Here’s where Pengana has been hunting for returns on the ASX

As featured in the Australian Financial Review. View the original article here.

Anton Du Preez is a deputy chief investment officer and fund manager overseeing Australian equities at Pengana Capital Group. The Sydney-based firm has $3.6 billion in assets under management.

The fund is up 4 per cent in the last month but has lagged the index on longer horizons. What has been driving performance recently, and do you expect those winners have further to run?

Our focus on fundamental cash flow returns is back in favour, and we expect that trend to continue. The reality check from the end of low interest rates was delayed by the artificial intelligence thematic. But that has now been shown to be a capital-intensive pursuit, and the market is again finally focusing on what return that investment can generate.

Our recent strong performance has been driven by companies that lead their industries, have predictable earnings and conservative balance sheets. In June, those names were Aristocrat, Ramsay Healthcare, Amcor, Credit Corp and James Hardie. Over the year it was BHP and Evolution Mining where our conviction comes from them being the lowest cost producers.

The S&P/ASX 200 Index ended the financial year up just 2.8 per cent, well below its long-term average. What are the main challenges affecting Aussie equities-focused active fund managers, and how do they affect your positioning?

The fund is benchmark-unaware: we pick stocks bottom-up, with a strong focus on the cash generation of the business. We usually hold about 30 stocks with little correlation to sector weights, so it’s hard for us to speak for an industry that mostly hugs its benchmark.

That said, the market has become much more volatile, especially around reporting season, where program trades and hedge funds dominate the short-term price reaction. For longer-term investors, that can create good opportunities to capitalise on very short-term mispricings. For us, the opportunities keep coming from high-quality businesses led by proven management teams and supported by resilient cash flows that can perform regardless of the prevailing theme.

National Australia Bank is in the fund’s top holdings: why is that your pick of the big four lenders?

We like NAB for its strong moat in SME lending – this segment can reprice more easily and with less political scrutiny. That said, our holding across the big four is only a fraction of the sector weight because we think valuations are too stretched relative to earnings growth. In addition, mortgage lending returns have been steadily eroded over the past few years due to a highly competitive environment.

Which stocks in your fund is the most undervalued by the market?

Metcash offers good value at 11 times forward price-to-earnings and a nearly 6 per cent dividend yield, driven by strong cash conversion. Both the food and liquor businesses have proved very resilient.

IGA has done a good job of getting more price-competitive with the majors, and the liquor business is well-placed with its convenience offering, rather than competing head-on with big-box stores like Dan’s.

The hardware division should benefit from strong operating leverage once the macro picture improves, and management has been proactive in right-sizing the cost base across the group.

Credit Corp is another company that we think offers value on a seven times forward P/E. Over the past few years, management has strategically pivoted towards personal loans, creating a new growth avenue alongside the mature but highly cash-generative Australian debt-collection business. US debt collection should also contribute meaningfully in coming years, now that the building blocks are in place.

What one piece of advice has influenced your approach to investing?

One of my earliest mentors used to say, “talk is cheap, but money buys the whisky”. In other words, you can talk and analyse all day, but if you don’t allocate capital with real conviction, you’ll never make decent money on a sustainable basis.

Are there any books, podcasts or TV shows that you’d recommend?

The Economist, for its in-depth podcasts across a range of subjects – and a personal weekend favourite is catching up with the Financial Times, especially the Lex column. Anthony Bourdain: Parts Unknown and Kevin McCloud’s Grand Designs are old TV favourites. Regeneration by Rachel Ward is also insightful on how to farm sustainably.

What is your favourite local bar/restaurant?

Alfie’s in the Sydney CBD for the perfect grilled steak and fries. Good wine list as well. Try the bar menu for better value.

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