The fund fell 26.8%1 during the month of March, underperforming the Small Ordinaries by 4.5%1 and the Small Industrials by 3.5%1. For the 12 months to March the fund is down 21.0%1 which is in line with the Small Ordinaries and 1.7% below the Small Industrials.
Our full commentary is below as well as video of a detailed webinar presentation outlining the fund and our current views on the market.
Senior Fund Manager
Senior Fund Manager
The Pengana Emerging Companies Fund combines the skills of highly experienced small company investors (collectively over 45 years’ experience) with a limited fund size and an objective of providing above market returns over the medium term. Our benchmark is the S&P/ASX Small Ordinaries Accumulation Index. The fund managers Steve Black and Ed Prendergast are part owners of the business and investors in the Fund, providing a strong incentive to perform. The Fund has strong research ratings from all major research houses and over the period since its inception has delivered returns well above benchmark.
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. 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 1 November 2004.
* For further information regarding fees please see the PDS available on our website.
** The Fund does not invest in resource stocks.
COMMENTARY
Global markets melted down in March as it became clear the Coronavirus would likely lead to a global recession. Volatility, as measured by the VIX index hit an all time high (ie worse than the GFC), and the US sharemarket circuit breaker (temporary market closure to offset panic selling) was triggered a staggering four times in one month. Treasuries were initially a safe haven, however faced selling pressure as panicked investors sought to raise cash.
The collapse in the oil price added to the chaos, and triggered fears of a credit crunch as many of the high risk bonds in the US were issued by shale oil companies which may be pushed toward default.
Government action was swift and extreme. Compared to the GFC, where quantitative easing was implemented late in the picture, central banks and governments moved immediately to drop interest rates, inject liquidity into the system, and offer support to businesses and individuals likely to suffer as a result of the lockdown measures.
Australian smallcap stocks fell 22.4%, which was worse than the 20.9% fall in the All Ordinaries, due to the lower liquidity which exacerbates price moves in times of volatility. Listed real estate assets, typically a safe haven of sorts, fell 35.6% on fears of widespread pressure on rents – especially in retail.
Our fund’s performance is obviously disappointing, with the extra pain coming from some of our illiquid holdings, two small positions in travel stocks (Helloworld and Corporate Travel) and market linked stocks such as Equity Trustees, Charter Hall, and Moelis. The picture worsened faster and more dramatically than most could have predicted, and similar to the GFC, the most illiquid stocks were hit hardest first. Making predictions from here is difficult, but we are clear in our approach to this challenging market.
Our response is best summarised as follows:
Over the coming 6-12 months we expect further volatility as the medical situation unfolds, and remain open to investing in selective cyclical stocks where the valuations imply unrealistically poor outcomes. Meantime we are happy to remain defensively positioned.
Investors’ nerves will be tested, especially given the personal effects the virus is having on all of us. However, it is important to remember that markets are forward looking. Throughout history, the market lows are typically made when the news is at its worst. To illustrate, in March 2009 the US market bottomed, then subsequently rose 57% in the following 12 months, but it wasn’t until February 2010 that the US data showed an end to the recession. While most investors feel more comfortable waiting for good news before gaining comfort to invest, this is not how markets operate. Also note that smallcap stocks historically bounce much harder than the larger stocks in a recovery situation.
We have run this fund for over 15 years, and successfully navigated the GFC. The long term disciplines remain firmly in place, as is the resolve to steer the fund through a rocky period which will be volatile, but likely also throw up highly attractive investment opportunities.
We recently hosted a detailed presentation on the fund and our views – click here to view.
Key contributors were Fisher and Paykel Healthcare (+17%), Kogan (+19%), and Technology One (+2%). Detractors included Moelis (-65%), Charter Hall (-45%), City Chic (-42%), Corporate Travel (-37%), and Steadfast (-34%).