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Australian Equities Fund

A portfolio of Australian businesses with transparent and resilient business models

May 2021 - Monthly REPORT

Its all about sustainable after tax cash returns...

SUMMARY

The Fund had another strong month, returning 2.6% for May. For context, this was in an environment where the equity market (All Ordinaries) generated 2.0% and the RBA cash rate remained at close to zero over the same monthly period.

The Fund’s 12-month rolling performance of 26.5% is particularly pleasing given our conservative settings.  Since inception, the Fund has generated a return of 10.2% pa against the backdrop of an RBA cash rate of 2.5% and an equity market return of 6.9% p.a. for the same period.

PORTFOLIO

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
SG Fleet Australia Industrials
Super Retail Group Australia Consumer Discretionary
Telstra Australia Communication Services
Consumer Discretionary
Accent Group Australia
Consumer Discretionary
Aristocrat Leisure Australia
Financials
Credit Corp Australia
Health Care
CSL Australia
Materials
Evolution Mining Australia
Real Estate
Mirvac Group Property Trust Australia
Financials
NAB Australia
Industrials
SG Fleet Australia
Consumer Discretionary
Super Retail Group Australia
Communication Services
Telstra Australia

PERFORMANCE

Performance Table

NET PERFORMANCE FOR PERIODS ENDING 31 May 20211
1 MTH 1 YEAR 3 YEARS P.A. 5 YEARS P.A. 10 YEARS P.A. SINCE INCEPTION P.A.
Australian Equities Fund 2.6% 26.5% 8.5% 8.1% 9.9% 10.2%
ASX Accumulation All Ordinaries Index 2% 30% 10.4% 10.5% 8.9% 6.9%
RBA Cash Rate plus 6% 0.5% 6.2% 6.8% 7.1% 8% 8.5%

Swipe horizontally to see all columns

Performance Chart

NET PERFORMANCE SINCE INCEPTION2

COMMENTARY

For some time our commentary in this monthly newsletter has been dominated by a few of the more pertinent concerns and opportunities facing investors. While we remain focused on preserving the purchasing power of the Fund entrusted to our stewardship in an environment that can best be characterised by rampant excess liquidity, pervasive FOMO, and the limited availability of safe havens for capital, we decided to focus on the underlying investment fundamentals of one of our larger holdings.

Super Retail Group (SUL) has been a clear beneficiary of the Covid Pandemic, decisively raising capital to secure the balance sheet, successfully converting limitations on international travel and government stimulus windfalls into strong near term earnings and, beyond that, re-investing in strengthening their sustainable competitive advantages at the group level.

With international borders closed, the consumer has focused their attention on domestic lifestyle options, which has played right into the hands of the group’s portfolio of Auto (car/garage), Rebel (sport), and BCF (domestic leisure/recreation).  Importantly, the accelerated shift to online has not, as predicted by some, resulted in a loss of market share or profitability for the Super Retail Group.  We have observed for a number of years now that investors appear to have underestimated a significant body of work that began under the previous CEO Peter Birtles and further developed under current CEO Anthony Heraghty to elevate SUL’s omnichannel retail capabilities.  As online penetration took a multi-year leap over the past 12 months, the SUL portfolio has thrived, gaining market share and enjoying substantial increases to gross and operating margins along the way.

Furthermore, contrary to the view that the group’s retail store footprint would be a liability in such a market shift, around 95% of all group sales (both online and in-store) continued to be collected in-store, and this remained relatively consistent through the COVID trading.  The learning has been that the substantial national store footprint continues to be an asset for the group.  We believe this store footprint, superior supply chain capabilities, key customer relationships, and the ability to take large inventory positions (courtesy of the very robust balance sheet), combine to create a portfolio of competitive advantages that should see further market share gains in the medium term.

Despite the strong performance and near term momentum, management is acutely aware of the fact that they are currently ‘over earning’ – and are focused on making the right decisions now to ensure that as conditions ‘normalise’ they can retain as much of the elevated turnover and profitability levels as possible.  In other words, normalise to a level above the original pre-covid trajectory.  Specifically, they are taking advantage of near-term windfalls to invest in stronger head office capabilities around procurement, pricing intelligence, rostering, property expertise, and more data-led strategies to drive promotional activity.  There remain significant opportunities in terms of enhancing and monetising customer loyalty programs and further improvements in omnichannel capabilities.  We have discussed each of these topics in some detail with management and are of the view that the group is on track to exit Covid in a much stronger position than it entered it.

Finally, with regards to valuation, despite the strong recent share price performance we view the shares as offering significant value. On an FY23 basis (ie post-Covid earnings) we believe the stock trades on around 13.5x earnings with an almost 9% after tax-free cash flow yield.  The Group will almost certainly exit this financial year in a positive net cash position, which will grow larger in the following years given the strong cash-generating nature of the business, suggesting scope for some form of capital management in the medium term.

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%2.3%-0.9%0.3%3.1%3.6%2.6%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%

2021/2022

Jul 0.3%
Aug 3%
Sep -0.4%
Oct -1.1%
Nov -1.1%
Nov -0.6%
Dec 1%
Jan
Feb
Mar
Apr
May
Jun

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
11.4%
NUMBER OF STOCKS
34
BETA4
0.63
MAXIMUM DRAW DOWN
-23.1%

FEATURES

  • APIR CODE PCL0005AU
  • REDEMPTION PRICEA$ 2.0228
  • FEES * Management Fee: 1.025%
    Performance Fee: 10.25%
  • Minimum initial investment A$10,000
  • FUM AT MONTH END A$ 981.53m
  • 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 Ethical Fund
Axiom International Ethical Fund
Axiom International Ethical Fund (Hedged)
Axiom International Ethical 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

1. Net performance figures are shown after all fees and expenses, and assume reinvestment of distributions. No allowance has been made for buy/sell spreads. 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.