Transcript of FNN Interview with Pengana Capital Australian Equities Fund senior portfolio manager Rhett Kessler. Donna Sawyer: Hello I’m Donna Sawyer from the Finance News Network, and joining me from Pengana Capital Australian Equities Fund is senior portfolio manager Rhett Kessler. Rhett, thanks for joining me.
Rhett Kessler: Thanks. It’s nice to be here.
Donna Sawyer: Let’s start by introducing the Pengana Capital Australian Equities Fund. What’s your investment philosophy?
Rhett Kessler: So we have a simple investment philosophy. We are unashamedly in the business of preserving capital and making a fair return for our investors, or our co-investors. We are absolutely not in the business of beating the market or benchmarking ourselves against the market. This implies that we have to know very clearly what kind of returns we are after and we use the risk-free rate as the benchmark; because our investors can put their money in the bank, not take any risk and get a certain return. If we’re going to take our money out of that and put it into shares, we have to generate at least another six per cent to make it worthwhile- taking on the additional risk. So our philosophy is to do six per cent above the risk free rate on a sustainable basis.
Donna Sawyer: What do you think makes a good investment?
Rhett Kessler: A good investment is something that achieves our investment objective; i.e. preserve capital, and makes us a fair return. But they generally have similar characteristics, and there are three things that most fund managers look for. Firstly they have to have a resilient business model, secondly competent management, and thirdly you have to be able to acquire them at the right price. If you accomplish those three, the good investment will be a gift that keeps on giving, i.e. keeps paying its way.
Donna Sawyer: Tell me how you go about identifying Australian company’s as investment opportunities?
Rhett Kessler: So this is what we spend all day doing. My dad often said if you want to get hit by a bus, you have to stand in the middle of a very busy bus lane rather than in a dead end, and findinggood investments and identifying them is much the same; you have to place yourself in the middle of the idea flow. So what we do is position ourselves so we are constantly assessing potential investments, and if we can say no ten times a day and maybe only say yes once a month, we know we are in the idea flow
. Also it takes a lot of hard work, a lot of training, and to be clearly focused on what you’re looking for – i.e. the thing I mentioned earlier; good business, competent management and the right price.
Donna Sawyer: What are the key risks you’re considering at the moment?
Rhett Kessler: The risk that drives us always is two-fold. Our investment risk is how we preserve capital in real terms, and we’re currently debating what that means on a global basis. Particularly because currency moves are quite extreme at the moment. So we manage for Aussie dollar wealth, but at the same time if the Aussie dollar is about to fall, potentially we could preserve global purchasing power by buying non-Aussie dollar earning streams. That’s one of the risks we’re thinking about. The second one is how do we make sure we get the right return? The risk-free rate has been moving around quite a bit, actually coming down, and although that’s provided some momentum to the share market, that’s created exuberance which we think may reverse. Now we don’t typically look at macro levels but these are two very dominant macro themes that we’re worried about, so we’re thinking about them.
Donna Sawyer: What are the main benefits of investing in the Pengana Capital Australian Equities Fund?
Rhett Kessler: We think there are a number of benefits. First of all we think we’ve got a very common sense mandate. And we have found that most of our direct high net-worth investors are much more interested in our mandate of preserving capital and making money, as opposed to beating the market. Also they quite like the fact that when we don’t know or when we can’t find things to help us do that, we are happy to sit in cash. Most equity funds have to be 95 per cent invested at all times, we can be 100 per cent in cash if we can’t find something to buy. Thirdly we’ve got a great track record. We’ve achieved approximately 14 per cent per annum over the last five years, net of all fees and charges to our clients. With a risk free rate of about four per cent, so we’ve achieved our six and over. And we haven’t been helped by the tailwind of an equity market, because the equity market- including dividends- has done about three to four per cent.
Donna Sawyer: Where have you made or lost money over the life of the fund?
Rhett Kessler: Thankyou for the question. So we’ve made money by not losing money, first point. Secondly, the companies where we’ve taken big bets because we’ve been confident the three factors are in alignment have made us money. Companies like DUET Group
(ASX:DUE), McMillan Shakespeare Limited
(ASX:MMS), Woolworths Limited
(ASX:WOW), ANZ Banking Group
(ASX:ANZ), to name a few. Those have been our big winners.
Donna Sawyer: Tell me how you managed to deliver significantly lower volatility than the rest of the market?
Rhett Kessler: First of all, we’re not trying to beat the market; that’s really important. Secondly, if we don’t know then we don’t play. Now my wife made the joke the other day she said, “Rhett of course you should out-perform the market because the market’s made up of all the bad stocks as well as all the good stocks, and you don’t invest in the bad stocks. Now therein lies the trick- not investing in the bad stocks. So I think the way we have kept volatility way is by three ways. First and foremost we do a fortune of work so that we’re very sure when we buy companies. Secondly, if we don’t know, we sit in cash and we’ve had a lot of cash at different times. And thirdly to be honest we’ve been lucky. You always need a bit of luck, they say you make your own luck and the harder we work the luckier we tend to get. But I think every good fund manager needs a bit of luck.
Donna Sawyer: You mentioned before that you have 35 per cent in cash and that’s a lot. What are you doing with that?
Rhett Kessler: That’s a good question because it takes up a lot of our headspace. It’s not good enough just to sit in cash; there are a lot of different options of cash or near cash. So we do a number of things. We put money with in term deposits and because there’s an arbitrage at the moment with banks happy to pay at higher levels- certainly than the RBA cash rate- for retail money, we’re getting quite a nice rate there. Secondly there are quite a few corporate bonds that are about to be redeemed. So we’re talking three to four month paper, and even cases where they’ve already announced they’re going to redeem it; where they’re yielding five or six per cent on a yield to maturity, that gives us a really nice return. So it’s something we constantly look at and we’re constantly trying to do a lot better than the RBA cash rate.
Donna Sawyer: Finally Rhett, what are some of the factors that are likely to impact on your performance this year?
Rhett Kessler: When I think about our performance I think can we preserve capital and make a fair return. The fact that we are looking hard to deploy cash- a lot of cash- means that currently we don’t feel there is that many opportunities. In exuberant times we tend to have a lot of cash because we can’t find the opportunities. So if the market remains at high valuation levels, we may have a return closer to cash. I guess the best-case scenario would be if we have a continuation of this correction, which opens up a lot of opportunities because we have a lot of powder dry, and then we’ll be able to deploy it for good returns for investors.
Donna Sawyer: Rhett Kessler, thankyou for your insights on Pengana Capital Australian Equities Fund.
Rhett Kessler: Thank you very much.
