Transcription of Finance News Network Interview with Pengana Global Small Companies Fund, Managed by Lizard Investors Chief Investment Officer, Leah Zell and Co Portfolio Manager, Jon Moog Lelde Smits: Hello I’m Lelde Smits for the Finance News Network and joining me from Lizard Investors are its Chief Investment Officer, Leah Zell and Co Portfolio Manager, Jon Moog.
Pengana Capital is offering investors the opportunity to invest in global small to mid cap companies, through the newly launched Pengana Global Small Companies Fund, managed by Lizard Investors in Chicago. Leah, Jon welcome to Australia.
Leah Zell: Thank you very much.
Jon Moog: Thank you.
Lelde Smits: Firstly Leah, could you start by briefly introducing yourself and detailing your experience?
Leah Zell: My name is Leah Zell. I was one of the pioneers of international small cap investing in the United States, and I have been investing in smaller companies globally for 30 years.
Lelde Smits: And Jon?
Jon Moog: Hi my name’s Jon Moog. I’ve been working with Leah for the last eight years, and I’ve got about 15 years of investment experience in equities.
Lelde Smits: What are the most important things that you’ve learnt about small to mid cap investing over your career?
Leah Zell: That you want to be able to find good investments before they, while they’re still below the institutional radar screen. That there’s a huge opportunity if you have the capacity to do your own work, and that understanding the business model as well as the financials, is key.
Lelde Smits: Jon, how many people are in your investment team?
Jon Moog: Our investment team is made up of five people. The senior investment people are Leah, myself and David Li. The three of us comprise the investment decision makers in the firm.
Lelde Smits: Jon, how do you arrive at consensus when identifying candidates for the portfolio?
Jon Moog: Well generally consensus can be tough to reach, but as long as two to three of us agree we tend to make the investment, so long as it meets all our investment criteria.
Lelde Smits: Jon, how do you define global small to mid-cap stocks?
Jon Moog: For us our sweet spot’s about $500 million, US market capped about $2 billion.
Lelde Smits: Leah, why do you believe they provide a compelling investment case?
Leah Zell: I think that both on the allocation side and on the manager side, capital is concentrated today. And the majority of money is going to Funds that are in excess of $10 billion. That means that the small cap universe is under covered, under followed, under owned. And that gives us a huge structural opportunity that we believe, is going to last for several years.
Lelde Smits: Leah, why are you able to capitalise on these opportunities?
Leah Zell: Because we are organised to invest in small cap equities. I’ve been doing this for 30 years, we’re all generalists, we’re opportunistic, we’re value oriented. People know that this is our expertise; they bring ideas to us. And since we have been operating in this universe, exclusively it means that we are focused to capitalise and to make the most of the great investments, when they show up.
Lelde Smits: Leah, what key factors must a stock exhibit for you to consider buying it?
Leah Zell: We have five criteria that we look at. We look for essentially and basically, most importantly, very good businesses. Businesses that have competitive advantages that have moats and once we find these businesses, they need to have good balance sheets. Management needs to allocate capital and be aligned with us; they need to have good corporate governance. And finally, they need to be at valuations where we can model a 20 per cent compound return.
Lelde Smits: Jon, how do you and your team identify opportunities from around the world?
Jon Moog: That’s something we spend a lot of time working on. I think over the last seven years, we’ve been able to identify and create a mechanism for sourcing ideas that are under followed, unloved, out of favour for a variety of reasons. And we spend a lot of time looking for opportunities that are really below the institutional radar screen.
Lelde Smits: Knowing when to sell is as important as knowing when to buy. What key criteria do you apply when deciding to sell?
Jon Moog: The two criteria used, the first and most simple is, we sell the stock when it appreciates to what we consider fair value and the thesis has played out, as we hoped. The second is slightly different, is when if the thesis is not playing out and the fundamentals of the company differ from what we expected. Oftentimes we’ll sell then because it does not, no longer meets what we originally invested in.
Lelde Smits: Finally Jon, how do you construct a portfolio designed to achieve your objectives?
Jon Moog: We construct a portfolio purely through bottoms up investing. So we invest in individual companies and put together a diverse set of individual companies we’re investing in. And then we manage risk top down. So we look at things like geographic mix, currency exposure and industry exposure, to make sure we are not over exposed to any one of those factors in the portfolio.
Lelde Smits: Thank you Jon and finally Leah, given small to mid-cap stocks are known to be volatile. How do you manage this?
Leah Zell: The first thing you have to do is limit the capital that you manage. And you need to concentrate on a limited number of names,so that you can know them very very well. The second thing you need to do is you need to have conservative criteria, so that you’re not speculating on very very risky names. Ultimately, risk control is at the level of the individual security that you buy.
And finally, you need to look at your portfolio and check for cross correlations, so that there aren’t concentrations of risk that you didn’t anticipate, either sector, geographic or currency.
Lelde Smits: Leah, Jon, thank you for explaining the case for Global Small Companies investing and good luck with the Fund.
Leah Zell: Thank you very much for your time.
Jon Moog: Thank you so much for your time.
Ends
