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Pengana Australian Equities Fund
May 2015 Monthly Update
1 of 2
Fund Description
The Pengana Australian Equities Fund aims to enhance and preserve investor wealth over a 5 year period 1 via a concentrated core portfolio of principally listed
Australian securities. The Fund is managed out of Sydney, Australia and uses fundamental research to evaluate investments capable of generating the target return
over the medium term. Essentially we are in the business of seeking to preserve capital and make money – We are not in the business of beating the market.
Since inception of the Fund on the 1st of July 2008 the Fund has generated a return of 12.4%2 p.a., rewarding investors with 8.8%2 p.a. above the Reserve Bank
Cash Rate of 3.6% p.a. and against a backdrop of returns from the Australian All Ordinaries Accumulation Index ("the Share Market") of 5.7% p.a. over the same
period. Importantly the Fund has maintained its track record of capital preservation in Real terms (greater than inflation) in Australian Dollars, in every year since
inception.
The Fund had a strong month closing up 1.1%. By way of comparison the Share Market was up 0.6% and the RBA cash rate remained at record lows
(+0.2%). This is particularly pleasing given the Fund’s defensive positioning.
Fund Features
Application Price at Month
End
A$1.7603
Redemption Price at Month
End
A$1.7516
Style
Fundamental
Current FUM of Fund
A$580m
Investors
Retail & Wholesale Clients
Management Fees
1.025% p.a. of NAV (incl. GST net of RITC)
Benchmark
The average of the daily
target Australian Cash Rate
used by the RBA
Performance Fees
(monthly)
10.25% (including GST, net of RITC) of
the increase in net asset value subject to
the RBA Cash Rate & High Water Mark
Inception Date
1 July 2008
Minimum Initial Investment
A$20,000
Fund Commentary
Fund Performance (A$, net of fees)
1
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
FYTD
2008/9
-1.03%
3.47%
-4.71%
-9.05%
-5.25%
3.94%
0.16%
-1.37%
7.88%
4.40%
2.06%
3.77%
2.98%
2009/10
3.46%
6.06%
3.83%
1.20%
1.03%
2.49%
-3.60%
1.13%
3.56%
-0.24%
-4.04%
-2.48%
12.53%
2010/11
5.06%
1.08%
3.56%
1.82%
-0.14%
3.04%
0.73%
1.48%
0.95%
0.02%
-0.76%
-0.53%
17.39%
2011/12
-3.11%
1.41%
-2.39%
4.69%
-2.45%
0.97%
2.85%
3.65%
4.24%
0.73%
-1.06%
-1.15%
8.28%
2012/13
2.88%
2.47%
0.22%
2.42%
2.78%
1.77%
5.23%
4.45%
0.04%
3.51%
-1.31%
-2.50%
23.96%
2013/14
1.99%
2.27%
1.38%
2.29%
-1.16%
1.27%
-1.96%
1.45%
-0.42%
1.24%
1.51%
-0.97%
2014/15
1.86%
1.54%
-2.40%
2.50%
0.02%
1.36%
2.61%
3.96%
1.34%
-1.65%
1.12%
9.14%
12.78%
As at 31st May 2015, cash represented 24% of the Fund. Whilst this is a high cash level it does not represent an attempt to predict a market
correction. It is an indication of the paucity of attractively priced investment opportunities currently available. Cash is a valuable, low risk,
income producing option to take advantage of future opportunities.
The top five holdings by value were: ANZ Bank, Caltex, Resmed, DUET Group and Telstra. The Fund’s largest positive contributors to the
month’s performance consisted of RCG Group, Donaco International, Super Retail Group and JB Hi-Fi. The largest detractors included Caltex,
Resmed and ANZ Bank.
The Fund’s material activities for the month included: (i) topping up its holdings in Crown, ANZ and Resmed; (ii) trimming its exposure in
DUET at an attractive price. As at the 31st of May 2015, the Fund’s exposure to non-Australian dollar earnings streams (inclusive of companies
with global earnings profiles such as Resmed, Fox Group, CSL, Crown Resorts, Rio Tinto, NZ based companies net of the forex hedge) stood
at 21%.
