September, 2023
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.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/monthly-30-09-2023-penaec.pdfAugust, 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.
File:July, 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.
File:June, 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.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/202678640.pdfApril, 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%.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/200499352.pdfFebruary, 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.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/198553290.pdfOctober, 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.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/193086312.pdfAugust, 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.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/190936781.pdfJuly, 2022
The Pengana Australian Equities Fund enjoyed a strong start to the new financial year, generating a +6.4% return in July. By way of comparison, the (annual) return of the RBA cash rate plus 6% equated to approximately +0.5% for the month, whilst the Australian stock market grew by 6.3%.
Despite the strong equity market momentum, we continue to see reasons for caution. The risks that we have been discussing for some time now – rising inflation, rising interest rates globally, the withdrawal of stimulus and money supply, geopolitical tensions in Europe and more recently, resurfacing questions of systemic risk in China – continue to present a difficult environment for protecting capital and making money.
We are also about to enter the reporting season for most companies’ fiscal 2022 year results, a period where will be looking to test and validate our investment thesis for each of our holdings.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/189909751.pdfMay, 2022
The Fund generated a -3.0% return in the month of May. By way of comparison, the (annual) return of the ‘RBA cash rate +6%’ equated to approximately +0.5% for the month, whilst the Australian stock market declined by -3.1% over the month.
Global Inflation continues its upward march. We believe domestic inflation is likely to experience further upward pressure, with wage growth just starting to emerge, energy prices likely to accelerate and retailers talking of the need for price points to go up. Central banks continue to pursue hiking policies in an attempt to reign in escalating inflation, whilst withdrawing quantitative easing measures. The cost of money is going up at the same time as the availability of money is going down.
For the first time in several months the ASX underperformed global peers during the month of May, with the S&P 500 holding broadly flat, whilst Asian and European markets mostly generated positive returns. With the exception of the Materials sector (+0.1%), all ASX sectors trended lower, led by Real Estate, Technology and Staples. Global Inflation continues its upward march – with the May release for the annual inflation rate in the US once again printing ahead of expectations at 8.3%, whilst CPI in Australia accelerated to 5.1% for the 12 months to March. We believe domestic inflation is likely to experience further upward pressure, with wage growth just starting to emerge, energy prices likely to accelerate and retailers talking of the need for price points to go up. Central banks continue to pursue hiking policies in an attempt to reign in the escalating inflation, with the RBA this week increasing rates by 50bps, the largest single hike for more than 20 years, following its first hike for this cycle in early May.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/188011517.pdfApril, 2022
The Fund generated a -0.6% return in the month of April. By way of comparison, the (annual) return of the RBA cash rate + 6% equated to approximately +0.5% for the month, whilst the Australian stock market declined by -0.8%.
The Australian market continued its year-to-date outperformance globally, with MSCI World falling 8% (in USD). We note that given the weakening of the Australian Dollar through the month, in USD the ASX declined approximately 6% during April, closer to the average of its global index peers. The Tech unwind continued to be a major factor in the domestic market in April, whilst Materials – a meaningful positive contributor to the ASX performance year to date, also contributed negatively in the month. The ASX performance was driven in particular by a positive contribution from Utilities (+9%), as well as Industrials and Staples.
Evidence supporting our concerns of rising inflation and an inflection point in the interest rate cycle continues to accumulate. Inflation has accelerated faster than most had expected, with March CPI reaching 5.1%. Given ongoing supply disruptions we see scope for further increases in the inflation rate before normalising towards the RBA’s targeted range. In order to achieve that goal, the Reserve Bank raised interest rates for the first time in more than a decade at their recent May meeting. Whilst absolute rates remain low, the inflection point in the cycle we believe is of more significance and we share the markets expectation for several more increases to follow.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/187078346.pdfFebruary, 2022
The Fund generated a +1.3% return in the month of February. By way of comparison, the (annual) return of the RBA cash rate + 6% equated to approximately +0.5% for the month, whilst the Australian stock market grew by +1.7% over the month.
We are pleased to report that, for the vast majority of the Fund’s holdings, February was a successful reporting season, providing validation almost across the board for our respective investment theses. Our broad conclusions from reporting season are as follows: firstly, underlying earnings remain strong, secondly the resulting cash flow impost is high, and finally the assessment of risk for predicting cash flows is going up, placing medium term pressure on market valuations.
