Pengana International Fund – Ethical aims to deliver returns that are greater than the MSCI All Country World Total Return Index (net, AUD) with lower volatility than the Index, over the medium to long term.
• Global equity markets weakened further during September, as the global economy continues to slow under the pressure of higher interest rates
• Longer-term bond yields increased upon fears that persistent inflationary pressures will keep interest rates elevated for an extended period, which particularly impacted growth stocks
• The Portfolio returned -5.9% in September, while the benchmark returned -3.8% Global share markets again moved lower in September, as persistent inflation increased the expectation that interest rates would remain elevated for an extended period. This helped push up longer-term government bond yields, which weighed on share prices.
US inflation remains persistent, increasing in August to 3.7% year-on-year from 3.2% in July. The US dollar increased by 2.5% against a basket of key trading partners’ currencies in September. This reflected growing expectations that the US interest rate will be kept at a premium over those of other major currencies. Economic growth data remains mixed, with the picture in North America and Europe being one of gradual improvement, yet still consistent with contraction.
China’s manufacturing activity continues to expand, although the broader ‘re‑opening’ following the lifting of its zero-COVID strategy has now largely stalled. Consumer spending remains sluggish, as the highly leveraged property market continues to slow the economy. Travel and entertainment continue to support economic activity in the region.
The Fund retains its focus on dynamic growth stocks whose positive revisions to earnings per share (EPS) drive outperformance as global economic growth moderates. The Fund continues to overweight information technology, health care, and consumer discretionary, while the largest underweight sectors are financials, energy, and materials.
The surge in long-term global bond yields last month drove an equity market switch out of growth stocks – which are more sensitive to changes in yields – and into value stocks. This led global growth stocks to underperform value by around 2.7% during September. The Fund underperformed its benchmark, but by a smaller margin of 2.1%. Strong stock performance in industrials contributed to relative returns. Weak stock performance in health care, financials and information technology were the main detractors.
US-based luggage manufacturer and retailer Samsonite continued to perform well after reporting second quarter earnings which were ahead of market expectations. The company continues to benefit from the strong growth in global travel.
Novartis is a Swiss-based diversified global pharmaceutical company with a focus on oncology, immunology, cardiovascular, and neurology. It performed well over the last month in anticipation of the spin-out of its biosimilar business Sandoz, which will effectively leave Novartis as a pure-play pharmaceutical stock. Furthermore, the Fund’s tracking of pharmacy script data for its key drug Kisquali – which remains ahead of consensus expectations – supports the positive outlook.
US-based Costco operates a global chain of members-only warehouse-style retail stores. It outperformed after reporting second quarter earnings and provided forward guidance, both of which were slightly ahead of market expectations. In addition, the company announced same store sales for September which were ahead of investor forecasts, providing further evidence of its ability to grow earnings over the medium-term.
US-based multinational technology company Nvidia underperformed in September after reporting very strong results in August. However, real-time data relating to Nvidia’s planned wafer capacity at its key manufacturing partner TSMC continues to show the potential for earnings to exceed market expectations into 2024.
French luxury goods company Hermès International underperformed upon concerns of a slowdown in the broader luxury goods sector. Peers including LVMH and Richement highlighted weakness in Europe and China. e.l.f. Beauty also underperformed following several months of outperformance. Tracked sales channel data has decelerated, but is still slightly ahead of expectations this quarter.
The position in ASML was reduced after the company gave more cautious earnings guidance for its Extreme Ultraviolet (EUV) lithography tools. ASML’s monopoly position in EUV tools leaves it well positioned to deliver longterm growth as a technology enabler of next-generation semiconductor manufacturing.
The holding in Hermès International was reduced as the luxury sector continues to weaken. Nonetheless, its more affluent customer base is expected to provide it with greater insulation from the broader slowdown in consumer spending.
The Fund established a position in Cintas, one of North America’s largest providers of corporate uniforms and related business services. The company is viewed as an attractive structural growth story as more US businesses outsource uniform laundry and it expands into new product areas (e.g. healthcare, education, first aid kits).
The Fund also established a position in FEMSA, a Mexican multinational beverage and retail company. It comprises Oxxo, the leading convenience store in Latin America with over 20,000 stores, Coca-Cola FEMSA, the world’s largest Coke bottler by volume, and FEMSA Health, the second largest pharmacy chain in Latin America. It has a strong balance sheet and opportunities to expand into the US.
The Fund reduced its exposure to US-based multinational chocolate manufacturer Hershey. This reflected longerterm concerns over the impact of obesity drugs on future sales volumes and a lack of progress in addressing several ESG concerns, which the Fund had raised with the company last year.
The holding in Germany’s national airline Lufthansa was also reduced after several major airlines began to report slowing travel demand over the northern hemisphere summer months.
The Fund exited its position in US-based specialty chemicals manufacturing company Albemarle, which focusses on providing lithium for electric vehicle (EV) batteries, as lithium spot prices remain weak.
Prior to establishing the position in the company, the investment team held a very positive engagement with the senior management of FEMSA to discuss ESG issues. This included governance following the recent death of the company’s CEO which left the succession plan uncertain. The impact of recent water scarcity on its bottling business was also discussed and the company emphasised that it undertakes ongoing engagement with municipalities to further reduce its water use.
