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Pengana Emerging Companies Fund September 2014 Quarterly Review

The Fund rose 5.8%1 over the September quarter, versus a 1.5%1 rise in the Small Ordinaries Index and a 4.2%1 rise in the Small Industrials Index. For the 12 months to September, the Fund was up 12.4%1, outperforming the Small Ordinaries Index by 12.5%1 and the Small Industrials Index by 8.2%1.
Global equity markets fell away towards the end of the quarter as confidence waned in response to weakening Chinese economic growth, increasing global geopolitical tension and speculation that the US Fed Funds rate would rise earlier than expected. 
The Australian market fell 0.6% over the quarter with the month of September being particularly weak (-5.4%) as investors were spooked by a sharply falling $A and soft iron ore prices. The Small Ordinaries Index performed broadly in line with the overall market but this masked a very weak resource sector. The Small Resources Index slumped 8.6% over the quarter in response to falling commodity prices as the growth outlook dimmed for Europe and China. Of particular note was the iron ore price, crashing to a five-year low as faltering demand out of China coincided with a surge in supply.
The recent fall in the $A against the $US, if sustained, will present a new set of challenges and opportunities for a group of listed companies. Companies importing products from Asia (retailers and wholesalers are the most exposed) will need to quickly increase prices or face the prospect of having to report lower gross profit margins in future periods. Conversely companies that generate earnings dominated in $US stand to benefit as they translate those earnings back into $A. Our portfolio is currently very well positioned in this regard, as we don’t own any traditional retailers or wholesalers but do have good exposure to companies with $US earnings including: Infomedia, Altium, Resmed, Servcorp and GBST.
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