The Fund’s investment objective is to achieve over the medium to long term an investment return, including capital appreciation, dividends and interest, in excess of the risk free rate plus a margin to compensate investors for the extra risk associated with investing in Australian equities (this is known as the ‘Australian equity risk premium’), with a volatility of return less than the Australian equity market. The Fund invests principally in listed Australian equities. If Pengana cannot find appropriate securities that meet its investment criteria, the Fund’s assets are held in cash or cash equivalents. Pengana principally targets listed Australian companies capable of generating underlying cash earnings yields of at least 6% per annum with sustainable growth. The Fund employs research-based security selection, using fundamental company research with macro-economic overlays for portfolio construction.
The Fund generated a -1.2% return in the September quarter, following a -3.7% return in the month of September. By way of comparison, the Australian stock market declined by -0.7% in the quarter and -2.8% in the month, whilst the (annual) return of the RBA cash rate plus 6% equated to approximately +2.4% and +0.8% respectively. Calendar year to date, the Fund has achieved a return of +5.4%, which compares favourably to the Australian stock market at +4.0% and, following the challenging month of September, is now below the cash plus 6% benchmark of +7.2% for the 9 months.
After a positive July and a softer August, markets took a greater step down in September with the increasing weight of higher bond yields bearing down on equity valuations. US and Australian Bond yields increased by almost 50bps in September on elevated oil prices, a modest increase in inflation, and a subsequent reversion of expectations towards rates remaining higher for longer, following the more recent narrative focused on the timing of rate cuts.
At a market level, Energy was the only positive sector on the ASX in September (+2.2%) and materially outperformed over the quarter (+11.6%). REIT stocks (-8.5%) underperformed on the bond yield rally in September as did the Tech sector (-7.7%), whose valuations are more sensitive to longer-term rate assumptions (higher rates = lower valuations). Over the quarter, Financials (+2.3%) and Consumer Discretionary stocks (+5.6%) were also positive, whilst Healthcare (-9.0%) was the main underperformer, with CSL and RMD negatively impacting sector performance.
ResMed was a material detractor for the Fund during the quarter. Share price weakness, which started in August and continued through September, was driven by two primary factors. Firstly, a lack of operating leverage in the FY23 results, where strong top-line growth failed to translate fully to profit growth – a dynamic that disappointed us but, understanding the dynamics, we remain confident in our longer-term cash flow projections. The second factor relates to the broader adoption of a drug (GLP-1 RA) for the treatment of obesity, which is recognised as a significant contributor to sleep apnoea. We believe the threat this poses to ResMed’s potential target market has been significantly overestimated due to a number of factors including cost of treatment, various side effects, and significant weight regain following withdrawal from the drug. An increasing number of academics in the relevant field have expressed their concerns around the widespread use of the drugs for obesity, whilst other commentators suggest that it could accelerate the penetration of sleep apnoea treatment (from the existing low base). Given what we view as solid underlying fundamentals and an overreaction to GLP-1, we added to our RMD holdings on the weakness during the quarter.
Other detractors over the quarter included CSL, who guided to a slower recovery of gross margins in their core business following COVID, and Telstra where solid underlying performance from the key mobile division was offset by disappointment from management’s decision not to monetise the recently separated infrastructure arm of the business. We believe Telstra management presented a sound argument to retain 100% ownership, however, recognise that a subset of the investor base was invested for that event alone, and transitioned its way out of the register. With the core elements of our investment thesis validated, we remain positive and have more recently added to our position at these more attractive levels.
On the positive side, the Fund benefited from its holding in NAB, SG Fleet, and ongoing contributions from discretionary names such as Accent Group and Super Retail Group. The main trading activity in the month focused on establishing a stake in Stockland Group (largely on the theme of domestic housing shortages), adding to existing holdings in Resmed on share price weakness, and accumulating positions in ANZ (on valuation of its quality institutional banking franchise) and Metcash (attractively valued exposure to domestic supermarket and hardware). Disposals centered around exiting our position in Amcor early in the quarter, before re-establishing a position at significantly lower valuations towards the end of September, and trimming positions in CBA, James Hardie, and SG Fleet.
Thematically, we expect inflation to continue to percolate through the global economy. Whilst inflation may have peaked, we expect it to remain elevated and therefore see little scope for rate relief in the medium term. From a valuation perspective, this environment typically favours portfolios whose valuation is predominately focused on current earnings and cash flows (such as this Fund), as opposed to those whose valuations are more dependent on future earnings and cash flows. Our cash balance remains healthy and ready to deploy should future opportunities present.