The Australian market was a standout performer globally in February, with all other global benchmarks experiencing substantial declines (S&P 500 -3.1%, EU -2.8%). The main drivers of this outperformance were a generally positive 1H22 reporting season, as well as an increasingly dominant resource weighting in the index, whose constituents benefited in particular from accelerating commodity prices throughout the month. The materials sector alone contributed around 1.3% to the market’s performance or >75% of the market’s total 1.7% in the month.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/184841311.pdfJanuary, 2022
In January, the concerns that we have been expressing regarding non-transitory inflation and an inflection point in the interest rate cycle, unfortunately, came to fruition, and the subsequent share price correction was broad-based and indiscriminate.
We are confident in the positioning of the portfolio, being concentrated in high-quality, resilient businesses capable of navigating and even thriving in this anticipated difficult environment. The underlying after-tax cash yield of the portfolio is now tracking at approximately 7.5% – one of the highest levels that we have experienced, and representing strong value in our view. We have added to positions selectively during January at attractive prices and are anticipating a positive February reporting season as our companies demonstrate their resilience and underlying value with actual results – with early reporting from Credit Corp, Amcor, James Hardie, and Resmed already providing good examples. The portfolio is in very good shape.
The Fund generated a -6.7% return in the month of January. By way of comparison, the (annual) return of the RBA cash rate + 6% equated to approximately +0.5% for the month, whilst the Australian stock market similarly declined by -6.6% over the month.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/183910343.pdfDecember, 2021
The Fund generated a positive return of 1.0% during December capping off a credible 12.4% return for the calendar year and comfortably exceeding its targeted return. By way of comparison, equity markets remained exuberant with a return by the Australian equity market of 2.5% and 16.5% for the 1 month and year respectively, highlighting our conservative positioning which, in hindsight, may have been too cautious. In particular, our Put Options position provided the ability to hold more equities with confidence but were not without a cost. We do not regret this investment and regard them as a useful tool in achieving our target of consistent returns.
We remain focussed on walking the tightrope between preserving capital and generating a return in an investment environment dominated by growth at any price, lofty valuations and what appears to be an overly sanguine view on the outlook for both inflation and interest rates. For some time we have shared our view on the likely impact of higher interest rates on the back of sharply higher inflation percolating its way through global economies.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/182654822.pdfNovember, 2021
The Fund generated a -0.6% return in the month of November. By way of comparison, the (annual) return of the RBA cash rate + 6% equated to approximately +0.5% for the month, whilst the Australian stock market fell for the third month in a row, by -0.3% in November.
Volatility appears to have returned as the market digests what we describe as a potent mix of i) highly inflated asset prices; ii) enormous stimulus coming to an end; iii) supply constraints and resulting inflation, partially offset by iv) record levels of household savings rates. Furthermore, investor “twitchiness” continues to escalate, particularly in tech names, cryptocurrencies and meme stocks. In response we have been focusing our attention on the underlying drivers of the cash flows within the portfolio and identifying where exposures and opportunities exist in light of these market factors.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/181789413.pdfSeptember, 2021
The Fund generated a robust 2.8% return for the September 2021 quarter, against a market return of 2.1% (ASX Accumulation All Ordinaries Index) and our targeted return (RBA Cash rate +6% annually) of 1.5% for the quarter. Several of the Fund’s larger holdings exhibited strong share price growth including Telstra, Aristocrat, Resmed, and NAB.
The Fund also benefited from strong contributions from Smart Group (takeover offer), Ryman Healthcare in NZ, and Medibank. The main detractors in the quarter were confined to Evolution Mining and Accent Group (the latter in particular has rebounded strongly in October), as well as miners Fortescue and Rio Tinto following the correction in iron ore prices.
We continue to be somewhat surprised that the Fund has performed as well as it has over the quarter. As we have commented previously, we believe protecting capital and generating a sufficient return in this environment is nontrivial. A key element of our capital preservation tool kit has always been the option to remain in cash, however, we find ourselves increasingly drawing on other elements such as put options, exposure to gold/utilities, and an even stronger overall bias towards defensively characterised business models.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/180244704.pdfAugust, 2021
The Fund performed well in August, generating a strong return of +3%. The Australian stock market continued its year-to-date gains with a +2.6% return for the month.
