Events that could shake any investor

May was jam-packed with events that could shake any investor.

We had COVID-19 decline in most of the developed world, but we saw it escalate in the emerging markets, most notably, in Brazil and India. We saw the first real economic data that shows the impact of COVID-19 on developed markets, with COVID-19 starting in late March in most developed markets and showing an impact by May. This was eye-watering economic data, including many all-time low figures.

The other thing we saw was an escalation in the US-China politics. We had the US impose more sanctions on Huawei. And we also saw the US’s very strong response to China’s proposal to implement its law into Hong Kong, which drew widespread protests. Towards the end of the month, we saw the very tragic killing of George Floyd and the protests that ensued.

In this month’s video and written commentary below we hold a lens to our investment process in the face of a market that has become mind-boggling.

We have also been in the news (Click a headline below to read the article):
Australian Financial Review – Pengana global fund to target franked dividends
Sydney Morning Herald – Pengana flags dividends for years amid absolute desperation for yield
Financial Standard – Pengana eyes fully franked dividend

Finally – we are pleased to include a link to our recent webinar where we discuss the latest update to our investment mandate, targetting fully franked dividends for shareholders into the future. Click HERE to watch

Top Holdings (alphabetically)

Alibaba Group China Information Technology

Bharti Infratel India Communication Services

Charter Communications Inc United States Communication Services

Dollar Tree Inc United States Consumer Discretionary

Houlihan Lokey Inc United States Financials

Medtronic United States Health Care

Mowi ASA Norway Consumer Staples

Tencent Holdings China Communication Services

Thermo Fisher Scientific United States Health Care

UnitedHealth Group Inc United States Health Care

The pace of big news events is dizzying. During May-20:

• Covid-19 was curtailed in most advanced economies but accelerated in many emerging economies.
• Progress was made on developing a Covid-19 vaccine, most notably by Moderna, sending stocks that have been most severely impacted by Covid, like travel-related stocks, soaring.
• The economic impact of Covid on the Western economies was reported with many of the data all-time lows.
• In the early part of the month markets were driven higher by the FAANGs and other momentum stocks. Later in the month there was a sharp reversal away from those stocks and towards value.
• US-Sino relations hit a new recent low as China moved to implement its security law in Hong Kong and the US increased its anti-Huawei policies.
• Later in the month, the US’s Twitter-In-Chief moved to censor social media platforms (including Twitter) as retaliation for censoring him.
• In a historic decision, the European Commission announced its intention to issue the first ever common currency bond.
• Riots erupted across the US following the police killing of George Floyd.
• Closer to home, the Australian government discovered it miscalculated the cost of its JobKeeper program by$60Bn.

Amidst all this news, what is one to do? Should you invest at all given the eye watering negative economic data, or should one buy stocks given the progress of the vaccine? If you do buy, should it be value, which has lagged for many years and has started to inflect, or should you stay in growth and momentum, which has been the place to be for years?

Should you focus on China, given its seemingly inevitable growth or avoid that region given the mushrooming conflict with the US? Should you hedge the USD exposure, reflecting the relative strength of Australia’s balance sheet, or should you remain unhedged, reflecting the USD’s historic flight to safety status? How important is corporate citizenship and ESG (Environmental, Social, and corporate Governance) to you and how do you ensure you are investing in companies with an appropriate level of these factors?

These are questions that we largely believe you shouldn’t have to answer. Rather, we attempt to implement an investment process designed to work across all seasons. That is, to invest in a diversified portfolio of growing and highly cash flow generative businesses trading at reasonable valuations with strong ESG practices. We don’t always get it 100% right, but it is pleasing to see that the strict application of the investment philosophy and process has shown that the decisions have been right more than they have been wrong.

Over the last month, ending 31 May, the strategy delivered 4.6% vs the benchmark’s 3.4% return¹. This takes the Portfolio’s one-year rolling return to 17.9% vs the benchmark’s 11.5%. Equally importantly, over the past year the volatility of the Portfolio was lower than the benchmarks and with less severe drawdowns than the market during the down periods. The Portfolio has delivered on its three goals of making money, avoiding drawdowns and minimizing volatility.

As discussed last month, the most pleasing thing about the Portfolio’s strong performance is that it did not come from one single trade. It was the outcome of the persistent application of the investment philosophy and process, which resulted in several things contributing to the return. The contributors include a diverse range of companies with no obvious commonality including: Indian cellular tower business (Bharti Infratel), US discount retailer (Dollar Tree), industrial laser designer and manufacturer (IPG Photonics), US medical device company (ABIOMED) and a European bank (ING Group).

The process ensures the Fund invests in highly diversified, cash generative, growing companies with fortress balance sheets, reasonable valuations, and strong ESG practices. The focus on growth and value coupled with our mandate to look at many regions, market caps and sectors means these companies are likely to be vastly different to what is held by others. While the names may be unfamiliar to you, you can rest assured they are all leaders in their market and are aligned with various investment themes.

Some of the themes that we are presently grappling with and that are forming the basis of our investment decisions include:

• The potential for an inflation scare;
• Companies that profit from corporate financial restructurings;
• The persistence of asset market volatility;
• A requirement for meaningful fiscal stimulus;
• An increase in medical testing;
• And companies that will benefit from the ‘stay-at-home’ society

We would like to thank our team for their colossal effort. Throughout the flood of seemingly earth changing events, from Covid to China, Twitter to Trump, EM to EU, the team has remained calm, focused, and steadfast with our tasks. We couldn’t be working better than we are now, which raises the questions of whether we should ever return to a CBD office and whether our next meeting with you will be on the Manly Esplanade? Now that would be a monumental event in the world of button-down funds management.