Pengana International Ethical (HOW0002AU) Report & Performance

• Global share prices strengthened in June as slowing inflation allowed the US Federal Reserve to keep interest rates unchanged, raising hopes that the peak in rates is now close
• The Fund returned 2.5% in June, while the benchmark returned 2.9%. Over the Financial Year, the Fund returned 23.5%, outperforming the benchmark by 3.1%
• Strong stock performance in the information technology and financial sectors supported relative returns in June

Global equity markets made strong gains in June as inflation continued to fall in the US, leading the Federal Reserve to keep interest rates unchanged at 5.00% – 5.25%. The US consumer price index (CPI) fell to 4.0% year-on-year in May, from 4.9% in April.

The US dollar declined by 1.4% against its major trading currencies in June, upon more positive investor sentiment. A stronger Australian dollar reduced fund returns in AUD terms.

Global economic growth continued to moderate, as purchasing managers’ data weakened slightly in the Eurozone while the contraction in US manufacturing new orders eased.

China’s manufacturing activity continued to expand but the broader ‘re-opening’ following the end of the zeroCOVID policy has now slowed. Consumer spending remained sluggish around the important June public holiday, while the property market remains weak. Travel and entertainment sectors continue to support economic activity in the Asia region.

The Fund retains its focus on dynamic growth stocks as positive revisions to earnings per share (EPS) drive outperformance as the economy moves into a period of weaker overall earnings growth. The Fund continues to overweight information technology, consumer discretionary, and health care while underweighting financials, energy, and materials.

Strong stock performance in information technology and financials and an overweight position in consumer discretionary contributed to relative returns. Weak stock performance in consumer discretionary and industrials and an overweight position in health care were the main detractors.

• Global equity markets strengthened in April upon signs of inflation moderating, positive economic data and company earnings which exceeded forecasts
• Australian dollar weakness supported share market returns in AUD terms
• The portfolio returned 0.5% in April, while the benchmark returned 2.8%

Global equity markets strengthened during April upon signs that inflation is moderating, economic data remains fairly stable and that company earnings are exceeding expectations. The MSCI All Country World Index AUD gained 2.8%. The Fund underperformed the benchmark by 2.3% in Australian dollar terms, as value stocks outperformed growth for the first time this year. This was driven by financials rebounding following the underperformance in March.

US inflation continued to trend down, but the US Federal Reserve again raised interest rates by 0.25%, to 4.75% – 5.00%. The US consumer price index (CPI) fell to 5.0% year-on-year in March from 6.0% in February. Economic growth trends remained consistent with those seen in March as purchasing managers’ data improved across the major economies.

During August, the Fund underperformed the benchmark, the MSCI All Country World Index by 1.7%.

Growth-inclined stocks weakened upon expectations that interest rates would need to be higher for longer to bring inflation back under control. Global value stocks outperformed growth by 1.9% in August.

The underperformance of growth companies occurred despite the continued moderation in inflation. The US Core Personal Consumption Expenditure (PCE) Price Index rose 4.6% year-on-year in August, down from the 4.8% July increase.

The more negative market sentiment followed a speech by Federal Reserve (Fed) Chair Jerome Powell at the Federal Reserve’s annual Jackson Hole conference. He detailed the Fed’s plan to slow inflation through higher interest rates, which reflected a willingness to tolerate higher unemployment and slower economic growth.

This shifted market expectations towards a higher peak in interest rates next year and a longer pause before eventual monetary easing. This brought a 0.60% increase in the yield of the interest rate-sensitive two-year US Treasury bond, wider credit spreads and lower equity market valuations.

The Pengana Axiom International Ethical Fund (“Fund”) generated a return of 9.6% in July, outperforming the benchmark, the MSCI All Country World Index (“Index”) by 4.2%.

During July the Fund outperformed the benchmark, the MSCI All Country World Index, by 4.2%. Growth-orientated shares outperformed value stocks, despite expectations that higher interest rates would be needed to address persistently high inflation, and this would negatively impact economic activity levels. While the strong US dollar continues to pressure European and emerging market economies, commodity prices (in USD) continued to fall. The Brent oil price fell 5% month-on-month, while European natural gas prices remained elevated on continued regional geopolitical tensions.

Global economic growth data continued to deteriorate. Data relating to European economic activity deteriorated sharply with June Germany factory orders 9.0% lower year-on-year, compared to a 3.2% fall in May. This weakness was reflected in the US 2-to-10-year yield curve inversion growing to 35 basis points by the end of July. Inverted yield curves sometimes provide early warning of a future recession.

During June 2022, the Pengana Axiom International Ethical Fund (“Fund”) fell by -4.4%, slightly overperforming the benchmark, the MSCI All Country World Index (AUD) (“Index”).

In June, growth factors began to reassert themselves as increasingly restrictive global monetary policy actions started to take their toll on economic activity levels. Overall, the MSCI All Country World Growth Index marginally outperformed the Value Index by 46 basis points in June.

Inflationary pressures showed some signs of moderation as commodity prices retreated from their highs. Brent oil was lower by -6.5% month over month, although regional natural gas prices remain elevated on continued European geopolitical issues.

Further, global economic growth data continued to deteriorate. Most notably, the June US ISM Manufacturing New Orders declined to 49.2, a cycle low and representative of a contraction in activity (reading <50). European economic activity remains mixed with consumer and industrial activity varying widely by country. The strong US dollar continues to pressure European and emerging market economies. China’s Zero COVID policy began to ease in June resulting in an improvement in economic activity. Key economic indicators, the Manufacturing Purchasing Manager’s Index (PMI) returned to expansionary territory at 50.2 versus 49.6, and Services PMI improved more rapidly to 54.7 in June versus 47.8 in May. Despite these improvements, overall Chinese economic activity remains mixed with continuous headlines around regional COVID case count increases and restrictions.