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Pengana Emerging Companies Fund May 2014 Update

During May our fund rose by 1.1%1, outperforming the Small Ordinaries Index by 1.0% and outperforming the Small Industrials Index by 1.3%. Over the twelve months to May, the fund is up 16.6%1, which is 10.4% above the Small Ordinaries and 6.1% above the Small Industrials. 
Global markets rose during May driven by a 2.1% increase in the US market following data confirming a slow recovery in the economy. The domestic market rose 0.6% driven by strength in defensive sectors like telcos, healthcare and utilities. Resources stocks underperformed due to weakness in gold and iron ores prices, while the retail sector fell 4.3% following the tough budget announcement.
We are increasingly concerned about the domestic economy and risk of further downgrades through June. The budget has impacted consumer confidence and, once again, Canberra is a major distraction to the marginal spender. Add to this the extended Easter/Anzac holiday period, and unseasonal warmth on the East Coast during April/May. Feedback from a range of companies of late suggests broader trading conditions have deteriorated from mid-April.
As a reminder, we have minimal exposure to retail stocks and companies heavily relying on corporate spending. In recent weeks we have seen downgrades from Chandler MacLeod (labour hire), and retailers RCG Group (Athlete’s Foot), Noni B, and Super Retail Group, which we believe is a prelude to further negative newsflow.
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