Transcription of Finance News Network Interview with Pengana Australian Equities Market Neutral Fund, Director of Portfolio Management and Strategy, Phillip BoustridgeLelde Smits: Hello I’m Lelde Smits for the Finance News Network and joining me from the Pengana Australian Equities Market Neutral Fund, is its Director of Portfolio Management and Strategy, Phillip Boustridge. Phillip welcome to FNN.
Phillip Boustridge: Thank you.
Lelde Smits: Phillip could you explain to us, how does a market neutral fund work?
Phillip Boustridge: Well a market neutral fund has no relative risk or what we call, beta exposure. The way that we do that is we have a long portfolio, which is offset with a short portfolio and they’re both the same length. What happens when markets rise, is that the long portfolio typically outperforms but when markets fall, the short portfolio outperforms. And what that does is it protects you from market movements.
Lelde Smits: So how many stocks does the Fund usually hold, both long and short?
Phillip Boustridge: We hold quite a few stocks in our portfolio, so it’s typically around 130 and we have say, 65 long and 65 short. And what we do is we only have 3.5 per cent either long or short, in any one stock. What that does is it controls the risk of the portfolio. So we’re looking for small amounts of consistent return, rather than those one-off big hits.
Lelde Smits: And what is your net long or short exposure typically?
Phillip Boustridge: That’s a good question. We’re a market neutral fund, so essentially our net exposure is very low and on a daily basis, we balance that to plus or minus 50 basis points. So the long and the short portfolios are always the same length. And that’s really important in order to get a true market neutral fund.
Lelde Smits: And Phillip, could you outline some of your largest positions and why they’ve performed so well for the Fund?
Phillip Boustridge: We have a long position in David Jones
(ASX:DJS) that we’ve been building up over a period of time. David Jones is a retailer that has recently reported an increase in earnings and as a result of that, we’ve seen upgrades come through. The Company has also got control of its inventory and its online business is starting to produce revenues.
The Company is also subject to takeover activity with Myers
(ASX:MYR) recently showing an interest in the Company. And what we’ve just seen recently, is the South African group Woolworths (JSE:WHL) come in and make a bid for the Company. And we’ve seen the share price jump 22 per cent, which has been a nice earner for our portfolio.
Lelde Smits: What are some of the most recent additions to the portfolio?
Phillip Boustridge: I can tell you about a short that we’ve been starting to build a position in, and that’s the iron ore producer Atlas Iron
(ASX:AGO). This company is really struggling at this point in time and we’ve seen downgrades coming through. And the underlying company is of poor quality in terms of its balance sheet. It really needs to get the rail and port channels open for it to enable to open up its future development that it’s got. And the big thing with this company is that at this point in time, it’s got negative free cash flows.
Lelde Smits: And are you currently favouring or avoiding stocks from specific sectors, and what is the rationale behind this bias?
Phillip Boustridge: Well we have – we don’t take specific positions in sectors, we always have a short and a long across every sector because as part of our market neutral strategy, we’re also set to neutral. We’re also size neutral for that matter.
Lelde Smits: So how did the Pengana Australian Equities Market Neutral Fund perform over the March quarter and further back?
Phillip Boustridge: Over the March quarter, the Fund has delivered a net return of plus 3.3 per cent. Now that’s higher than the Australian equity markets, but because it’s a market neutral fund, the benchmark really is cash. And that performed 60 basis points over that period of time. If we look back further, the Fund has a net return of 9.9 per cent per annum with a risk of 8.1 per cent. That’s half the risk of the Australian share market and a higher performance, over that period of time.
Lelde Smits: And finally Phillip, could you outline the benefits of your strategy when constructing a portfolio?
Phillip Boustridge: This is a very important point for people to understand. The Fund has no correlation to the Australian share market. And what that means is, when you combine this with your equity market investments, it dramatically reduces the risk of your portfolio. Not only that, when you look at a range of absolute return funds, you even reduce that risk further. So when it comes to portfolio construction, it’s about risk, it’s about return, but it’s also about correlation and what you want are assets that have a low and consistent correlation, over time.
Lelde Smits: Phillip Boustridge, thank you for your insights.
Phillip Boustridge: Thank you.
Ends
