Tiptoeing around time bomb sectors


by Carolyn Herbert

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, it’s nice to be here.

Lelde Smits: The Fund is in the business of preserving capital and making money. How do you deliver this objective day to day?

Rhett Kessler: It’s not an easy objective to deliver, particularly in these tough environments; we do it in a number of different ways. First and foremost, we only ever take money out of our cash holdings and buy anything, if we know everything we think we should know about. So we have a saying ‘if we don’t know, we don’t play’ and that permeates everything we do.

Secondly, I think we believe that the devil’s in the detail, so the more work we do the luckier we tend to get. So the harder we work, the luckier we tend to get and this is a constant theme.

Thirdly, we tend towards toilet paper and toothpaste type companies, so things that we can predict with reasonable certainty. And fourthly, we work probably overtime in getting to meet management and assessing their competence. And then I guess the last one has always just being disciplined.

Lelde Smits: Australia’s major reporting season has recently wrapped up. Which stocks performed well for you over the period?

Rhett Kessler: If anything we’ve become more cautious, that’s overall. But in terms of the companies that have done really well for us, companies like CSL Limited (ASX:CSL) and Credit Corp Group Limited (ASX:CCP) to name two. We were fortunate enough that for CSL Limited in particular, its competitors’ results came out earlier and the market was a bit spooked, by how poor they were. We were confident that it actually meant that CSL was doing better, and managed to buy some nice additional holdings at a very, very nice price.

Credit Corp has just been for us the gift that keeps on giving. We started buying around $2.00, management’s very competent, the business model is very solid, the market continues to rate it on a single digit earnings multiple. Yet it continues to pay great dividends and deliver 20 per cent earnings growth every year, for the last four to five years.

Lelde Smits: The Fund holds Telstra Corporation Limited (ASX:TLS). What were your impressions of the company’s latest result and buyback announcement?

Rhett Kessler: It was a good result, both operationally and in terms of the capital management. Operationally the mobile phone business continues to deliver well, monetising its superior business model for shareholders. And the NBN is, I think, plodding along much as expected. On the capital management, I think it was a very fair way to distribute the surplus franking credits, through this capital management buyback, because it shares the benefit of franking credits between those that can benefit from it and those who can’t. The latter happening, because the company is able to buy back the shares at a discount.

Lelde Smits: Last time we spoke you mentioned ResMed (ASX:RMD) and Duet Group (ASX:DUE) as top performers. Have they kept delivering for you?

Rhett Kessler: They absolutely have. Duet Group is one of our largest holdings, has been for a while, and continues to surprise because of management’s ability to do value adding deals for shareholders. ResMed is the global medical devices business that’s dominant in its own sphere. It’s just launched a new product and it’s been very well accepted, and that’s been reflected in the share price as well.

Lelde Smits: What other stocks have been supporting your performance?

Rhett Kessler: Our performance this period has been generated by a wide range of companies. But if I had to call out two, it would probably be National Australia Bank Limited (ASX:NAB) and McMillan Shakespeare Limited (ASX:MMS). So NAB, we took advantage of a very strong performance by the banks in general and NAB in particular, to dispose of our entire holding in NAB. And secondly McMillan Shakespeare, after many negative reports about it actually came through with a wonderful result and was up, probably one of the best performers of the reporting season.

Lelde Smits: Finally Rhett, you mentioned recently that caution is required around several potential time bomb sectors of the market. Could you explain what you mean by this?

Rhett Kessler: I see the world around me in terms of pictures. And in the perfect environment, you’d like to look out across the landscape, or the investible landscape, and see beautiful green meadows with lots of flowers and birds singing away and the sun shining. Unfortunately the current environment’s anything but that, and I almost liken it to a lot of dark and dreary buildings out there that you know, there are time bombs in them waiting to go off. And what that means is you have to tiptoe around not just the buildings, but a very wide area around that. That’s the current environment and that’s why I think we require a lot of caution.

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

Rhett Kessler: Thanks, nice to be here.


Carolyn Herbert

Finance News Network
Carolyn joined FNN in August 2015 as the Head of News and also presented the Market at Midday and the Market Wrap. With more than five years of broadcast journalism experience, Carolyn has worked as a finance anchor on the Sky News Business channel and as an anchor and reporter for ABC News. She is also a qualified corporate lawyer specialising in IPOs, takeovers and mergers and acquisitions.