10 years of successful small cap investing


Transcription of Finance News Network Interview with Pengana Emerging Companies Fund Senior Fund Manager, Steve Black

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, Steve Black. Steve welcome to FNN.

Steve Black: Thank you.

Lelde Smits: Pengana Emerging Companies Fund is focused on small cap companies. So what themes have defined the sector over this year?

Steve Black: Certainly it’s noteworthy that the IPO market has reopened after a prolonged period of hibernation. We’ve seen over 40 IPOs in the industrial space in the last 12 months, and they generally have performed very well over that period. So I think the backlog of IPOs will continue to clear over the coming months.

Lelde Smits: Steve as you mentioned IPOs; could you give us an example of stocks you have invested in and their performance to date?

Steve Black: It’s the end of the IPO market that we are very wary about. These are companies where we haven’t had a lot of meetings with management; we need to recognise the risks are far greater investing in IPO. That said, there has been three or four that have passed our hurdle and they are Veda Group Limited (ASX:VED), which is up a strong 85 per cent on issue price. We haven’t owned all the stock since issue price, we bought a lot on market afterwards, but it’s done well nevertheless.

Burson Automotive (Burson Group Limited ASX:BAP), which is an auto parts distribution business and it’s up 35 per cent on issue price. And Mantra Group Limited (ASX:MTR), which is the hotel management business and it’s up 50 per cent on issue price. So those stocks have done well, not every stock works for you. The one that hasn’t performed to date is Gentrack Group Limited (ASX:GTK). Now that’s a stock that’s down 15 per cent on the price we paid on issue, but we still hold out good hopes for that business longer term.

Lelde Smits: Where have you identified thematic changes that could become investment opportunities?

Steve Black: It’s an interesting question, the financial services sector which we’re certainly very favourably disposed towards, has been underperforming lately. We’ve been taking that as an opportunity to buy more of those stocks into the portfolio. The stocks like Platinum Asset Management, IOOF Holdings Limited (ASX:IFL), Treasury Group Limited (ASX:TRG), HFA Holdings Limited (ASX:HFA). Very good companies trading on PE’s of 14s and 15s, very little debt, paying fully franked dividend yields of five to six per cent in a market, where you get to see a lot of the flows out of TDs back into the stock market. We think they’re the prime beneficiaries of that investor change.

Lelde Smits: Looking closer at the Fund’s performance. How has the Fund performed over the September quarter and over the past year?

Steve Black: Thankfully it’s performed well. Over the last quarter it’s delivered 5.8 per cent after fees. That’s up against a market that’s, well the small ordinaries index is up 1.5 per cent. And then over the last 12 months, it’s up 12.8 per cent against a flat market again after fees. So in arriving at our 10 year anniversary at the end of October, that level of return is somewhat similar to what we’ve generated over the full 10 year duration. So we’re very pleased with that.

Lelde Smits: Over the last quarter, how did your larger shareholdings perform and could you highlight any notable stocks?

Steve Black: Certainly, the last quarter coincided with the reporting season. And it’s a very important time for the portfolio, because share prices tend to respond more to the actual performance of companies delivering results, rather than the mood swings or the sentiment that might be in the market. So two stocks that stand out for me are M2 Telecommunications (M2 Group Limited ASX:MTU), a long standing holding in the Fund and also Veda Group Limited (ASX:VED), which is a recent IPO. Both performed very, very well over that quarter.

Lelde Smits: Finally Steve, after a solid start to the year the benchmark index has pulled back in the second half. What’s your outlook for the year ahead?

Steve Black: Our philosophy in investing is about being fully invested through the cycle. So we’re not about to time market directions, we don’t have a strong view on the market and where it’s headed the next six to 12 months. What we can say though, is that we have a very strong portfolio of 60 stocks where we have been able to pick up these high franchise businesses, at very cheap prices. So we are very excited about the prospects of the companies we own in the portfolio, over the next 12 months.

Lelde Smits: Steve Black, thank you for the update from Pengana Emerging Companies Fund.

Steve Black: No worries at all, thank you.