SUMMARY
We are pleased to report that the Fund had a strong finish to the 2020 calendar year, returning 2.3% for the month of December. The Australian stock market also finished in positive territory, closing up 1.8%.
We are pleased to report that the Fund had a strong finish to the 2020 calendar year, returning 2.3% for the month of December. The Australian stock market also finished in positive territory, closing up 1.8%.
We are pleased to report that the Fund had a strong finish to the 2020 calendar year, returning 2.3% for the month of December. The Australian stock market also finished in positive territory, closing up 1.8%.
Importantly, as founders and managers of the Pengana Australian Equities Fund, Anton and I are especially proud to have generated a net return of 6.5% for the 12 months ended 31st December 2020. This was against a backdrop of the 3.6% return by the market as well as the 0.3% by the RBA cash rate – a potential driver of the robust equity returns given the paucity of yield outside equities.
We had an extremely active year, pivoting several times over a volatile 12 months. These included:
1) Our disciplined approach allowed us to build cash reserves (as high as 25% of the Fund) as well as substantial insurance through put options at the start of the year.
2) The pandemic induced downdraft in equities required strong nerves to apply our significant cash pile (supplemented by the sale of the Put option proceeds) into equities at a time when fundamental longer-term valuations outweighed short term forecast risks.
3) a focus on “hard assets” driven by our realisation that extremely loose monetary policy or quite simply “Global central banks turning on their printing presses full blast” would undermine the value of cash.
4) Currently we are faced with a market that continues to be bifurcated or even bipolar with regards to risk assessment. We continue to avoid the multitude of (in our view) overvalued “concept” stories. A very real risk exists around unsustainable share price valuations relying on: flawless management execution; favourable loose monetary conditions; and the utopian combination of low-interest rates and no inflation. Conversely, attractive valuations underpinned by both existing and resilient cash flows remain available, admittedly without robust growth but nevertheless offering healthy returns. Once again owning these requires a contrarian and disciplined approach.
While not wanting to be alarmist we feel our concerns are real, building to a crescendo and include: 1) the lowest interest rates in history, 2) unprecedented levels of FOMO, 3) the pervasive access to financial markets through trading platforms like Robinhood and Superhero driving retail direct share “investing” as well as option activity that can only be categorised as unbridled speculation, 4) widespread unrealistic (euphemism) listed and unlisted company valuations and finally the 5) the unsustainable level of government/central bank stimulus. These issues are forcing us to consider the impact of their unwinding on the broader financial markets as well as underlying economic activity levels.
In summary, we share a common conundrum with other investors. Where and how to hide when cash alternatives offer scant protection given the uncertainties facing fiat money. Most growth opportunities appear more than fully priced while bargains may be well-disguised value traps. Passive flows are enormous, implying a herd mentality that moves fast, relying more on sentiment-based momentum than fundamentals requiring strong nerves for any contrarian conviction. We remain focussed on our investment methodology of using sustainable after-tax cash earnings yields generated by good business, managed by competent and honest management to craft our portfolio in a disciplined and conservative manner.
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. 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.