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Transcription of Finance News Network Interview with Pengana Emerging Companies Fund Senior Fund Manager, Ed Prendergast

Lelde Smits: Hello I’m Lelde Smits for the Finance News Network and joining me from the Pengana Emerging Companies Fund, is Senior Fund Manager, Ed Prendergast. Ed welcome back to FNN.

Ed Prendergast: Thank you, thanks for having us.

Lelde Smits: Pengana Emerging Companies Fund invests in small cap stocks. Which stocks have driven your performance this year?

Ed Prendergast: We had good performance in three of our big holdings, Capital Health Limited (ASX:CAJ), G8 Education Limited (ASX:GEM) and Slater & Gordon Limited (ASX:SGH), all of which were up 90 per cent in the year. And the financial services sector was quite good to us as well. We were heavily invested in Perpetual Limited (ASX:PPT) which rose by 40 per cent, IOOF Holdings Limited (ASX:IFL) and SFG Group.

Lelde Smits: How has the fund performed relative to the benchmark over the quarter and over the past year?

Ed Prendergast: For the June quarter we were down about 2 per cent, the market was down 2.5 per cent. And for the year to June, we were up 19 per cent after all fees and the market was up 13 per cent. And when we say the market, it’s the small ordinaries, the small cap index.

Lelde Smits: The S&P/ASX 200 Index has been climbing higher this year on the back of Wall Street’s records. How does this compare to the small cap end of the market?

Ed Prendergast: The broad market is up about 17 per cent for the year to June, small caps are up about 13 per cent. One of the differences is there’s a lot more cyclical stocks in the small cap sector, and there’s no banks. So the banks have been a strong driver over the large caps.

Lelde Smits: You’ve got about 50 to 60 stocks in your portfolio. Could you give us an example of a strong performer and why you chose to enter that position?

Ed Prendergast: Slater & Gordon is one of our biggest holdings and I guess, as I mentioned before, we like stocks that can grow in any economic environment and it grew at more than 10 per cent through the GFC (Global Financial Crisis). The primary revenue driver is personal injury lawsuits, which doesn’t require consumer confidence or interest rates for that to happen, it’ll happen in any economic environment. And more importantly, they’ve got a very strong brand and they’re taking market share from a lot of the regional law firms through that brand.

Lelde Smits: Recurring revenue is a key feature of the stocks that you own. What might be some stocks that meet this criteria at the moment?

Ed Prendergast: Well recurring revenue comes through - the classic one would be the fund managers, things like Perpetual. If you assume they have the money in their funds to manage for a full year, then they get a daily recurring fee on that. But there are plenty of other stocks that the income may not necessarily be recurring, but it is highly predictable. Things like Austbrokers Holdings Limited (ASX:AUB) which sells insurance to small businesses. Now that’s one bill that small businesses will always pay, it’s not a discretionary item; they won’t choose to pay it in good years and not in bad. So that’s a nice recurring kind of style of revenue.

Lelde Smits: Pengana Emerging Companies Fund has handed back about $90 million to your clients over the past 18 months. Could you explain why?

Ed Prendergast: When we started the fund 10 years ago, we always had a strong focus on keeping the size of the fund to a manageable level. There’s a big trap in small cap investing whereby successful performance attracts attention, a lot of funds. And if you get too big, you simply can’t outperform because you have too big an impact on the share price, as when you get in and out. So our fund size has always been, or the limit of our fund size has always been roughly $500 million which we got to 18 months ago, and sort of closed the fund.

From there we’ve outperformed, so the size of the fund has grown through performance and we’ve given most of that back. And really it’s very important, once you get to a certain level of funds under management and beyond, you actually are not able to look at the smaller end of the market, which is where quite often it’s the best area because they’re the stocks that can rise by the most.

Lelde Smits: What do you believe is an appropriate size for the fund and do you plan to return more funds in the future?

Ed Prendergast: Right now it’s about $580 million, that’s the current size of the fund after the recent distribution. And we think that the right number is about $500-$550 million, so if we keep outperforming, we certainly will be in a position hopefully to return a bit more capital.

Lelde Smits: Finally Ed, what are you feeling most bullish about at the moment?

Ed Prendergast: One of the sectors we like a lot and have a heavy exposure to is financial services. And it really comes back to that idea that finally after five years since the GFC, I think a lot of the scars have healed from investors, and they’re prepared to really open up their investments to riskier areas of the portfolio.

Things like stocks and property and frankly that switch from - term deposits were $200 billion before the GFC, they’re now almost $600 billion and that rise in cash is now getting a bit lazy, and will be redeployed. So things like Perpetual and IOOF Holdings and the financial planning stocks, will see the benefit of that cash as it comes back in.

Lelde Smits: Ed Prendergast, thank you for the update from Pengana Emerging Companies Fund.

Ed Prendergast: Thank you.


Ends

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