The consumer has remained remarkably resilient amidst escalating cost of living pressures and higher interest rates, benefiting from accumulated savings through the COVID period, ongoing high employment rates, and wage inflation which continues above trend. We expect macro pressures to weigh further on households, however, the evidence increasingly suggests a managed (possibly soft) landing scenario as opposed to the greater fear associated with a consumer “cliff” scenario.
At a corporate level, we expect revenue growth to moderate and remain challenged in the medium term, with ongoing price increases to become more difficult to pass through, and unlikely to offset volume weakness. We expect inflationary pressures to continue through the cost of doing business lines, with the main culprits being wage growth of circa 5%, increasing rents, energy, insurance, and so on. As a result, our default expectation is for negative operating leverage to play a greater role in corporate earnings for FY24. We expect that the elevated cost of debt will create winners v losers, with the key differentiation being balance sheet leverage. With this in mind, we are focusing on companies with strong pricing power and resilient demand/market share profiles. We are trying to identify and preference companies with meaningful productivity enhancements or controllable cost bases. And we are focused on businesses with net cash balance sheets, or at least a long-term fixed cost of debt.
We remain as focused as ever on our primary objectives of capital preservation and generating a reasonable real return for our investors. We continue to believe this is best served by a disciplined approach and consistent investment methodology. A variety of good businesses run by honest and competent management teams at the right price will create a well-diversified portfolio of ever-growing cash earnings streams.
What is Pengana Australian Equities Class A Pengana Australian Equities Class A is an Managed Funds investment product that is benchmarked against ASX Index 200 Index and sits inside the Domestic Equity - Absolute Return Index. Think of a benchmark as a standard where investment performance can be measured. Typically, market indices like the ASX200 and market-segment stock indexes are used for this purpose. The Pengana Australian Equities Class A has Assets Under Management of 946.40 M with a management fee of 1.03%, a performance fee of 0.57% and a buy/sell spread fee of 0.4%.
How has the investment product performed recently?
The recent investment performance of the investment product shows that the Pengana Australian Equities Class A has returned 5.06% in the last month. The previous three years have returned 3.59% annualised and 11.33% each year since inception, which is when the Pengana Australian Equities Class A first started.
How is risk measured in this investment product?
There are many ways that the risk of an investment product can be measured, and each measurement provides a different insight into the risk present. They can be used on their own or together to perform a risk assessment before investing, but when comparing investments, it is common to compare like for like risk measurements to determine which investment holds the most risk. Since Pengana Australian Equities Class A first started, the Sharpe ratio is 0.54 with an annualised volatility of 11.33%. The maximum drawdown of the investment product in the last 12 months is -7.36% and -23.12% since inception. The maximum drawdown is defined as the high-to-low decline of an investment during a particular time period.
What is the relative performance of the investment product?
Relative performance is what an asset achieves over a period of time compared to similar investments or its peers. Relative return is a measure of the asset's performance compared to the return to the other investment. The Pengana Australian Equities Class A has a 12-month excess return when compared to the Domestic Equity - Absolute Return Index of 2.22% and -0.32% since inception.
Does the investment product produce Alpha over its Peers?
Alpha is an investing term used to measure an investment's outperformance relative to a market benchmark or peer investment. Alpha describes the excess return generated when compared to peer investment. Pengana Australian Equities Class A has produced Alpha over the Domestic Equity - Absolute Return Index of -0.09% in the last 12 months and -0.09% since inception.
What are similar investment products?
For a full list of investment products in the Domestic Equity - Absolute Return Index category, you can click here for the Peer Investment Report.
What level of diversification will Pengana Australian Equities Class A provide?
Pengana Australian Equities Class A has a correlation coefficient of 0.89 and a beta of 1.67 when compared to the Domestic Equity - Absolute Return Index. Correlation measures how similarly two investments move in relation to one another. This establishes a 'correlation coefficient', which has a value between -1.0 and +1.0. A 100% correlation between two investments means that the correlation coefficient is +1. Beta in investments measures how much the price moves relative to the broader market over a period of time. If the investment moves more than the broader market, it has a beta above 1.0. If it moves less than the broader market, then the beta is less than 1.0. Investments with a high beta tend to carry more risk but have the potential to deliver higher returns.
How do I compare the investment product with its peers?
For a full quantitative report on Pengana Australian Equities Class A and its peer investments, you can click here for the Peer Investment Report.
How do I compare the Pengana Australian Equities Class A with the ASX Index 200 Index?
For a full quantitative report on Pengana Australian Equities Class A compared to the ASX Index 200 Index, you can click here.
