CLOSE
BACK

OUR FUNDS

CLOSE

International Fund - Ethical Opportunity

May 2020 - Monthly REPORT

Events that could shake any investor

SUMMARY

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.

PORTFOLIO

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 Flow Traders Netherlands Financials Houlihan Lokey Inc United States Financials Medtronic United States Health Care Mowi ASA Norway Consumer Staples Tencent Holdings China Communication Services UnitedHealth Group Inc United States Health Care

Sector Breakdown

Capitalisation Breakdown

Region Breakdown

Segment

PERFORMANCE

PERFORMANCE SINCE STRATEGY INCEPTION

NET PERFORMANCE FOR PERIODS ENDING 31 May 20201
1 Month1 YearSINCE INCEPTION
Fund 4.9%18.6%10.4%
Benchmark 2.9%10.0%9.1%
1 Month1 YearSINCE INCEPTION
Fund
4.9%
18.6%
10.4%
Benchmark
2.9%
10.0%
9.1%

PERFORMANCE SINCE STRATEGY INCEPTION

NET PERFORMANCE SINCE INCEPTION2

COMMENTARY

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 4.9% vs the benchmark’s 2.9% return1. This takes the Fund’s one-year rolling return to 18.6% vs the benchmark’s 10.0%. Equally importantly, over the past year the volatility of the Fund was lower than the benchmarks and with less severe drawdowns than the market during the down periods. The Fund has delivered on its three goals of making money, avoiding drawdowns and minimizing volatility.

As discussed last month, the most pleasing thing about the Fund’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.

PROFILE

STATISTICAL DATA

PORTFOLIO SUMMARY
VOLATILITY3
9.8%
NUMBER OF STOCKS
33
BETA4
0.77

FEATURES

  • APIR CODE HHA0002AU
  • REDEMPTION PRICEA$ 2.5024
  • FEES * Management Fee: 1.5%
  • Minimum initial investment Closed to new investors (existing investors may make additional investments)
  • FUM AT MONTH END A$ 59.96m
  • STRATEGY INCEPTION DATE 1 July 2015
  • BenchmarkMSCI All Country World Total Return Index in AUD**

Fund Managers

James McDonald

CIO

Description

“The Pengana International Fund – Ethical Opportunity (the Fund) is a long only fund that holds 30-50 companies across developed and developing markets, large and small companies. The Fund predominantly invests in companies that deliver stable yet growing free cash flow throughout cycles (which we classify as ‘Core’ holdings) whilst also taking positions in more cyclical companies (‘Cyclical’) and those whose valuation has been materially misconstrued by the market (‘Opportunistic’). We avoid investment in companies that, in our opinion, are harmful to people, animals or the environment. Important Note: There are significant accumulated tax losses contained within the Fund which may benefit existing investors.
We have accordingly closed the Fund to new investors in order to maintain the interests of existing investors. We strongly urge you to seek tax advice if you are an investor in the Fund, to understand how this may benefit you.

EXPLORE OUR FUNDS

Harding Loevner International Fund
Harding Loevner International Fund
Axiom International Fund
Axiom International Fund
Axiom International Fund (Hedged)
Axiom International 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
Pengana Diversified Private Credit Fund
Pengana Diversified Private Credit Fund

1.2. A new strategy was implemented for the Pengana International Fund – Ethical Opportunity from 1 July 2017 by the Pengana team. The financial information below refers to the strategy currently employed by the Fund. For full performance history of the Fund, please refer to the Pengana website. From July 2017, performance figures are those of the Hunter Hall Pengana International Fund – Ethical Opportunity’s class A units (net of fees). Between July 2015 and June 2017, performance figures have been recalculated by adjusting the Pengana International Fund’s (ARSN 610 351 641) net returns to reflect the management fee of the Pengana International Fund – Ethical Opportunity. From July 2017, the Pengana International Fund – Ethical Opportunity has been managed by the same team and with the same strategy as the Pengana International Fund. The Pengana International Fund’s net track record data is historical. Past performance is not a reliable indicator of future performance. The value of the investment can go up or down.
3. Annualised standard deviation since inception. 4. Relative to the MSCI All Country World Total Return Index in AUD.
* For further information regarding fees please see the PDS available on our website.
**The benchmark was changed from MSCI World Total Return Index (net, AUD) effective 6 June 2017.
Important Note: There are significant accumulated tax losses contained within the Fund which may benefit existing investors.
We have accordingly closed the Fund to new investors in order to maintain the interests of existing investors. We strongly urge you to seek tax advice if you are an investor in the Fund, to understand how this may benefit you.