Net Returns to 31st May 20152
AEF
Cash
Rate
All
Ords
Std
Dev
Sharpe
Ratio
1 Month
1.1%
0.2%
0.6%
N/A
N/A
3 Months
0.8%
0.5%
-0.9%
N/A
N/A
6 Months
9.0%
1.1%
11.3%
N/A
N/A
11.7%
2.4%
10.1%
6.5
1.43
2 Years annualised
9.6%
2.5%
13.1%
6.0%
1.18
3 Years annualised
14.7%
2.7%
16.7%
6.7%
1.80
5 Years annualised
13.6%
3.4%
10.0%
7.2%
1.41
Since inception p.a.
12.4%
3.6%
5.7%
9.5%
0.92
1 Year
1
This is not intended to be a forecast but merely an indication of what the Fund aims to achieve. The Fund may not be successful in meeting this objective. Returns are not guaranteed.
2
Total return performance figures are derived from Managers’ records and are shown after all fees and expenses, and assume reinvestment of distributions. Investments can go up and down. Past performance is not a reliable indicator of future
performance. Inception date: 1 July 2008.
Pengana Capital Ltd (ABN 30 103 800 568, Australian financial services license number 226566) is the issuer of units in the Pengana Australian Equities Fund
(ARSN 146 346 929) (the “Fund”). A product disclosure statement for the Fund is available and can be obtained from our distribution team. A person should
obtain a copy of the product disclosure statement and should consider the product disclosure statement carefully before deciding whether to acquire, or to
continue to hold, or making any other decision in respect of, the units in the Fund. This report was prepared by Pengana Capital Ltd and does not contain any
investment recommendation or investment advice. This report has been prepared without taking account of any person’s objectives, financial situation or needs.
Therefore, before acting on any information contained within this report a person should consider the appropriateness of the information, having regard to their
objectives, financial situation and needs. Neither Pengana Capital Ltd nor its related entities, directors or officers guarantees the performance of, or the repayment
of capital or income invested in, the Fund.
Pengana Australian Equities Fund
May 2015 Monthly Update
2 of 2
Investment Commentary
The ASX200 ended the month largely unchanged on both an accumulation (+0.4%) and price (-0.2%) basis. Sector performance
was weakest in Banks (-3.2%) and Consumer Staples (-2.2%). Both Woolworths and Wesfarmers/Coles held investor days in May,
with the former acknowledging that investment in price and in-store service is required – investors interpreted the price
commentary as a signal of a price war, which resulted in the weak share price performance. Outperforming sectors included REITS
(+2.9%), Healthcare (+2.4%), Materials (+2.2%) and Consumer Discretionary stocks (+1.7%). Global market performances were
mixed, with the MSCI World Index ending the month up 0.1% and the S&P500 eking out a small gain of 1%. European stocks slid
1.2% as fears over Greece’s potential default escalated as its first IMF payments deadline drew near. Volatile trading was a feature
of the Shanghai Index, which recorded its largest one-day loss of 6.5% after margin lending rules were tightened – despite this the
market ended up 3.8%.
Benchmark spot iron ore prices posted another strong month of gains, ending May up 10.1%, due to expectations of further
stimulus from the Chinese government as the PBOC reduced benchmark interest rates for a third time in six months. The RBA acted
in chorus and reduced its policy rate by 25 bps to a record low of 2.0%.
As mentioned numerous times before, the core investment philosophy of the Fund is based on two main premises, (i) preserve
capital and (ii) generate a sustainable and sensible return to investors that is cognisant of the risk/return relationship. Both of
these key premises are illustrated below as well as how we have implemented these beliefs on a practical level.