Can I sort and compare the Pengana Australian Equities Class A to do my own analysis?
To sort and compare the Pengana Australian Equities Class A financial metrics, please refer to the table above.
Has the Pengana Australian Equities Class A been independently verified by SMSF Mate?
This investment product is in the process of being independently verified by SMSF Mate. Once we have verified the investment product, you will be able to find more information here.
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Comments from SMSF Mates
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Performance Commentary - August 31, 2023 The Fund generated a -0.7% return in August. By way of comparison, the Australian stock market declined by -0.7%, whilst the (annual) return of the RBA cash rate plus 6% equated to approximately +0.8% for the month. Calendar year to date, the Fund has achieved a return of +9.4%, which compares favourably to our benchmark return of +6.4% over the same period, and the Australian stock market at +7.0%. We are pleased that a portfolio of defensive, hard assets continues to deliver a healthy, positive real return in varying market conditions.
The key message that we took away from this corporate earnings season was that whilst the outlook for corporate revenues is likely more resilient than first thought, ongoing inflation continues to provide upward pressure on the cost of doing business. We are pleased to be able to report that for the majority of our holdings, we received a positive validation of our respective investment theses. Standout performers included our discretionary retail holdings Accent Group and Super Retail Group. Resmed was a notable detractor in the period, offsetting what was otherwise a strong period for the Fund.
Performance Commentary - July 31, 2023 The Fund generated a +3.3% return in July. By way of comparison, the Australian stock market grew by +3.0%, whilst the (annual) return of the RBA cash rate plus 6% equated to approximately +0.8% for the month.
The Fund has continued its positive momentum calendar year to date, achieving a return of +10.2%, which compares favourably to our benchmark return of +5.5% over the same period, and the Australian stock market at +7.8%.
It was pleasing that despite its conservative settings, with a portfolio biased to defensive holdings together with elevated cash and put option exposure (lower equity exposure), the Fund was still able to outperform the market in a strongly positive period.
Performance Commentary - June 30, 2023 The Fund generated a +1.2% return in June and +6.7% for the June half. By way of comparison, the (annual) return of the RBA cash rate plus 6% equated to approximately +0.8% for the month (+4.7% for the half), whilst the Australian stock market returned +1.9% in June and +4.7% for the half. For the 2023 financial year, the Fund’s total return equated to +10%, compared to the market return of +14.8%, and a cash rate plus 6% return of +8.9%.
After a difficult start to the financial year, we are pleased that the Fund has been able to once again exceed our objective of cash +6% (after all fees and costs), and generate a real, positive return for our investors from a portfolio of defensive, hard assets.
Having taken decisive actions to address the first-half performance, it was encouraging to see a turnaround in the second half. Perhaps more than the number itself, we were particularly pleased with the nature of the second-half performance. Despite its conservative positioning, the Fund was able to participate in broad market strength during January and June, including outperforming a positive market in April. During the negative months of February, March, and May, the Fund proved its resilience, outperforming the market in each of those periods. An overall result of +6.7% for the half was pleasing both in absolute terms, and relative to the market’s +4.7%, particularly given the challenging environment, and gives us confidence that the Fund is once again behaving as we expect it to across various market conditions.
Over the financial year, the Fund experienced contrasting performances in the first and second half year periods. As we have discussed previously, we were disappointed with the first half result of +3.1%, where absolute performance was impacted by negative contributions in particular from Ryman Healthcare, Evolution Mining, and a small number of less liquid names, particularly within the diversified financials space. From a relative perspective, the Fund’s longstanding underweight position in materials accentuated a negative performance gap relative to the market, with that sector providing a substantial positive contribution to the overall market return in the December half.
Performance Commentary - April 30, 2023 The Fund generated a 2.7% return in April. By way of comparison, the Australian stock market grew by +1.8%, whilst the (annual) return of the RBA cash rate plus 6% equated to approximately +0.7% for the month. Calendar year to date the Fund has now generated a return of +7.8%, which compares favourably to our benchmark return of +3%, and the overall market return of +5.4% over the same period. We are encouraged that over this period of time, the Fund has shown that a portfolio of defensive, hard assets have delivered a healthy, positive real return in difficult market conditions.
A pause by the RBA early in the month set a positive tone for markets – providing some relief around growth risks, whilst also suggesting we may be nearer to a terminal peak in the rate cycle. Rate sensitive and growth sectors benefited the most with REITS and Information Technology stocks outperforming. Conversely, commodity prices across the board came under pressure in April, with Oil, Iron Ore and several agricultural prices declining materially through the month, resulting in what has become an unfamiliar circumstance where Materials stocks underperformed. Gold bucked the trend, and its positive momentum through April has continued into May, resulting in a strong positive contribution from our position in Evolution Mining.