August was dominated by ‘reporting’ season, a time of the year which we characterise as a ‘firehose’ of information relative to the ‘trickle’ throughout the rest of the year. It is a time where we typically look to assess milestones and/ or validate our investment thesis across the portfolio. Whilst that remains difficult in the current environment of ongoing COVID lockdowns (making it difficult to assess the ‘underlying’ state of affairs), there continues to be winners and losers, with our long term focus on good businesses, run by competent management teams, by and large continuing to keep us on the right side of that equation.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/178714105.pdfJuly, 2021
The Australian stock market followed up a strong performance in FY21 with a 1.1% gain in July. The Pengana Australian Equities Fund returned 0.3%.
We are entering the reporting season for most companies’ fiscal 2021 year results. Until recently, investors were hoping to get an insight into what the ‘new normal’ would look like, however with the extension of lockdowns and multiple covid waves continuing to play out, ‘normal’ gets kicked further down the road.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/176281975.pdfJune, 2021
Since inception thirteen years ago, the Fund has averaged 10.2% pa return after all fees and charges. By way of context, the Australian share market and Cash rates averaged 7.1% pa and 2.5% pa over the same period respectively.
It has been a tumultuous 13 years, punctuated by many “once in a life time events” including: the Global Financial Crisis, Central Bank Quantitative Easing (QE), versions 1, 2 and 3, the Greek banking crisis, the bond market Taper Tantrum, Brexit, the Trump presidency, a Flash Crash, and most recently a global pandemic. Paradoxically the latter event resulted in massive government stimulus that injected liquidity into financial markets helping them recover from pandemic lows and reach new heights. The Fund generated a robust return for unit holders of 27.7% over the financial year ending June 2021. We were particularly pleased given the conservative setting of the Fund as well our ability to minimize the drawdown during the prior year’s Covid induced negative performance, the first negative year in the Fund’s history.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/175092062.pdfMay, 2021
For some time our commentary in this monthly newsletter has been dominated by a few of the more pertinent concerns and opportunities facing investors. While we remain focused on preserving the purchasing power of the Fund entrusted to our stewardship in an environment that can best be characterised by rampant excess liquidity, pervasive FOMO, and the limited availability of safe havens for capital, we decided to focus on the underlying investment fundamentals of one of our larger holdings.
Super Retail Group (SUL) has been a clear beneficiary of the Covid Pandemic, decisively raising capital to secure the balance sheet, successfully converting limitations on international travel and government stimulus windfalls into strong near term earnings and, beyond that, re-investing in strengthening their sustainable competitive advantages at the group level.
With international borders closed, the consumer has focused their attention on domestic lifestyle options, which has played right into the hands of the group’s portfolio of Auto (car/garage), Rebel (sport), and BCF (domestic leisure/recreation). Importantly, the accelerated shift to online has not, as predicted by some, resulted in a loss of market share or profitability for the Super Retail Group. We have observed for a number of years now that investors appear to have underestimated a significant body of work that began under the previous CEO Peter Birtles and further developed under current CEO Anthony Heraghty to elevate SUL’s omnichannel retail capabilities. As online penetration took a multi-year leap over the past 12 months, the SUL portfolio has thrived, gaining market share and enjoying substantial increases to gross and operating margins along the way.
Furthermore, contrary to the view that the group’s retail store footprint would be a liability in such a market shift, around 95% of all group sales (both online and in-store) continued to be collected in-store, and this remained relatively consistent through the COVID trading. The learning has been that the substantial national store footprint continues to be an asset for the group. We believe this store footprint, superior supply chain capabilities, key customer relationships, and the ability to take large inventory positions (courtesy of the very robust balance sheet), combine to create a portfolio of competitive advantages that should see further market share gains in the medium term.
Despite the strong performance and near term momentum, management is acutely aware of the fact that they are currently ‘over earning’ – and are focused on making the right decisions now to ensure that as conditions ‘normalise’ they can retain as much of the elevated turnover and profitability levels as possible. In other words, normalise to a level above the original pre-covid trajectory. Specifically, they are taking advantage of near-term windfalls to invest in stronger head office capabilities around procurement, pricing intelligence, rostering, property expertise, and more data-led strategies to drive promotional activity. There remain significant opportunities in terms of enhancing and monetising customer loyalty programs and further improvements in omnichannel capabilities. We have discussed each of these topics in some detail with management and are of the view that the group is on track to exit Covid in a much stronger position than it entered it.
