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International Ethical Fund

November 2019 - Monthly REPORT

Renewed Focus on Emerging Markets

SUMMARY

PORTFOLIO

Top Holdings (alphabetically)

Alibaba Group China Consumer Discretionary Aon United States Financials Charter Communications Inc United States Communication Services Cigna Corp United States Health Care Deutsche Boerse Germany Financials Epiroc Sweden Industrials Medtronic United States Health Care Microsoft United States Information Technology Mowi ASA Norway Consumer Staples UnitedHealth Group Inc United States Health Care

Sector Breakdown

Capitalisation Breakdown

Region Breakdown

Segment

PERFORMANCE

PERFORMANCE SINCE STRATEGY INCEPTION

NET PERFORMANCE FOR PERIODS ENDING 30 Nov 20191
1 Month1 YearSINCE INCEPTION
Fund 4.9%18.7%10.3%
Benchmark 4.3%22.7%11.2%
1 Month1 YearSINCE INCEPTION
Fund
4.9%
18.7%
10.3%
Benchmark
4.3%
22.7%
11.2%

PERFORMANCE SINCE STRATEGY INCEPTION

NET PERFORMANCE SINCE INCEPTION2

COMMENTARY

In this month’s video we discuss our renewed focus on the Emerging Markets, and economically sensitive companies. These are the type of markets that we haven’t talked about for a long time, and interestingly, we think that we will touch on this more and more over the next 1 -3 years as the markets progress. In addition, we cover one example of a company that we’ve recently invested in that, in our opinion, ticks all the boxes.

Firstly, let’s look at how markets have performed over the month.

November was another strong month, and markets continue to be strong with the Fund moving up close to 5% for the month. What particularly pleases us is the way we achieved that performance, through companies that actually went up for the right reasons. Particularly, these are our investments in the sectors of U.S Health Insurance (in particular our investments in Cigna and UnitedHealth) and Indian telecommunications.

We have been talking for some time about how attractive these U.S. health insurance companies are, and how well they’ve performed over the years, and they continue to perform well, however we still think there’s considerable upside and so continue to be strong, and big holders of these businesses.
In addition, our bets in India have similarly done very well.

Why is this?
Over the last 2 – 3 years the Indian Telco sector has been disrupted strongly by a 3rd entrant. Namely, Reliance Jio.
As a result, prices there have plummeted for the average Telco plan., which has meant that profitability of all the firms has come down. We have seen this as unsustainable, with a belief that companies eventually would have to raise prices because on an absolute and relative basis, Indian telecommunication costs are very very low. In fact, you’d be struggling to find (even if you look in very remote places like sub-Saharan Africa) a country where prices are lower than that of India. This means close to 1.4 billion people enjoying these low prices. Over the last month there have been some announcements of companies deciding to raise their prices, which is good for both the Fund, and the companies.

On the broader macro level we are starting to see strong out-performance of certain markets and certain regions, that hinting at signs of reflationary forces coming back into the system. Now, if this continues and eventuates, this is quite a big change in the dynamic of the market because for the last 10 years, we’ve had nothing but deflationary forces driving ‘investment decisions’. As such, we’ve had the out-performance of quality, compounding growers such as Visa, Mastercard, Facebook, Google over the last 10 years and because people were looking for certainty they were looking for growth and the alternative was very unattractive, such as bonds and money markets. Now, since the FED decided to stop quantitative tightening in September they have injected a lot of liquidity into the system (thus far US$325 billion of liquidity into the system) and they are expected to inject approximately half a trillion by the end of this year. These numbers are astronomical, and the effect this has had is the expectation that inflation would come back into the system. Countries like China, India, Brazil, Russia have done phenomenally well since then, and even if we look at countries like Germany, that are particularly sensitive to how the Emerging Markets perform, and the growth in these economies, that particular index has also done very strongly.

In addition, small caps are starting to out-perform their larger counterparts. This is something we haven’t seen for quite some time.
Whilst these are early days, we feel we are starting to see some real indications across broader indices that something is taking hold. We think that this will happen over the next 1 – 3 years and as a result, have been shifting our portfolio slowly, but surely to have more exposure to these kind of markets.

Particularly to companies either domiciled in Emerging Markets, or companies that benefit from Emerging Market growth, domiciled in Western markets.

One such company that is actually domiciled in Emerging Markets is Huazu Group – a company based in China. Huazu Group owns and operates hotels and has grown tremendously over the last 15 years. Since it started with 4 hotels, 15 years ago, Huazu now has over 5,000 hotels under their umbrella. This is a phenomenal achievement by any measure. That has allowed them to grow very rapidly of late is the fact that they don’t have to buy the hotel’s properties themselves. Property owners flock to them, and say “you take these keys, you take this hotel, this property, turn it into one of your branded hotels, and let me benefit from your success.” through profit-sharing agreement. As a result, their network of hotels across China, and their Loyalty Program with over 100 million active users at any one time, ensures that the occupancy rate for Huazu Group is over 90%, where the typical owner of a hotel will enjoy 55% – 60% at most. This is a huge improvement on the financials of a typical hotel as a result, because they share in the profits, the owner of the hotel is happy and Huazu is happy because they’ve added another property at a very low cost.

Huazu is growing at a pace of 700+ hotels a year.

As people feared the outcome of what’s happening with the Trade War and what that means for travel within China (business travel in particular) the share price fell dramatically as shareholders feared the worst. Our team had done a lot of work prior to this happening, and we had been waiting for the right opportunity to buy this business, which eventuated in the December 2018 quarter.

PROFILE

STATISTICAL DATA

PORTFOLIO SUMMARY
VOLATILITY3
9.2%
NUMBER OF STOCKS
34
BETA4
0.79

FEATURES

  • APIR CODE HOW0002AU
  • REDEMPTION PRICEA$ 3.1721
  • FEES * Management Fee: 1.35% p.a
  • Minimum initial investment $25,000
  • FUM AT MONTH END A$ 346.27m
  • STRATEGY INCEPTION DATE 1 July 2015
  • BenchmarkMSCI All Country World Total Return Index (net, AUD)

Fund Managers

Description

The Pengana International Ethical 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 are, in our opinion, harmful to people, animals or the environment.

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Harding Loevner International Fund
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Axiom International Fund (Hedged)
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Australian Equities Fund
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High Conviction Property Securities Fund
High Conviction Property Securities Fund
Global Small Companies Fund
Global Small Companies Fund
WHEB Sustainable Impact Fund
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Emerging Companies Fund
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High Conviction Equities Fund
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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
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Pengana Diversified Private Credit Fund
Pengana Diversified Private Credit Fund

1. Net performance figures are shown after all fees and expenses and assume reinvestment of distributions. Past performance is not a reliable indicator of future performance, the value of investments can go up and down.
2. A new strategy was implemented for the Pengana International Ethical Fund from 1 July 2017 by the Pengana team. The financial information refers to the strategy currently employed by the Pengana International Ethical.

From July 2017, performance figures are those of the Pengana International Ethical Fund (the “Fund”) 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 Fund. From July 2017 the Fund has been managed by the same team and with the same portfolio construction strategy as the Pengana International Fund, complemented by strict ESG filters and processes. 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.