The Fund rose 2.9%1 in July, outperforming the Small Industrials Index by 3.0% and the Small Ordinaries Index by 1.5%1. For the 12 months to July, the Fund was down 10.3%1, outperforming the Small Industrials Index by 0.6%1 and underperforming the Small Ordinaries Index by 1.8%.
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
The Fund rose 2.9%1 in July, outperforming the Small Industrials Index by 3.0% and the Small Ordinaries Index by 1.5%1. For the 12 months to July, the Fund was down 10.3%1, outperforming the Small Industrials Index by 0.5%1 and underperforming the Small Ordinaries Index by 1.8%.
Global markets continue to defy the obvious negative of the Covid 19 virus, with the US market rising a further 5.5% in July, eclipsed by the Chinese market rising 12.8%. NASDAQ rose 6.8% as tech stocks remained the market leaders. This sector is benefiting from low interest rates, and a sense that its earnings are actually being boosted by the Covid situation given the reliance on technology and social media as the global workforce adjusts to less human contact.
Excitement over a potential vaccine added to the overall optimism, with over 160 individual trials underway. This added to the bullish short term sentiment created by unequivocal comments from the Fed that rate rises are not on the agenda for 2-3 years.
The Australian market was less bullish, rising 0.5% in July. Tech stocks did well, up 4.8%, however this sector constitutes under 4% of the Australian market compared to over 25% of the US market. The mining sector in Australia rose 7.1%, boosted by a 10% rise in gold stocks as global investors look to gold as a hedge against uncertainty and falling bonds yields. Iron ore prices rose a further 5% in July reflecting stronger Chinese demand as it emerges from the early disruption from the virus.
Our Fund has bounced by 45% since the March 23 lows, while the industrial small-cap index has bounced 39%. We are pleased with this outcome having moved to a reasonably defensive position, and adjusting quickly to reverse some of this conservatism as the outlook became slightly clearer. Valuations in April reached a point of extreme bearishness which allowed us to invest in many higher quality businesses whose prices were driven down by panic selling.
We are surprised, however, that many cyclical stocks have bounced so hard given the fluid outlook relating to the disease and the economic outcomes. To illustrate, many retail stocks have bounced due to strong retail activity over the June quarter. Domestic consumers are currently being assisted by government support, mortgage holidays, and early super withdrawals. As the economy continues to contract, especially given the lock-downs in Victoria of late, this activity may tail off, leaving certain stocks highly exposed.
We now head into results season during which we will be busy meeting management teams (albeit not face to face!) and deciphering the outlook for individual companies. We remain focused on high-quality companies whose earnings are relatively resilient and selective cyclical stocks where valuations allow for substantial upside to offset the current low visibility.