Rhett Kessler
Australian investors can survive local equities market turmoil – such as that experienced in August and September – if they focus more on strategies that can deliver absolute returns not just returns relative to an index, according to Pengana Capital.
Rhett Kessler, senior fund manager for the Pengana Australian Equities Fund, is currently speaking at an adviser roadshow where he is discussing how the Fund has managed the recent market volatility for the benefit of its investors.
At a briefing yesterday Damian Crowley, Pengana’s Director of Distribution, introduced the roadshow by highlighting that 90% of the risk in traditional portfolios came from equities. On top of this, the majority of directly held stocks are in the top 20 largest stocks listed on the ASX. For managed funds, most people’s money is invested in mainstream “benchmark aware” strategies – ie strategies that are also heavily weighted to the ASX top 20 or top 50 largest stocks.
The result of this concentration is that when markets take a dive, investors’ portfolios inevitably head into negative territory, destroying precious capital.
Mr Kessler said the best way for investors to maintain a path to financial independence was to preserve capital and try and minimise the impact of equity market falls, while also achieving a decent return.
“Part of doing this means when markets get crazy and expensive, and people are getting greedy, you stay focused on your investment goals and don’t simply run with the herd,” Mr Kessler said.
The Pengana Australian Equities Fund invests in a concentrated portfolio of around 20-25 stocks and has an overarching goal to preserve investors’ capital and provide downside protection in difficult markets – generating a fair return of at least 6% above the cash rate, no matter what markets are doing. The Fund is benchmark unaware – ie it invests in companies purely on their investment merit and not based on their weighting in the index.
As part of its ‘absolute return’ approach, the Fund is also able to hold unlimited amounts of cash if suitable investments can’t be found. For this exact reason its cash position had been building up over the first two quarters of the year. During August and September the Fund was able to take advantage of big falls in the share prices of great companies (as greed to turned to fear) to convert cash into investments aimed at preserving capital and generating solid returns.
“Many investors berate their managers for holding cash, saying it’s easy to sit on the sidelines and not what they’re paying management fees for. However when markets dive and everyone is heading for the exits, we are able to reach for our wallets and buy things at great prices,” Mr Kessler said.
“We gorged on cheap stocks in August and September… It’s when there’s the proverbial blood in the streets that you want to be able to buy.”
During August and September the ASX All Ords returned -7.3% and -2.5% respectively. Substantial purchases made by the Fund during the period included a material holding in Duet Group during and following its capital raising to acquire Energy Developments; a material increase in holdings in Spotless Group during the sell down by PEP; and a holding in Contact Energy, benefitting from Origin’s sell down. The Fund also added to existing positions and acquired several other new smaller holdings.
Mr Kessler said Australian investors were getting wiser about how to manage inevitable volatility – and that people “really want to be able to sleep at night”.
“We have a long track record for assessing risks and being disciplined in picking stocks that can both preserve capital and make money – and this really resonates with our very wide investor base,” he said. “It’s possible to be protected, and to gain opportunities in down markets, if investors consider strategies that are focused on delivering absolute returns not just returns relative to an index.”
Since inception in July 2008 the Fund has returned a seven year annualised return of 11.0%*- growing a $100,00 portfolio to $213,387 during that period – with no negative years – versus a $130,533 outcome for the same amount invested in the ASX All Ords Accumulation Index.
Pengana currently manages around A$1.5 billion in assets across five established equity strategies spanning Australian shares, Australian small caps, global resources, global small caps, and Asian event driven.
*Total return after fees and expenses and assuming reinvestment of dividends to 30th September 2015.