Transcription of Finance News Network Interview with Pengana Australian Equities Fund Senior Portfolio Manager, Rhett KesslerLelde 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: Thank you, it’s nice to be here.
Lelde Smits: Pengana Australian Equities Fund is focused on capital preservation and fair returns. Can you detail your strategy?
Rhett Kessler: Right, so we aim where we investigate companies to have a sufficient margin of safety, so that we can always preserve the capital while at the same time, generating a reasonable return for investors. Now a reasonable return is six per cent above the risk free rate, so that they can be compensated for the additional risk of taking equities on board.
Lelde Smits: So Rhett, can you outline which factors equate to an attractive stock for the Fund and which stocks do you actively avoid?
Rhett Kessler: Sure, so that’s the heart of our investment process. So what we like to do is look for three things and I think most people look for those. Firstly we like to buy good businesses, run by competent management and they must be at the right price. And the way we define a good business is it’s got to be transparent, so we have to be able to understand it. It’s got to be predictable and the company itself has to have power over its stakeholders.
Secondly, management needs to be competent in the areas required in that industry or specific company. And we have to make sure they don’t stand between us and the cash flows of that business. And then thirdly, our after tax cash earnings yield is our definitive, it’s our definition of the right price. So if we can buy something that yields us six per cent now after tax cash earnings yield, not dividend, growing to 12 per cent to 15 per cent in five years. That’s good for us.
Lelde Smits: Looking closer at some stocks, could you list some of your best performing positions and explain how they contributed to the Fund over the past six months?
Rhett Kessler: Sure, one of our best performing stocks was Woolworths Limited
(ASX:WOW). At a time when everybody was consumed by the fact that (a) it wasn’t performing as well as Coles, (b) it had this loss making start-up called Masters, we focused on the main game in that its food and liquor business was making really good returns for shareholders. And because of the aforementioned concerns, we could buy it at the right price. Great business, great management, right price and pounce we did and our investment thesis has been proved out - and the company’s made a tonne of money for us.
Lelde Smits: How have you adjusted your portfolio following the reporting season just gone?
Rhett Kessler: We’re constantly adjusting the portfolio. Reporting season is a high volume time for new information. One of our really insightful views was that one of the market darlings that we held, SEEK Limited
(ASX:SEK) came out with a spectacular result. That not only confounded the bulls of the market on that stock, but effectively it created real issues for some of the bears who were shorted. As a result, the company raced through our price target, substantially, and we took advantage. Even though we love the company, we love the management; we couldn’t hold it at that price. So we disposed of it at a very healthy profit.
Lelde Smits: What is your largest position and have you added to it recently?
Rhett Kessler: Our largest position is Duet Group
(ASX:DUE) a very boring utility company, their yields are almost nine per cent with some nice growth. We like that, we like boring particularly when it’s very profitable boring. The company had a rights issue at a lower level when they did yet another great ancillary deal. We took up full rights on that, the company’s success was recognised and so our position became too big, and we trended slightly. And that’s just the concentricity that happens in a real life portfolio.
Lelde Smits: Finally Rhett, the benchmark index on the Australian share market gained 15 per cent over last year. What is your forecast for this year and how will it impact the Pengana Australian Equities Fund?
Rhett Kessler: So we try not to get caught up in what the market’s going to do. The market for us is a tail wind or a head wind. At the end of the day, we own real companies and we have to live or die by the returns we get from those companies. It’s exceptionally hard to pay school fees at a relative returns, I should know I’ve got four kids at private school. So we don’t try to predict the market, we only buy companies that can preserve capital and generate that risk free rate, plus six per cent. So we’re always aiming for around ten per cent and we think that’s definitely achievable this year.
Lelde Smits: Rhett Kessler, thank you for your insights.
Rhett Kessler: Thank you, nice to be here.
Ends
