Transcription of Finance News Network Interview with Pengana Australian Equities Fund Senior Portfolio Manager, Rhett Kessler
Lelde Smits: Hello I’m Lelde Smits for the Finance News Network and joining me from Pengana Australian Equities Fund is Senior Portfolio Manager, Rhett Kessler. Rhett welcome back to FNN.
Rhett Kessler: It’s good to be here again.
Lelde Smits: Australia’s half yearly reporting season has just wrapped up. What are some of the major trends you observed?
Rhett Kessler: I think there were two major trends. Firstly, we saw a lot of companies make enormous strides in terms of improving their efficiencies, using the internet or online methodology. And so costs were very well controlled.
Secondly, there’s certainly a very important theme and that’s your Corporate Darwinism is coming to the fore. And by that I mean the strong are getting stronger, based on their very strong balance sheets, their marketing clout and their distribution platforms.
Lelde Smits: We’ve seen a lot of volatility in the market over the past 12 months. How has the Fund performed over this period?
Rhett Kessler: Yes there has been a lot of volatility. However, we pride ourselves on keeping volatility down in the Fund. So while the market’s been bouncing around, up and down on consecutive days, we’ve had quite a smooth ride. It’s interesting, because a lot of new long short hedge fund managers appear to pay rather large school fees, in trying to predict market movements on the short term. And some of them had their faces ripped off, which is a very technical expression in the market. We’ve managed to avoid most of that.
Lelde Smits: I notice your cash level is quite high at the moment. Is this because you’re cautious about valuations or the macro environment?
Rhett Kessler: We don’t try to guess the macro environment at all. We’re very much bottom-up focused, we’re lousy market timers as well. What we think we are good at is measuring the risk return trade-offs, and being disciplined in picking stocks that can preserve capital and make money. A high cash constituent part of our portfolio at the moment represents a paucity of available ideas. And we’re sticking to our discipline and we think we’ll be rewarded, because cash is a great option. It actually earns you a bit of income, not much, but allows you an option to buy value when and if it emerges.
Lelde Smits: What are some of the current investment themes that are shaping some of your portfolio decisions?
Rhett Kessler: There’s several. The bottom line is the major investment theme is find good companies, run by competent management at great prices. And the areas that we’re looking in are varied. So healthcare continues to be a very big area for us, and a subset of that would be the retirement segment of the healthcare industry.
So we all know the Baby Boomers are heading to retirement age and the pointy end of healthcare spend. And as the first ones start to reach that area, we expect companies in that sector to take off in terms of profitability. So we’re well positioned there. Secondly, we’ve been quite focused on non-Aussie dollar earning streams and that’s worked for us exceptionally well - CSL Limited (ASX:CSL), ResMed (ASX:RMD), even Fox.
Lelde Smits: Your mandate has a focus on capital preservation and downside risk protection. How is your current portfolio positioning reflecting this?
Rhett Kessler: There are three ways that we’ve adopted in order to achieve this. First and foremost we’ve maintained our discipline, only investing in companies that can preserve capital and make a fair return for us. And when we haven’t found those opportunities, we’ve stuck to cash. 30 per cent in cash as we mentioned earlier, is a big number for us. Secondly, where we have bought companies, we’ve ensured that they’re focused in defensive industries, where there’s a high degree of recurring revenues that are quite safe and predictable.
Thirdly, we went through quite a big patch about a month ago, where the market was extremely optimistic about the future. We found that valuations were generally very high and the risk associated with those valuations, as priced by the market, were quite low. That was a perfect opportunity for us to buy a substantial amount of puts on the market. We buy six-month puts, five per cent out of the money, and that’s for us an insurance premium.
We hope and pray that we can tear them up as worthless, because if you insure your house against fire, actually the last thing you want to do is claim on that insurance policy. But it does help you sleep at night, because you have protection if, God forbid, valuations do drop sharply.
Lelde Smits: Rhett Kessler, thank you for the update from Pengana Australian Equities Fund.
Rhett Kessler: Thank you.