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Global Small Companies Fund

Specialists in a vast and growing investable universe

February 2022 - Monthly REPORT

The small-cap universe looks attractively valued

SUMMARY

The global equity market sell-off continued in February driven primarily by Russia’s invasion of Ukraine. Expectations for the number of interest rate hikes that would be delivered by the US Federal Reserve (Fed), the Bank of England (BoE) and the European Central Bank (ECB) ramped up quickly and pushed equity markets lower.  Equity volatility spiked, with the Volatility Index (VIX) ending the month near 30. Oil prices surged with the potential withdrawal of Russian oil from world markets, and Brent crude closed above $100 per barrel at the end of the month, up from $73 at year end. Against this backdrop, the Fund returned -6.0% in February, underperforming the benchmark return of -3.4%.

Upcoming fee reduction
We are pleased to advised that with effect from 1 April 2022 the management fee for the Pengana Global Small Companies Fund (ARSN 604 292 677, APIR PCL0022AU) (Fund) will reduce from 1.334%pa (including GST net of RITC)1 to 1.1%pa (including GST net of RITC).

PORTFOLIO

Top Holdings (alphabetically)

Cogeco Communications
Canada
Communication Services
Sendas Distribuidora SA
Brazil
Consumer Staples
Serco Group PLC
United Kingdom
Industrials
Softchoice Corp
Canada
Information Technology
TietoEVRY Oyj
Finland
Information Technology

Capitalisation Breakdown

Region Breakdown

PERFORMANCE

Performance Table

NET PERFORMANCE FOR PERIODS ENDING 28 Feb 20221
1 MTH 1 YEAR 2 YEARS P.A. 3 YEARS P.A. 5 YEARS P.A. SINCE INCEPTION P.A.
Global Small Companies Fund -6.0% -3.0% 6.1% 7.8% 8.5% 7.7%
MSCI All Country World SMID Cap Index unhedged in AUD -3.4% 9.4% 11.4% 10.6% 10.9% 9.0%

Swipe horizontally to see all columns

Performance Chart

NET PERFORMANCE SINCE INCEPTION2

COMMENTARY

In the US, equity markets were broadly negative on the month, as investors tried to process the implications of Russia’s invasion of Ukraine. Rising inflation continued to be topical and it is expected that the Fed will deliver six rate hikes by the end of the year. Europe was most directly affected by the recent actions of Russia as European equities underperformed other regions. If Russian commodity exports are disrupted, it would have a significant impact on the European Union as Europe is heavily dependent on Russia for crude oil and natural gas resources.

The consumer discretionary and financials sectors were the worst performers, reflecting expectations for pressure on consumer spending and economic activity as energy prices rise.  In Asia, equities recorded a modest decline in February relative to other regions around the world.  Stocks in China and Hong Kong slipped as US and European countries started to impose economic sanctions on Russia, leading to commodity price rises and fresh concerns over higher inflation. In Hong Kong, technology stocks declined due to new concerns over changing regulatory rules in China.  Emerging markets also underperformed global equities driven by large declines in Russian equities.  China and India also posted negative returns.  Global small caps outperformed global large caps on the month as the MSCI ACWI Small Cap index significantly outpaced the MSCI ACWI.

Individual stock selection and the Fund’s regional overweight in western Europe were the main drivers of underperformance versus the benchmark in February.  Smaller cap names in the portfolio underperformed (companies with market caps of under $2bn) contributing to the negative divergence from the benchmark. Approximately 97 bps separated the top contributor and largest detractor.  As of 28th February, the top 10 holdings accounted for approximately 37% of the Fund’s assets, with the largest position approximately 4.7% of the portfolio.  Regional and sector exposure remained relatively unchanged month over month.

Despite market turbulence, there were relatively few significant changes to the existing names in the portfolio as company fundamentals across the book are still reasonable.  We continue to keep a close eye on global inflation as we believe that will have a more lasting impact on the investment environment than the Russia-Ukraine conflict.  Two new positions were purchased during the month.  The first was Parkland Corporation, a gasoline distribution, and marketing business based in Canada.  They are the largest independent fuel retailing company having a large network of gas stations across Canada and the US and are shifting their business mix towards high margin food and convenience items.  The second addition to the portfolio was Schibsted Media Group, an international media group, headquartered in Oslo, Norway. Schibsted operates a variety of online classified businesses in the Nordic region with very high market share.  After the company backed out of its significant ownership in Adevinta, we purchased shares for 11x EBITDA, a bargain for this quality asset.

The Fund exited three positions in the month including Wizz Air immediately after the Russian-Ukraine conflict started.  Given Wizz’s exposure to air traffic in eastern Europe, we viewed unwinding this position as prudent.  The Fund also exited L&T Technology Services and Future PLC.  Both stocks performed well surpassing our view of fair value.

The market environment continues to be challenging.  Investors are understandably anxious, but we believe the market has already priced in a good portion of downside risk.  With some exceptions, the small-cap universe looks attractively valued and we believe the opportunity set continues to look ripe on a long-term basis.

PROFILE

STATISTICAL DATA

PORTFOLIO SUMMARY
VOLATILITY3
12.9%
NUMBER OF STOCKS
49
BETA4
0.75
MAXIMUM DRAW DOWN
-20.7%

FEATURES

  • APIR CODE PCL0022AU
  • REDEMPTION PRICEA$ 1.5317
  • FEES * Management Fee: 1.1%
    Performance Fee: 20.5%
  • Minimum initial investment A$10,000
  • FUM AT MONTH END A$ 176.15m
  • STRATEGY INCEPTION DATE 1 April 2015
  • BenchmarkMSCI All Country World SMID Cap Index unhedged in AUD

Fund Managers

Jon Moog

CIO and Portfolio Manager

David Li

Head of Research and Portfolio Manager

Description

The Fund invests principally in small and midcap listed (or soon to be listed) global equities. Its investment objective is to obtain returns greater than the MSCI All Country World Index SMID Cap unhedged in Australian dollars (‘Index’) over rolling 3 year periods after fees. The Fund’s investment manager, Lizard Investors LLC, uses a value oriented investment approach that seeks to identify and invest in quality businesses that create significant value but are mispriced, overlooked, or out-of-favour. The investment manager believes that unique opportunities exist due to limited available research, corporate actions, or unfavourable investor perception.

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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 April 2015.
3. Annualised standard deviation since inception.
4. Relative to MSCI All Country World SMID Cap index unhedged in AUD.
* For further information regarding fees please see the PDS available on our website.