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Australian Equities Fund

A portfolio of Australian businesses with transparent and resilient business models

March 2022 - Monthly REPORT

Diverging equity market outcomes

SUMMARY

The Fund generated a -3.8% return in the March quarter.  By way of comparison, the (annual) return of the RBA cash rate + 6% equated to approximately +1.5% for the quarter, whilst the Australian stock market grew by +1.6% over the same period. The Australian market was a standout performer globally in the March quarter.  With the exception of the FTSE, all other global benchmarks experienced declines.

Overall performance in the March quarter benefited from our positioning for inflation and rate rises, however it was negatively impacted by a larger than usual participation in the market correction early in the period, and a lower participation in the resource and energy led market recovery toward the end of the period.

That said, large dividend receipts have bolstered cash levels and provided capacity to acquire additional holdings at attractive levels.  Furthermore, the underlying cash flows in the portfolio remain intact, evidenced by a generally strong corporate reporting season in February. With an after tax cash yield of 7.6% at the end of March, the Fund continues to be attractively valued and well positioned for what we believe will be fundamental themes throughout 2022 of elevated inflation and the inflection point in the rate cycle.

Below is a recording of our recent webinar where CIO and Portfolio Manager Rhett Kessler provides performance, portfolio, and stock-specific updates for the Fund. Financial planners may also complete a short questionnaire available HERE for CPD points. You can also find a summarised portfolio and investment update HERE.

 

PORTFOLIO

Top Holdings (alphabetically)

Amcor PLC
Australia
Materials
Aristocrat Leisure
Australia
Consumer Discretionary
CBA
Australia
Financials
Credit Corp
Australia
Financials
CSL
Australia
Health Care
Evolution Mining
Australia
Materials
Mirvac Group Property Trust
Australia
Real Estate
NAB
Australia
Financials
Telstra
Australia
Communication Services
Woolworths
Australia
Consumer Staples

Sector Breakdown

Capitalisation Breakdown

Country Breakdown

Custom Sector Breakdown

PERFORMANCE

Performance Table

NET PERFORMANCE FOR PERIODS ENDING 31 Mar 20221
1 MTH 1 YEAR 3 YEARS P.A. 5 YEARS P.A. 10 YEARS P.A. SINCE INCEPTION P.A.
Australian Equities Fund 1.9% 5.5% 9.6% 6.1% 8.8% 9.5%
Fund Objective: RBA Cash Rate plus 6% 0.5% 6.1% 6.4% 6.8% 7.6% 8.4%
ASX Accumulation All Ordinaries Index 6.9% 15.5% 11.5% 9.8% 10.2% 7.2%

Swipe horizontally to see all columns

Performance Chart

NET PERFORMANCE SINCE INCEPTION2

COMMENTARY

Two prevailing thematics impacted both global and domestic markets in the quarter, however important distinctions resulted in the diverging equity market outcomes.

Firstly, inflation arrived.  Inflationary forces that have been in play for some time, proved not only to be ‘not transitory’, but continued to accelerate through the March quarter, accentuating an environment of negative real rates globally and putting increased pressure on central banks to respond by raising rates.  This dynamic was particularly evident in the US where inflation accelerated to over 7% mid quarter prompting the Federal Reserve to raise rates earlier than it had expected.  In Australia, whilst we too witnessed a step up in inflation, it remains at levels well below the US, and just above the RBA’s targeted 2-3% range.  We see further inflation pressures in the domestic economy, however would argue Australia’s fiscal position means it is much better placed to deal with the situation.

Secondly, the war in Ukraine, and the ripple effect on the global economy.  When one of the world’s largest energy producers engages in a war with one of the world’s largest soft commodity producers, there is going to be substantial global supply disruption, further inflationary pressure and subsequent impacts on global growth.  Without losing sight of the tragedy of the situation, Australia is perfectly positioned to benefit from the evolving commodity environment – not just with its major Iron Ore and Energy exports, but also with an expanded LNG capability and a strengthened soft commodity sector that has by and large benefited from consecutive strong growing seasons.