What is Pengana International Ethical Pengana International Ethical is an Managed Funds investment product that is benchmarked against Developed -World Index and sits inside the Foreign Equity - Large Growth Index. Think of a benchmark as a standard where investment performance can be measured. Typically, market indices like the ASX200 and market-segment stock indexes are used for this purpose. The Pengana International Ethical has Assets Under Management of 370.35 M with a management fee of 1.35%, a performance fee of 0.00% and a buy/sell spread fee of 0.6%.
How has the investment product performed recently?
The recent investment performance of the investment product shows that the Pengana International Ethical has returned -1.5% in the last month. The previous three years have returned 4.4% annualised and 13.56% each year since inception, which is when the Pengana International Ethical first started.
How is risk measured in this investment product?
There are many ways that the risk of an investment product can be measured, and each measurement provides a different insight into the risk present. They can be used on their own or together to perform a risk assessment before investing, but when comparing investments, it is common to compare like for like risk measurements to determine which investment holds the most risk. Since Pengana International Ethical first started, the Sharpe ratio is NA with an annualised volatility of 13.56%. The maximum drawdown of the investment product in the last 12 months is -4.97% and -45.92% since inception. The maximum drawdown is defined as the high-to-low decline of an investment during a particular time period.
What is the relative performance of the investment product?
Relative performance is what an asset achieves over a period of time compared to similar investments or its peers. Relative return is a measure of the asset's performance compared to the return to the other investment. The Pengana International Ethical has a 12-month excess return when compared to the Foreign Equity - Large Growth Index of 4.08% and 1.95% since inception.
Does the investment product produce Alpha over its Peers?
Alpha is an investing term used to measure an investment's outperformance relative to a market benchmark or peer investment. Alpha describes the excess return generated when compared to peer investment. Pengana International Ethical has produced Alpha over the Foreign Equity - Large Growth Index of NA% in the last 12 months and NA% since inception.
What are similar investment products?
For a full list of investment products in the Foreign Equity - Large Growth Index category, you can click here for the Peer Investment Report.
What level of diversification will Pengana International Ethical provide?
Pengana International Ethical has a correlation coefficient of 0.71 and a beta of 1.34 when compared to the Foreign Equity - Large Growth Index. Correlation measures how similarly two investments move in relation to one another. This establishes a 'correlation coefficient', which has a value between -1.0 and +1.0. A 100% correlation between two investments means that the correlation coefficient is +1. Beta in investments measures how much the price moves relative to the broader market over a period of time. If the investment moves more than the broader market, it has a beta above 1.0. If it moves less than the broader market, then the beta is less than 1.0. Investments with a high beta tend to carry more risk but have the potential to deliver higher returns.
How do I compare the investment product with its peers?
For a full quantitative report on Pengana International Ethical and its peer investments, you can click here for the Peer Investment Report.
How do I compare the Pengana International Ethical with the Developed -World Index?
For a full quantitative report on Pengana International Ethical compared to the Developed -World Index, you can click here.
Can I sort and compare the Pengana International Ethical to do my own analysis?
To sort and compare the Pengana International Ethical financial metrics, please refer to the table above.
Has the Pengana International Ethical been independently verified by SMSF Mate?
This investment product is in the process of being independently verified by SMSF Mate. Once we have verified the investment product, you will be able to find more information here.
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Comments from SMSF Mates
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Performance Commentary - August 31, 2023 The Fund established a position in the Italian luxury sports car manufacturer Ferrari, which has an extremely strong global brand and a waiting list for vehicles in excess of two years. The Fund’s modelling shows significant scope to increase earnings as personalisation becomes a larger part of the business. Currently, personalisation represents just 15% of car and spare parts sales but generates 50-90% gross profit margins.
The Fund also established a position in US-based Cadence Design Systems, which is a leader in electronic design automation. Its software provides the basic building blocks for designing a semiconductor device, such as placing and routing transistors on a chip. There is limited competition in the electronic design automation industry and the company has historically shown resilient growth through business cycles.
The Fund exited its position in US-based multinational cosmetics company Estee Lauder. The company had reported disappointing second quarter earnings and issued forward guidance which was way below investor expectations. While the brand does not appear to be impaired, the company must address several near-term issues that will likely impact its margins for longer than initially expected.
During August, US-based logistics real estate investment trust Prologis’ ESG rating was downgraded to A from AA by MSCI. Human capital management initiatives were found to just be in line with the industry peer group, rather than ahead of it. The company appears to lag industry peers in offering support for degree programs, and its non-salary benefits appear limited to some employees. The Fund plans to engage with the company to better understand what programs it offers to employees and if it has any plans to increase benefits.
The Fund held ESG engagement conversations with the management teams of Microsoft and Taiwan Semiconductor Manufacturing Corp (TSMC) during August. In conversation with TSMC, it became apparent that the company offers a wide range of learning resources to all employees (both full and part-time employees and also contractors). The learning content and approaches cater to the needs of individuals and organisations. This is not reflected in MSCI’s ESG reporting, so the Fund urged the management team to engage with MSCI to potentially improve its rating.
Performance Commentary - June 30, 2023 • 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.
Performance Commentary - April 30, 2023 • 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.
Performance Commentary - October 31, 2022
Performance Commentary - August 31, 2022 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.
Performance Commentary - July 31, 2022 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.
Performance Commentary - June 30, 2022 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.
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