Transcription of Finance News Network Interview with Pengana Global Resources Fund, Portfolio Manager, Tim Schroeders.Donna Sawyer: Hello I’m Donna Sawyer from the Finance News Network and joining me from Pengana Global Resources Fund is Portfolio Manager, Tim Schroeders. Tim welcome to FNN.
Tim Schroeders: Pleasure to be here Donna.
Donna Sawyer: The Pengana Global Resources Fund offers exposure to a portfolio of globally listed resource sector companies. Why should
investors look at including an exposure to global resources, as part of a portfolio?
Tim Schroeders: In a portfolio context, resources provide good diversification and can actually lower risk in a balanced portfolio. And whilst it’s fashionable at the moment for investors to seek yield at the exclusion of capital appreciation, those trends do change over time. And resources globally are a significant part of the overall economy, and particularly significant in leveraging to emerging economic growth. So they do provide good balancing in an overall portfolio.
Donna Sawyer: So what is your investment philosophy?
Tim Schroeders: Our philosophy is ostensibly the same as many other managers. We’re seeking superior returns over a medium term time frame. However, what we do do differently is we use a different investment process, marrying top down and bottom up processes in seeking to create a portfolio that’s more robust, with lower risk. And importantly, uses tools such as shorting capabilities and pairs to mitigate risk and hold onto gains once those gains are secured, as opposed to giving them back with the fluctuations in the market.
Donna Sawyer: Pengana Global Resources Fund has a fairly rigorous selection process. Tell me about your investment strategy and screening process?
Tim Schroeders: Our strategy is really one of making sure that we stick to a disciplined process in assessing investments, and valuing them appropriately. But also understanding the changing nature of markets and what investors are rewarding. And that does change significantly through an economic cycle. What we do do well is being able to use both long and short components and also, that’s very valuable in terms of we get more bang for our buck out of our valuation process. So we’re not only trying to pick the best potential returning companies, but we’re also able to utilise those that have poor return characteristics, by shorting them in our portfolio as we see fit.
Donna Sawyer: So what do you look for when investing in a good resource sector company?
Tim Schroeders: Typically the generic answer to such a question is low on the cost curve, a tier one asset, long life in terms of reserves and a good balance sheet behind that company. And some sort of production differentiation. In reality, the missing ingredient is the value around that. Is it appropriately priced in the market, was there something else that we seek or see in the value that’s not apparent to the rest of the market? Therein lays the challenge in setting a portfolio. Some of those companies have those broad characteristics, but they’re either fully priced at some points in the cycle, or overpriced. And we can adjust accordingly in terms of being long those stocks or in fact short, if we see there’s an opportunity where the market’s got overly exuberant in pricing those stocks.
Donna Sawyer: Are there any types of resource sector stocks that the Fund won’t invest in?
Tim Schroeders: I think we’re very cautious in terms of small cap explorers and developers. There is a point in the cycle where you can invest in those, but generally with no cash flow. They’re not things that you can value accurately. As a mandated change within the way we structure our portfolios, we don’t invest in small capitalised stocks offshore, because we don’t get the access to management that we do domestically. And we believe management is such a critical factor in investing in that part of the market.
Donna Sawyer: Aside from volatility, what are some of the key risks you’re considering right now?
Tim Schroeders: I think the context of risk is important, and what we’ve seen is excess capacity built up in the global economy, up until the Global Financial Crisis. That’s taken some time to work through and we’re part the way through that process at the moment. Equity markets have been volatile, resources in particular. China’s a significant risk for us in terms of Australia produces three key commodity exports being iron ore, coal and natural gas. Those exports go to three key customers in China, Japan and South Korea.
It’s a very concentrated pool of commodities going to a few customers. Any of those customers have economic woes or hit speed bumps, we’re vulnerable. That’s why being a global manager, we have a broader context, we’re able to invest in commodities in a broader sense and not be exposed to two or three key components. And hopefully mitigate against some of those risks, which are becoming more apparent day by day.
Donna Sawyer: That leads me to the next question about performance. Pengana Global Resources Fund’s objective is to capture strong
participation to the upside of global resource market movements, while limiting downside exposure. Have you achieved that over the life of the Fund?
Tim Schroeders: Since we incepted the Fund in March 2007, the Fund’s average return per annum has exceeded six per cent, against the backdrop where our composite index has actually fallen over four per cent, per annum. So overall we’re very pleased. It would have been nicer to have a little more of a tail wind admittedly. But generally speaking, the objective of participating the upside whilst limiting the downside has been achieved, and we’re very pleased by that.
Donna Sawyer: Finally Tim, what are some of the factors that are likely to impact on your performance this year?
Tim Schroeders: I think we’re going through different iterations in the market at the moment. Commodity prices have been moving lower, expectations and blue sky have been priced out of the resources sector. And the yield portion, yield at any cost play in the market is coming to an end. And I do see a rotation back into resource stocks during the second half of the year. As people become more confident on the US recovery and China’s new leaders provide some new economic stimulus, we’re likely to see that sometime in the second half of this year, with an urbanisation package announced.
Donna Sawyer: Tim Schroeders thanks for the introduction to Pengana Global Resources Fund.
Tim Schroeders: It’s been a great pleasure, thanks Donna.
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