The benefit for the Australian equity market, where Resource (+15% Qtr) and Energy (+29%) stocks rose sharply, was compounded by the substantial upward index weighting of BHP in the quarter.  Resources and Energy combined contributed around +4.4%, of the market’s total 1.6% in the quarter.  Excluding the Resource and Energy sectors, the Australian market declined by approximately 6.5% in the quarter.

The Fund entered the quarter positioned as it normally is with an overall defensive bias.  With inflationary pressures and a rising interest rate environment in mind, we held healthy sized positions in Telcos, Financials (NAB and CBA), gold producer Evolution Mining and other businesses with strong pricing power in their value chains (such as Woolworths and Healthcare companies Resmed and CSL).

Our positioning for this theme proved right – stocks such as Telstra, NAB and CBA performed strongly throughout the quarter.  Whilst we were substantially “underweight” headline energy and resources, we did benefit from a smaller position in BHP, and more materially from our holding in Evolution Mining (held for inflation exposure).  Our positioning in Health Insurers (NIB and MBF) also contributed positively given their propensity to benefit as interest rates rise.

On the other hand, there are three main factors we have identified that we consider we got wrong, or worked against us in the quarter.  1) Our cash holdings were too low.  Management of cash holdings is a bottom-up process for us, it is an outcome of investment decisions and we do not target a cash holding.  With a relatively high after-tax cash earnings yield for the portfolio at the start of January, selling existing positions was less obvious, and we had over a period continued to identify what we considered to be attractive opportunities to deploy cash. Adding to the above was the Fund’s midyear distribution to unit holders at the beginning of January.  2) Put Options expiry.  The Fund had held put options throughout 2021 with a final position due for expiry in January 2022.  As expiry date approached, we assessed the market pricing to roll forward however given increased levels of volatility, option pricing had risen substantially, to a level that was not commensurate with our disciplined process for renewing.  As a result, our put options expired prior to the market correcting, leaving the Fund without ‘insurance’ during that event. 3) Volatility from less liquid small caps.  The Fund has a small number of positions in less liquid small caps, which we consider to be good businesses, however in times of broad market corrections, these names can have a disproportionate negative impact on performance.

In summary, our overall performance in the March quarter benefited from our positioning for inflation and rate rises, however was negatively impacted by a larger than usual participation in the market correction early in the period, and a lower participation in the resource and energy led market recovery toward the end of the period.

That said, large dividend receipts throughout the period have bolstered cash levels and provided capacity to acquire additional holdings at attractive levels.  Furthermore, the underlying cash flows in the portfolio remain intact, evidenced by a generally strong corporate reporting season in February. With an after tax cash yield of 7.6% at the end of March, we believe the Fund continues to be attractively valued and well positioned for what we believe will be fundamental themes throughout 2022 of elevated inflation and the inflection point in the rate cycle.

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
2021/2022 0.3%3%-0.4%-1.1%-0.6%1%-6.7%1.3%1.9%-12%0.2%-7.4%
2020/2021 1.5%2%-2%1.5%10.2%2.3%-0.9%0.3%3.1%3.6%2.6%1.1%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%

2022/2023

Jul 6.4%
Aug -0.1%
Sep -6.1%
Oct 2.7%
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun

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

STATISTICAL DATA

PORTFOLIO SUMMARY
VOLATILITY3
11.3%
NUMBER OF STOCKS
31
BETA4
0.63
MAXIMUM DRAW DOWN
-23.1%

FEATURES

  • APIR CODE PCL0005AU
  • REDEMPTION PRICEA$ 1.9275
  • FEES * Management Fee: 1.025%
    Performance Fee: 10.25%
  • Minimum initial investment A$10,000
  • FUM AT MONTH END A$ 895.2m
  • 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.

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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.