The main positive contributors to the Fund’s performance in April were Evolution Mining, NIB Insurance, CSL, Super Retail Group, and Telstra. The main detractors in the month were BHP, a reduction in the value of put options, SG Fleet and Amcor. We continued to build on our position in Metcash Limited, partially offset by trimming positions in Mirvac (taking profits into REIT strength), Aristocrat Leisure, Accent One, and Super Retail Group. The trimming of shares in Super Retail in April proved fortuitous as an overreaction to its recent trading update has provided us with a more attractive entry point again this month. With the Fund’s equity holdings rising in value during the month, the net movement in our cash holdings declined modestly to 13.2%.
Performance Commentary - February 28, 2023 The Fund generated a -1.2% return in the month of February. By way of comparison, the (annual) return of the RBA cash rate plus 6% equated to approximately +0.7% for the month, whilst the Australian stock market declined by -2.5%. Calendar year to date the fund has returned a 4.9% gain compared to cash plus 6% of 1.4% and a market return of 3.8%. We are pleased with the Fund’s ability to have participated in the upside in January, despite its more cautious positioning, whilst also proving resilient in a more challenging February.
February saw a reversal of some of January’s strong gains, with reporting season bringing to bear some of the risks that we have been speaking about in recent months. Specifically, elevated forecast risk was evident in the higher number of ‘beats’ and ‘misses’ compared to average, whilst the elevated cost environment became more evident in corporate earnings.
Notwithstanding a generally difficult month for equity markets, the Fund experienced a mostly positive reporting season in terms of benchmarking the updates from our holdings with their respective investment theses. Outlook commentary made it clear, for the first time, that factors such as the impact of rising rates and inflation on household budgets, and rising cost pressures on operating expenses, are beginning to materialise in corporate earnings.
Outlook commentary continued to reflect a more cautious environment and we observed outsized share price reactions, generally negative, as investors recalibrated their earnings and expectations. Secondly, the elevated cost environment became more evident in corporate earnings. Revenue lines generally held up well, supported by inflation pass through and a still buoyant consumer. However corporate operating costs, and particularly financing expenses, rose sharply, with the latter a common driver of earnings downgrades throughout the month.
Performance Commentary - October 31, 2022 The Fund generated a +2.7% return in the month of October. By way of comparison, the (annual) return of the RBA cash rate + 6% equated to approximately +0.7% for the month, whilst the Australian stock market improved by +5.7%.
October is AGM season with company addresses typically providing investors with a trading update for their respective businesses. Whilst a number of sectors surprised on the upside during the month – such as Financials, and Discretionary Retailers, overall revisions were mostly skewed to the downside.
The impact of elevated inflation and cost of living pressures was yet to take full effect in corporate trading to October, however, investors anticipate a more substantial impact on earnings to come in 1H calendar 2023. Importantly while consumer surveys continue to show a decline in consumer confidence, discretionary spending data points remain intact. Our base working assumption is that the “gravity” of higher interest rates and cost of living expenses will materialise early in the new year.
Despite an elevated level of volatility in markets, we remain as focused as ever on our primary objectives of capital preservation and generating a reasonable real return for our investors.
Performance Commentary - August 31, 2022 The Fund generated a -0.1% return in the month of August. By way of comparison, the (annual) return of the RBA cash rate + 6% equated to approximately +0.7% for the month, whilst the Australian stock market improved by +1.3% over the month.
The market performance in August was again driven entirely by the Materials and Energy sectors, together making up 140 bps of the markets overall 130bps gain – i.e. the market performance ex materials and energy was therefore negative in August. Strength early in the month quickly abated following hawkish comments from the Federal Reserve re-igniting fears that central banks may be more aggressive in their efforts to contain inflation by raising rates.
Notwithstanding a range of share market reactions to results, for the most part we were pleased with the recent reporting season, with our investment thesis for positions throughout the portfolio largely confirmed. That said, strength in trading to June 30 has given way to a more uncertain and challenging outlook, and forecast error remains high.
Volatility has returned in September, and the fund is benefiting from our lower equity exposure (cash levels continued to rise through August), as well as an increase in the value of the put position in the portfolio. Volatility has returned in September, and the fund is benefiting from our lower equity exposure (cash levels continued to rise through August), as well as an increase in the value of the put position in the portfolio.
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