In search of the gifts that keep on giving

Transcription of Finance News Network Interview with Pengana Australian Equities Fund Senior Portfolio Manager, Rhett Kessler

Lelde Smits: Hello I’m Lelde Smits for the Finance News Network and joining me from the Pengana Australian Equities Fund, is its Senior Portfolio Manager, Rhett Kessler. Rhett, welcome back to FNN.

Rhett Kessler: Thank you, really nice to be here.

Lelde Smits: We have spoken before but for those who have not heard of your Fund, could you outline your investment philosophy and strategy and how you choose stocks that deliver capital preservation and a reasonable return?

Rhett Kessler: The first thing I do every day with my team when we come in, is we take a blank sheet of paper and we say, are there any good deals we can apply cash to today? And the metrics we use for that are essentially we’re looking for gifts that keep on giving; so companies that can generate cash year after year, in a growing way that can feed us.

Lelde Smits: How has your Fund performed over the last three months and 12 months, and which stocks supported this performance?

Rhett Kessler: The Fund has been fairly consistent over the last year. So we’ve done about 2.5 per cent in the last three months and we’ve done about 7.5 per cent over the last 12 months. The stocks that have helped us have been things like DUET Group (ASX:DUE) one of our biggest holdings, ResMed Inc. (ASX:RMD), Telstra Corporation Limited (ASX:TLS), all your boring safe toothpaste and toilet paper type companies.

Lelde Smits: Which stocks detracted from your performance and how have you adjusted your portfolio since?

Rhett Kessler: The areas that have been more problematic have been two stocks, Mermaid Marine Australia Limited (ASX:MRM) has been a problem for us. And we think - we’ve ripped that apart, we’ve had a good look at it and we think we understand what we got wrong. We did get something wrong and we’ve taken steps to fix that. Secondly was Seven West Media Limited (ASX:SWM), it’s a media company generating great cash flows, but old media is out new media is in. And the share price has been affected, but not the earnings, and we think that one will come back nicely.

Lelde Smits: Consumer sentiment took a hit as the Federal Government released its ‘tough budget’. What impact did you observe it had on the market, and how has the Fund responded as a result of the budget’s policies?

Rhett Kessler: Unfortunately the Budget hit consumer sentiment really hard and wallets were left in peoples’ pockets. As a result, now during June one month later than normal, as company management and Boards are looking at management accounts for the end of May, they’re realising that they’re not going to hit their guidance numbers. And so we’ve seen a raft and I think we’ll see more of companies downgrading their earnings. I think it’s a short term thing. So because we knew it was coming, we could predict, we could see it, we’ve steered clear of those areas. And we’re now looking through the carnage to see if there’s anything that’s overreacted, that now represents value over the medium term.

Lelde Smits: As an Australian Equities Manager, where do you look for value when stocks get expensive and currently how much of the Fund is fully invested?

Rhett Kessler: Currently 25 per cent of the portfolio is in cash, which is quite high for us. And that’s an outcome from there being a lot of expensive companies out there; we think valuations are fairly full. There’s always pockets of value and hence we’ve got 75 per cent invested, so there’s a combination. Firstly there’s still some very high quality companies that we’ve always liked, that we think represent good value. So ResMed, DUET is still good, Seven West Media as we’ve spoken about. But then you also get companies which are, probably in the short term, will do it a bit tough as we’ve mentioned because of the short term consumer sentiment, but have been sold off to a position where we think we can make good money out of them. And those are some of your discretionary retailers like Super Cheap Auto Group Limited (ASX:SUL) and even RCG Group Limited (ASX:RCG).

Lelde Smits: What are some of your top stock holdings at the moment and why do you like them?

Rhett Kessler: Two companies we like, firstly ResMed. As people know, this is a sleep apnoea medical device business with a globally dominant position across many economies, and we like their diversification. It’s also economically insensitive and it’s not exposed to the Aussie dollar so much in terms of, if the Aussie dollar goes down we’re going to make a lot of money out of holding ResMed Incorporated.

Secondly, Tatts Group Limited (ASX:TTS), this is really interesting. Its main business of 70 cents in every dollar that you put into Tatts is the National Lottery Business. Now while the consumers doing it tough, and we expect them not to have a great year, for a lottery business not a great year means instead of being up three per cent, it might only be up one per cent. And every year it just ticks over nice cash business and at quite a nice price. And so as you can see, we’re buying gifts that keep on giving.

Lelde Smits: Rhett Kessler, thank you for the update from Pengana Australian Equities Fund.

Rhett Kessler: Thank you, nice to be here.


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