aristocrat Leisure
Consumer Discretionary Australia
Credit Corp
Financials Australia
CSL
Health Care Australia
Evolution Mining
Materials Australia
Mirvac Group Property Trust
Real Estate Australia
NAB
Financials Australia
ResMed
Health Care Australia
Telstra
Communication Services Australia
Waypoint Reit Ltd
Real Estate Australia

Sector Breakdown

Capitalisation Breakdown

Country Breakdown

Custom Sector Breakdown

Fund Performance NET PERFORMANCE FOR PERIODS ENDING 30 Nov 20201

1 Month1 Year3 Years P.A.5 Years P.A.10 Years P.A.SINCE INCEPTION
Fund 10.2%0.7%4.5%6.5%9.3%9.7%
RBA Cash Rate 0.0%0.4%1.0%1.3%2.2%2.6%
ASX Accumulation All Ordinaries Index 10.2%-0.1%7.5%9.6%8.2%6.3%
1 Month1 Year3 Years P.A.5 Years P.A.10 Years P.A.SINCE INCEPTION
Fund
10.2%
0.7%
4.5%
6.5%
9.3%
9.7%
RBA Cash Rate
0.0%
0.4%
1.0%
1.3%
2.2%
2.6%
ASX Accumulation All Ordinaries Index
10.2%
-0.1%
7.5%
9.6%
8.2%
6.3%

Fund Performance NET PERFORMANCE SINCE INCEPTION2

Commentary

We are delighted to report that the Fund generated its strongest monthly return since its inception of 10.18% during November. The Australian stock market also had an exceptionally strong November, finishing up 10.16%. Interestingly, the RBA cash rate yielded virtually no return for the month, a potential driver of the robust equity returns given the paucity of yield outside equities.

An important differentiator during November was that we witnessed a sharp reversal in the Growth at any price momentum in favour of fundamental value. For some time our prior newsletters have commented on the increasing bifurcation within equities as the “sexy” tech-driven disrupters to attract the majority of investor attention/funds. This thematic has been compounded by the rise (and rise) of Passive Funds which exaggerate the momentum by rewarding past winners for enlarging their index weightings.

This recent volatility in share prices has provided several opportunities to reallocate capital into more attractively priced opportunities. Examples of the Fund’s recent activity include: selling our holdings in New Zealand based Gentailers, Meridian and Contact Energy, as well as Bingo Industries after sharp rallies. We also reduced our holdings in Credit Corp and Aristocrat into strength. We started new holdings in United Malt Group and IAG while also adding to our positions in Super Retail Group, RIO, and Woolworths. We also recently added to our holdings in NAB and ANZ.

Pleasingly our positive contributors included our long held high conviction positions including CreditCorp, NAB, Telstra, Accent Group, and even SG Fleet.

We have also commented that while the temptation to change our methodology has never been greater, we have remained true to our investment process focussed on sustainable after-tax cash earnings yields to preserve capital and generate a reasonable return. It remains our view that a disciplined approach has never been more important, particularly given the siren-like appeal of certain sectors and their accompanying sky-high valuation metrics.

Importantly, after a long period of defensive investing, we are excited about the combination of several positive factors including,

  • Successful navigation of the pandemic by the domestic authorities,
  • The ongoing demand for our commodities particularly the largest – Iron Ore,
  • A particularly well-timed (versus other regions) bumper agricultural season and the surprising net positive impact of a halt in international travel (Australians spend more when traveling abroad than incoming tourists and foreign students).
  • Ultra low-interest rates have renewed confidence in residential property,
  • Stabilising prices and reducing the short/medium term concerns around mortgage and other credit defaults.
  • We have also noticed that highly skilled ex-pats and other nationals are starting to recognise the attraction of Australia as a more permanent residence.

Since March 2020 we have been hard at work putting our cash reserves (as much as 25% of the Fund) and proceeds from our large insurance policy (Puts sold during the Covid induced downdraft) to work in very attractively priced opportunities. We remain excited about the plethora of opportunities. Consequently, we are currently 94% invested.  Significantly we remain focused on Good Businesses with resilient (toilet paper and toothpaste type) business models, run by Competent and Honest management at the Right Price.

We are often asked to explain our investment thesis behind one of our largest positions in the portfolio – Telstra. Essentially the major value components are the Mobile Phone business – 45% and the government-backed recurring revenue stream from the NBN – 35%. The latter represents an inflation adjusted long dated annuity stream (government bond) which appears to have been overlooked given the sharp fall in interest rates and implied lift in valuation. The former comprises the country’s leading supplier of the new oxygen – mobile data with a significant competitive advantage in rolling out the more attractive 5G network. Currently, on a 5.3% fully franked yield we anticipate a stabilisation and then growth in underlying earnings supplemented by additional cashflows as its reported earnings carry much larger noncash depreciation charges.

Our significant position in the financials (NAB, CBA, ANZ, and CreditCorp in particular) has also helped our absolute returns as we anticipated that they would be used as major pillars in supporting the government’s bridge across the Covid Lockdown valley. Furthermore, they appeared to have been priced for major defaults and a medium term impairment to dividends, neither of which appear to have materialised or are likely.

Finally, it is worth commenting on our significant position in Super Group – the discretionary retailer which owns Rebel, Super Cheap Auto, and BGF. While the former two have been remarkably resilient (Rebel, in particular, has prospered) through the pandemic, the surge in domestic spending continues to support healthy double-digit sales growth. By our estimates, even allowing for a conservative retracement of sales growth into 2022 we are comfortable owning the high-quality franchises on an 8%+ after-tax cash earnings yield with no debt on the balance sheet.

In summary, we would like to thank our clients for their ongoing custom. We certainly do not take it for granted. We will continue to focus on maintaining and growing the purchasing power of the funds you have entrusted to our care. We wish you and your families a safe, healthy, and happy festive season and look forward to engaging with you in the New Year.

Performance Table FUND PERFORMANCE (A$, NET OF FEES)

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%15%0.1%16%
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%

2020/2021

Jul 1.5%
Aug 2%
Sep -2%
Oct 1.5%
Nov 10.2%
Dec 2.3%
Jan -0.9%
Jan
Jan
Jan
Jan
Jan

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%

STATISTICAL DATA FUND PORTFOLIO SUMMARY

VOLATILITY3 11.6% NUMBER OF STOCKS 34
BETA (USING DAILY RETURNS)4 0.62 MAXIMUM DRAW DOWN -23.1%
  • VOLATILITY 11.6%
  • BETA (USING DAILY RETURNS) 0.62
  • NUMBER OF STOCKS 34
  • MAXIMUM DRAW DOWN -23.1%

Fund Managers

Rhett Kessler

CIO and Senior Fund Manager

Anton du Preez

Deputy CIO and Fund Manager

Features

  • PORTFOLIO MANAGERS Rhett Kessler
    Anton du Preez
  • APIR CODE PCL0005AU
  • REDEMPTION PRICEA$ 1.8556
  • FEES * Management Fee: 1.025%
    Performance Fee: 10.25%
  • Minimum initial investment A$20,000
  • FUM AT MONTH END A$ 928.12m
  • STRATEGY INCEPTION DATE 1 July 2008
  • BenchmarkThe RBA Cash Rate Target plus Australian equity risk premium.

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.

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1. Net performance figures are shown after all fees and expenses, and assume reinvestment of distributions. 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.
*(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.