Michael Maughan

Pengana Capital Group has added senior Australian equities investment expertise to its ranks, with the appointment of Michael Maughan as a Senior Portfolio Manager within the Pengana Australian Equities team.

Michael Maughan previously held a long-term position as a Portfolio Manager at Tyndall Asset Management, and brings over 25-years of experience in equities research and portfolio management.

Russel Pillemer, CEO of Pengana Capital Group, said Michael is highly regarded and will be a huge asset to Pengana’s Australian equities team. “Michael is well-known for his disciplined investment approach, deep company insights, and consistent delivery of income and growth outcomes for clients.

“Michael will operate as a peer alongside our existing senior team members, contributing to the collaborative culture that defines Pengana’s investment philosophy”, Pillemer said.

Rhett Kessler, CIO and Senior Fund Manager for the Pengana Australian Equities Fund added: “Michael brings expertise across technology, media, telecoms, transport and property, which complements the team’s existing strengths and expands our research depth.

“We also value Michael’s disciplined focus on fundamental cash flow analysis, his strong senior corporate relationships, and his clarity in communication with both clients and stakeholders.”

Michael said he feels a natural affinity with Pengana’s approach. “I’m thrilled to be joining Pengana’s Australian equities team. I’ve always admired Rhett Kessler and Anton du Preez and the team for their integrity and skill as investors, operators, and communicators.

“While we all bring varied experiences and skills, we share the same philosophy and have a genuine commitment to growing clients’ wealth steadily and responsibly”, Maughan said.

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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.

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Weaker Australian dollar creating opportunity in many sectors.

The weaker $A will benefit tourism, education, agricultural and even the mining industry, a leading fund manager says.

Pengana Capital’s Australian equities fund manager Rhett Kessler says ‘a lower $A represents lower global purchasing power for us as consumers. However, we expect several important domestic industries to benefit materially from the currency shift’.

‘These include the tourism, education, agricultural and even, dare we say it, mining industry. Many companies have been forced to streamline their operations to cope with the high $A.’

Although we have been biased towards a weakening $A for some time, the speed of its decline has been surprising.

Kessler is pessimistic about the short- to medium-term outlook for discretionary spending and employment levels, despite the falling $A possibly translating into very high profits for some companies.

‘Having said this, we expect most domestically orientated companies to report muted trading activities (at best) while also being cautious in their outlook statements.

‘The recent unusual political activity continues to impact negatively on consumers and corporates alike while the unseasonably warm winter has severely dented discretionary fashion retail sales.’

Commenting on the US Fed ‘frightening’ investors during May and June with several ‘tapering’ of fiscal stimulus statements, Kessler says the Fed highlighted its flexible approach to ensure a sustained US economic recovery.

This saw a widespread relief rally with most equity markets – S&P500 (+4.9 per cent), FTSE 100 (+6.5 per cent) and the Euro Stoxx 50 (+6.4 per cent), closing significantly higher.

The Australian market followed with resources (+10 per cent), materials (+9 per cent) and energy (+6 per cent) leading the charge.

Conversely the weaker sectors were REITS (-1 per cent), information technology (0 per cent) and consumer staples (+1 per cent).

The Australian dollar continued its slide against the US dollar falling another 2 per cent (to print) to below 90c for the first time since August 2010.

‘It appears that the combination of political uncertainty, a deteriorating fiscal position, weakening mining sector and persistent concerns regarding the outlook for the Chinese Economy continues to weigh on the domestic economy (read lower interest rates) and consumer confidence,’ he says.

The long list of companies issuing profit warnings during the lead-up to the 2013 financial year reporting season has highlighted the impact these issues are having on trading conditions.

Mining services companies have been hit particularly hard due to the triple whammy of:
a) a difficult comparison with a robust prior period
b) the sharp slowdown in mining activity generally
c) the effect of the larger mining houses laser-like focus on cost-cutting

While this may provide some relief for financial and industrial companies due to less competition for scarce resources (labour and capital in particular), the transition is expected to take some time and be the source of some pain, says Kessler.

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Pragmatic investors need to be alert for well-managed companies with the business models and balance sheets to take advantage of three dynamics.

‘The first is the US economy’s ability to consistently re-invent itself combined with the potential ‘game changer’ of becoming energy self-sufficient due to its recently accessible (and massive) oil shale reserves, followed by the Chinese authorities’ efforts to reinvigorate (or at least stabilise) economic growth may be successful.’

‘The third factor is the significant reduction in interest rates domestically may be creating a base for consumer confidence,’ Kessler says.

Investors need to focus on companies with resilient business models that have the balance of power over their suppliers and customers . Examples include:

• Ryman Healthcare with high-quality aged care facilities and capital-efficient business model
• Resmed with its dominant global position in sleep-apnoea medical device solutions
• Telstra as the provider of superior wireless communications services and scalable fixed-line construction services
• Caltex with its position as an integrated liquid fuel procurer, storage and distribution facilitator and marketer
• ANZ Bank through its Asia Pacific banking services network – in particular for five reasons:
  1.       a high-quality member of the domestic banking oligopoly
  2.       management’s focus on improving productivity
  3.       results to date in this area have provided a key underpinning to after-tax cash earnings
  4.       the after-tax-cash-earnings yield generated by these businesses deserve focus
  5.       a resilient business model due to the scale required to create a robust technology platform and diversified funding base.

‘Our reliance on structural competitive advantage allows for shareholder benefits as weaker competitors fall by the wayside,’ he says.

‘Australian businesses are still fighting cyclical and structural factors such as a cautious consumer, lack of confidence in the Government’s policy decisions, the increasing effects of a strong Australian dollar on domestic business’s competitive position and growing uncertainty in the mining and related sectors,’ Kessler adds.

Continuing attempts by the US, European and Japanese monetary authorities to dilute their respective currencies (to de-monetise their debt and stimulate their export sectors) will translate into “higher values” for hard assets and companies with well-diversified and robust cash flows.

‘Robust share prices have narrowed the investable opportunity set, and business activity levels continue to be muted with many sectors reporting evidence of a deteriorating operating environment.

‘The re-rating of many companies’ share prices may be due to the (not immaterial) impact of a lower cost of money environment and the resulting positive effect on long duration assets (particularly off a low base) rather than the improvement in the outlook for revenues and earnings.’

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