Finally, with regards to valuation, despite the strong recent share price performance we view the shares as offering significant value. On an FY23 basis (ie post-Covid earnings) we believe the stock trades on around 13.5x earnings with an almost 9% after tax-free cash flow yield. The Group will almost certainly exit this financial year in a positive net cash position, which will grow larger in the following years given the strong cash-generating nature of the business, suggesting scope for some form of capital management in the medium term.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/173456926.pdfApril, 2021
The Fund’s robust return of 3.6% for March reflected the buoyant conditions present in an Australian economy flush with stimulus-induced liquidity. By way of comparison, the market was up 3.9% as investors continued to search for returns against the backdrop of a 0.1% RBA Cash Rate.
Several important themes remain at work in the domestic economy including:
a) Other than for liquidity purposes and nominal capital preservation, investors are not being rewarded for holding cash or even term deposits. Furthermore traditional safe havens – (particularly government) bonds require investors to lock in negative real interest rates with the added duration risk. Likewise property yields, even geared at low-interest rates, are not that attractive. It’s no wonder that equities look so enticing, particularly given their recent double-digit return contribution from the combination of dividend yields and capital growth. The Fund’s cash holdings, including a 1% investment in hybrids, was 7% at month-end.
PENGANA AUSTRALIAN EQUITIES FUND
b) Goods and services demand remains elevated in a supply constrained environment, which has significant implications for companies with pricing power. Most input costs are seeing upward pressure with timber (or lumber), steel, cotton and freight all exhibiting large (and in some cases unsustainable) price rises. The Fund’s iron ore exposures through Rio and Fortesque have been very profitable investments. We have trimmed these into the very recent strength.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/172052139.pdfNovember, 2020
We are delighted to report that the Fund generated its strongest monthly return since its inception of 10.18% during November. The Australian stock market also had an exceptionally strong November, finishing up 10.16%. Interestingly, the RBA cash rate yielded virtually no return for the month, a potential driver of the robust equity returns given the paucity of yield outside equities.
An important differentiator during November was that we witnessed a sharp reversal in the Growth at any price momentum in favour of fundamental value. For some time our prior newsletters have commented on the increasing bifurcation within equities as the "sexy" tech-driven disrupters to attract the majority of investor attention/funds. This thematic has been compounded by the rise (and rise) of Passive Funds which exaggerate the momentum by rewarding past winners for enlarging their index weightings.
This recent volatility in share prices has provided several opportunities to reallocate capital into more attractively priced opportunities. Examples of the Fund's recent activity include: selling our holdings in New Zealand based Gentailers, Meridian and Contact Energy, as well as Bingo Industries after sharp rallies. We also reduced our holdings in Credit Corp and Aristocrat into strength. We started new holdings in United Malt Group and IAG while also adding to our positions in Super Retail Group, RIO, and Woolworths. We also recently added to our holdings in NAB and ANZ.
Pleasingly our positive contributors included our long held high conviction positions including CreditCorp, NAB, Telstra, Accent Group, and even SG Fleet.
We have also commented that while the temptation to change our methodology has never been greater, we have remained true to our investment process focussed on sustainable after-tax cash earnings yields to preserve capital and generate a reasonable return. It remains our view that a disciplined approach has never been more important, particularly given the siren-like appeal of certain sectors and their accompanying sky-high valuation metrics.
Importantly, after a long period of defensive investing, we are excited about the combination of several positive factors including: Successful navigation of the pandemic by the domestic authorities. The ongoing demand for our commodities particularly the largest — Iron Ore. A particularly well-timed (versus other regions) bumper agricultural season and the surprising net positive impact of a halt in international travel (Australians spend more when traveling abroad than incoming tourists and foreign students). Ultra low-interest rates have renewed confidence in residential property. Stabilising prices and reducing the short/medium term concerns around mortgage and other credit defaults.
We have also noticed that highly skilled ex-pats and other nationals are starting to recognise the attraction of Australia as a more permanent residence.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/162875775_unlocked.pdfticker: PCL0005AU
release_schedule: Monthly
commentary_block: Array
factsheet_url:
https://pengana.com/our-funds/australian-equities-fund/
under
REPORTS AND RESOURCES
asset_class: Domestic Equity
asset_category: Australia Large Blend - Absolute Return
peer_benchmark: Domestic Equity - Absolute Return Index
broad_market_index: ASX Index 200 Index
structure: Managed Fund
manager_contact_details: Array
fund_features:
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.