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High Conviction Equities Fund

A concentrated portfolio of ethically screened global companies

June 2022 - Monthly REPORT

Contributors and Detractors

SUMMARY

The Fund fell 6.9% during the month as inflation and energy concerns weighed on the market.

In this month’s report, we look at the Fund’s main contributors and detractors and how the current economic environment is affecting these businesses.

PORTFOLIO

Top Holdings (alphabetically)

Ardent Leisure Group Ltd
Australia
Consumer Discretionary
Ardent Leisure Group Limited operates as an amusement park. The Company offers leisure and entertainment facilities such as theme parks and other related attraction solutions. Ardent Leisure Group serves customers in Australia.
Ciena Corp
United States
Information Technology
Ciena Corporation develops and markets communications network platforms, software, and offers professional services. The Company's broadband access, data and optical networking platforms, software tools, and global network services support worldwide telecom and cable/MSO services providers, and enterprise and government networks.
Lamb Weston Holdings Inc
United States
Consumer Staples
Lamb Weston Holdings, Inc. operates as a holding company. The Company, through its subsidiaries, produces and supplies frozen potato products. Lamb Weston Holdings offers fries, oven roasted potatoes, puffs, chips, slices, and prepared potato products.
Lumentum
United States
Information Technology
Lumentum Holdings Inc. operates as a holding company. The Company, through its subsidiaries, supplies optical and photonic products. Lumentum Holdings serves customers worldwide.
Telix Pharmaceuticals Ltd
Australia
Health Care
Telix Pharmaceuticals Limited operates as a biotechnology company. The Company develops and commercializes molecularly-targeted radiation therapy for the treatment of prostate, renal, and brain cancer. Telix Pharmaceuticals serves patients worldwide.

Sector Breakdown

Capitalisation Breakdown

Region Breakdown

PERFORMANCE

Performance Table

NET PERFORMANCE FOR PERIODS ENDING 30 Jun 20221
1 MTH 1 YEAR 2 YEARS P.A. 3 YEARS P.A. 5 YEARS P.A. SINCE INCEPTION P.A.
High Conviction Equities Fund Class A -6.9% -28.4% 1.6% 3.1% 7.7% 22.4%
MSCI World Total Return Index (net, AUD) -4.7% -6.5% 9.2% 7.7% 10.0% 10.1%
RBA Cash Rate plus 3% 0.3% 3.2% 3.2% 3.3% 3.8% 4.1%

Swipe horizontally to see all columns

Performance Chart

NET PERFORMANCE SINCE INCEPTION2

COMMENTARY

US French Fry producer Lamb Weston rose 10% as the market sought out defensive stocks.  In addition, cooler temperatures and rainfall in Northwest USA alleviated concerns over another poor potato harvest. Although potatoes are irrigated and face no water shortages, they are sensitive to heat during the months of July and August during crop maturation and harvest.

Subaru rose 7% after the Japanese yen continued to depreciate as the Bank of Japan held government bond yields near zero while other banks raised rates. 90% of the company’s sales are made outside of Japan but unusually 65% of its production is located in Japan, so it is a large beneficiary of the declining currency.  In addition, the company recently highlighted that its production volume is recovering from the semiconductor shortage.  In a normal year, the company sells 90,000 units per month but this fell to approximately 60,000-70,000units over the last 18 months

US software company Walkme rose 7.5%. We like the stock for its low valuation relative to other software companies. It has a market value of USD730mln, USD326mln of cash, and forecast revenue this year of USD250mln growing 25% per annum. It is loss-making but the company expects to only burn USD100mln of its cash to reach breakeven. Most profitable software companies trade on 4-6x (or more) revenue, so we see upside as the company transitions to profitability over the next 2 years.

Australian listed Ardent Leisure rose 4% ahead of its capital return in July following the sale of its US operations. Post distribution the company has a market value of $260mln with $150mln of cash valuing Dreamworld at $110mln. We believe strong domestic travel demand will enable the company to generate $15m-$20mln of profits per annum. The theme park sits on 60 hectares of land of which only 30 hectares are currently used, allowing future development of some of the remaining land.

