Pengana Australian Equities Fund 
Pengana Australian Equities Fund 
A bifurcated market rally
The Australian stock market had a strong August, ending up 3.7%. In comparison, the Fund generated a 2% return. For comparison purposes, the RBA cash rate yielded virtually no return for the month.
The Australian stock market had a strong August, ending up 3.7%. In comparison, the Fund generated a 2% return. For comparison purposes, the RBA cash rate yielded virtually no return for the month.
The rally in August was concentrated in a few sectors, with technology stocks the notable outperformers. The Australian IT sector has gained an astonishing 142% since 23rd March or, from a valuation perspective, the 1-year forward PE multiple has more than doubled from 34 times to 74 times over this period. For comparison purposes, the ASX200 PE is trading on a “mere” 20.4 times. BNPL (Buy Now Pay Later) companies, including Afterpay and Zip, also continued their exponential growth trajectory, making for an increasingly narrow and bifurcated market rally. To put this into context, Afterpay was second only to CSL in terms of contribution to the overall index performance.
August also was the key reporting season with some specific themes emerging.
As expected COVID19 played havoc with FY20 earnings and in particular with forward-looking statements. More importantly, businesses that were beneficiaries of lockdowns/Jobkeeper payments (WFH, online retailer, or essential services) benefitted disproportionately to others that had to cease or curtail trading. The pertinent questions have become the sustainability of future earnings and the recovery potential of depressed earnings – “what is the new normal?”. Hence the reluctance of management teams to give guidance and defer guidance to the AGM season in November. The current Victorian shutdown, the potential for second waves in other key states, and the timing of a withdrawal of stimulus measures remain key unknown variables. This translated into an upgrade/downgrade revision cycle of 23%/40%. At a sector level Communications, Financials and REITS were particular laggards, and key stock downgrades included Qantas, Seek, CBA, Telstra and GPT.
At a Fund level our holdings in Super Retail, SG Fleet, Cleanaway, and Accent Group were the main contributors to performance whilst Telstra, Resmed and Evolution Mining impacted negatively.
One of the latest additions to the Fund is our holding in EBOS Group, the market-leading pharmaceutical distributor in Australia. EBOS is predominantly a wholesaler of pharmacy products to 3,500 pharmacies in Australia and NZ (including Chemist Warehouse) and a 1,300 – outlet retail pharmacist under the TerryWhite Chemmart banner. Animal care is the 2nd division, distributing well-known brands to retail and veterinary practices. Pharmacy constitutes 85% of the business with animal care the remainder 15%. EBOS is a highly defensive business with consistent and attractive cash conversion metrics that can be attributed to management’s long-term track record of working capital management and prudent capital allocation. Current valuation metrics are a 6.5% after-tax yield for FY21 and a 3.5% dividend yield.
The domestic market has rallied hard off its lows, currently trading at 20 times forward earnings (Industrials ex Financials almost 30 times). We are finding it increasingly difficult to identify new opportunities that are consistent with our process and valuation metrics.
External factors that muddy the waters are the increasing political tensions between China and Australia – notably the second anti-dumping review of wine exports being the latest announcement; the continued lockdown of Victoria; the live risk of 2nd wave lockdowns in other states and the sustainability of stimulus by State and Federal government and its longer-term impact on consumers. On the positive side, one could argue that the recent announcement by CSL to manufacture a COVID vaccine (when approved) provides the much-needed light at the end of the tunnel.
In our view, the Australian Government has done an excellent job in extending a bridge across the COVID19 induced economic “lockdown” valley. However, landing us safely on the other side remains an enormous challenge. The current optimism in share prices does not appear to be pricing these appropriately. We continue to exercise caution in our investment process, resulting in our cash holding increasing to 14% at end of August.
CIO and Senior Fund Manager
Deputy CIO and 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. 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.