Our preservation of capital mantra is implemented through numerous strategies, including: (i) maintain a margin of safety in our
stock selection – this could be a valuation buffer or conservative modelling assumptions. Crown Resorts is a good example that is
discussed below; (ii) invest in cash when we can’t identify stocks that fit our investment requirements – demonstrated by cash
currently representing 24% of the Fund; (iii) use of insurance – when our fundamental, bottom-up analysis indicates that the
market is expensive we buy put options to limit the downside risk, or in simple terms, to “let us sleep at night”. It is critical to
note that we do not trade put options and we usually hold them to maturity. Importantly, at initiation of a put option we “expense
the premium costs” and if they mature out of the money it was a good outcome for the Fund because over the option’s life we had
insurance that covered for material downturns.
Crown Resorts Limited (“Crown”) is one of the Fund’s largest positions accounting for 4% of the Fund. Crown has two key parts:
(i) Australian operations, which comprises around 70% of our valuation; (ii) Crown’s share in Melco Crown Entertainment (MPEL),
which is the remaining 30%.
Crown’s domestic operations comprise a portfolio of high quality integrated resort assets in Melbourne and Perth, with long dated
monopoly casino licences that continue to generate resilient profits and cash flows. These properties are benefiting from recent
substantial capital expenditure programs and favourable licence updates. We regard this as evidence of the balance of power
Crown’s resorts enjoy due to their importance to their respective state economies. At the current share price of $12.70 these
properties generate an implied 11% prospective cash yield, which is funding a substantial medium-term growth agenda for the
portfolio.
MPEL has seen a rebasing of profits as a result of its primary footprint in Macau, which is undergoing a structural change, primarily
driven by a government crack-down on corruption. Whilst on-going profits and cash flows will be lower in absolute terms, we think
they will be higher quality and more sustainable. Furthermore, MPEL is diversifying its Macau exposure and recently opened a
property in Manilla which is capturing a large amount of gaming growth in the region. We are conservative in our forecasts for MPEL,
and within our Crown valuation, we value MPEL shares at circa US$7 per share, which is less than half their current market value.
Even at such a discount, we believe Crown shares remain considerably undervalued.
We remain focussed on acquiring and holding investments that offer predictable, sustainable and well stewarded after tax cash
earnings yields in excess of 6% that will grow to double digit levels as a percentage of our original entry price in five years. We
believe that building a well-diversified portfolio of these “gifts that keep on giving” represents a meaningful way to create and
preserve financial independence for our co-investors.
Those interested in a more detailed discussion of the Fund’s investment philosophy are referred to the “Resources” section of the
Fund’s website. There are several video clips discussing individual investment topics: www.pengana.com/resources/videos.
Contact Details
Pengana Capital Limited ▪ Level 12, 167 Macquarie Street, Sydney, NSW 2000, Australia ▪ T +61 2 8524 9900 ▪ F +61 2 8524 9901
ABN 30 103 800 568, AFSL 226566
For further information, please visit our website at www.pengana.com or contact:
Private Clients:
Jacqueline Shnier +61 2 8524 9918 jacqueline.shnier@pengana.com
Advisors:
Damian Crowley NSW/QLD +61 2 8524 9970 damian.crowley@pengana.com
Rebecca Morgan VIC/TAS/SA/WA +61 3 8663 7906 rebecca.morgan@pengana.com
Pengana Capital Ltd (ABN 30 103 800 568, Australian financial services license number 226566) is the issuer of units in the Pengana Australian Equities Fund
(ARSN 146 346 929) (the “Fund”). A product disclosure statement for the Fund is available and can be obtained from our distribution team. A person should
obtain a copy of the product disclosure statement and should consider the product disclosure statement carefully before deciding whether to acquire, or to
continue to hold, or making any other decision in respect of, the units in the Fund. This report was prepared by Pengana Capital Ltd and does not contain any
investment recommendation or investment advice. This report has been prepared without taking account of any person’s objectives, financial situation or needs.
Therefore, before acting on any information contained within this report a person should consider the appropriateness of the information, having regard to their
objectives, financial situation and needs. Neither Pengana Capital Ltd nor its related entities, directors or officers guarantees the performance of, or the repayment
of capital or income invested in, the Fund.