On the negative side gym operator F45 fell 35% as concerns mount over the health of the US consumer in the face of high inflation and rising interest rates. Likewise, US streaming company Spotify fell 13% and Howard Hughes, a property owner, and developer, fell 15% over concerns of slowing US consumption.

Australian cancer immunotherapy company Immutep fell 30% on little news. We believe the company is an attractive takeover target given its recent strong data in lung cancer treatment.

US listed Kornit Digital, which produces digital textile printers and ink for the fashion industry, fell 20% in June and had a profit warning in early July   It now has a market value of $1.1bn (down from $7.5bn six months ago), $700mln of cash and we expect revenue of more than $300mln in 2023.  In 2019 the company had $180mln of revenue and $39mln of cash flow so we know the business can be very profitable at lower levels, particularly as the mix of high-margin ink will increase.  The company estimates 20bn t-shirts, hoodies and bags are printed each year of which it has just 1-2% market share.  It offers the advantage of being able to produce closer to the consumers at a lower cost using less water and in smaller lots, so companies like Amazon, Etsy, Redbubble, Nike, and Disney can match demand and supply. Amazon was the largest customer in 2021 at 27% of revenue but has recently slowed the pace of equipment rollout due to slower demand.

Despite posting a strong earnings beat, Canadian listed drilling company Major Drilling fell 13% as global commodity prices fell.  Our thesis for investing in the stock is a lack of exploration in the mining industry and depleting ore reserves, particularly at a time when more metals like lithium and copper are likely to be needed for electrification. Weakness in Chinese housing demand is currently overwhelming demand for metals however major infrastructure spending in China should in time stimulate demand.

PROFILE

STATISTICAL DATA

PORTFOLIO SUMMARY
VOLATILITY3
25%
NUMBER OF STOCKS
18
BETA4
0.62
MAXIMUM DRAW DOWN
-28.4%

FEATURES

  • APIR CODE HHA0020AU
  • REDEMPTION PRICEA$ 0.8898
  • FEES * Management Fee: 1.80% p.a. (Class A) | 1.25% p.a. (Class B)
    Performance Fee: 15.38% (Class A) | 20% (Class B)
  • Minimum initial investment A$10,000
  • FUM AT MONTH END A$ 36.85m
  • STRATEGY INCEPTION DATE 11 December 2014
  • BenchmarkRBA Cash Rate + 3%

Fund Managers

James McDonald

Portfolio Manager

Jeremy Bendeich

Portfolio Manager

Description

The Pengana High Conviction Equities Fund (the Fund) invests globally in a concentrated portfolio of up to 20 stocks. The Fund can invest in both small and large cap stocks and is diversified across countries and sectors. We avoid investment in companies that are currently, in our opinion, unnecessarily harmful to people, animals or the environment.

EXPLORE OUR FUNDS

Harding Loevner International Fund
Harding Loevner International Fund
Axiom International Ethical Fund
Axiom International Ethical Fund
Axiom International Ethical Fund (Hedged)
Axiom International Ethical Fund (Hedged)
Australian Equities Fund
Australian Equities Fund
High Conviction Property Securities Fund
High Conviction Property Securities Fund
Global Small Companies Fund
Global Small Companies Fund
WHEB Sustainable Impact Fund
WHEB Sustainable Impact Fund
Emerging Companies Fund
Emerging Companies Fund
High Conviction Equities Fund
High Conviction Equities Fund
Pengana International Equities Limited (ASX: PIA)
Pengana International Equities Limited (ASX: PIA)
Private Equity Trust (ASX: PE1)
Private Equity Trust (ASX: PE1)
Alpha Israel Fund
Alpha Israel Fund

1. Net performance figures are shown are those of Class A Units, 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 11 December 2014.
3. Annualised standard deviation since inception.
4. Relative to MSCI World. Using daily returns.
* For further information regarding fees please see the PDS available on our website.