Pengana International Ethical Opp (HHA0002AU) Report & Performance

The Pengana Axiom International Ethical Fund (Hedged) (“Fund”) generated a return of 11.3% in July, outperforming the benchmark, the MSCI All Country World Index in AUD (Hedged) (“Index”) by 4.3%. During July the Fund outperformed the benchmark, the MSCI All Country World Index (Hedged), by 4.3%. 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. In China, the Zero COVID policy continued to unwind across most of the country which resulted in improved economic activity

During August, the Fund underperformed the benchmark, the MSCI All Country World Index by 2.0%.

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 US dollar continued to strengthen in August, pressuring European and emerging market economies. Meanwhile, commodity prices, except for European natural gas prices, continued to moderate, with the price of Brent crude oil falling by 5%.

Economic news varied by region, with stronger July US manufacturing and labour market data, while Europe and China continued to deteriorate. Eurozone purchasing managers’ data were weaker in July, indicating the sector is contracting, while regional inflation continues to accelerate (rising 4.3% year-on-year in August, from 4.0% in July).

The Pengana Axiom International Ethical Fund (Hedged) (“Fund”) generated a return of 11.3% in July, outperforming the benchmark, the MSCI All Country World Index in AUD (Hedged) (“Index”) by 4.3%. During July the Fund outperformed the benchmark, the MSCI All Country World Index (Hedged), by 4.3%. 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. In China, the Zero COVID policy continued to unwind across most of the country which resulted in improved economic activity

During June 2022, the Pengana Axiom International Ethical Fund (Hedged) (“Fund”) generated a return of -7.8%, slightly underperforming the benchmark, the MSCI All Country World Total Return in AUD (Hedged).

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.

During May 2022, the Pengana Axiom International Ethical Fund (Hedged) (“Fund”) generated a return of -2.5%, underperforming the benchmark, the MSCI All Country World Total Return in AUD (Hedged), by -2.3%. Portfolio Manager Bradley Amoils recently held a Portfolio and Investment Update webinar which can be found below. The headwind for growth orientated strategies continued through May. The market sold off sharply in the early part of the month as concerns around increasingly restrictive monetary policy and the COVID-related economic slowdowns in China weighed on sentiment. However, the market ended the month reasonably flat as some evidence of “peaking” inflation (i.e. improved personal consumption expenditure in the US) started to emerge. There is less evidence in Europe, where German CPI grew +7.9% year over year, compared to +7.2%, driven by higher commodity prices and a strong US dollar, and German retail sales only rose +2.5% year over year, which was significantly less than the consensus expectations of +4.4%.

Against this backdrop, Axiom continues to focus on dynamic growth stocks. We believe positive earnings revisions will be the most likely factor to drive outperformance at this point in the economic cycle. The Fund continues to be overweight in information technology and consumer discretionary, and has moved into a slight overweight position in healthcare. We remain underweight in financials, energy, and materials and have reduced our position from overweight to underweight in industrials.

• Dual headwinds of accelerating inflation and slowing economic growth led the Pengana Axiom International Ethical Fund (Hedged) (“Fund”) underperformed the benchmark, the MSCI All Country World Index (Hedged) (“Index”), in AUD terms, by 5.5%.

• During the month the fund trimmed exposure to Semiconductors which are exposed to the deteriorating economic environment, and exited our holding in Align Technology.

• The largest positional increase was to Novo Nordisk, supported by strong demand for their drug Ozempic

The Fund’s improved relative performance during the second half of March took a step back in April. This was largely due to the headwinds of accelerating inflation and slowing economic growth, and further exacerbated by China’s Zero COVID policy which resulted in the lockdown of significant portions of the domestic population which slowed growth and intensified supply chain disruptions. Recession watchers have also been very concerned by the US yield curve with the closely watched 2- to 10-year curve oscillating between 0 and 40bps during April. The Axiom process continues to focus on investing in dynamically growing businesses and for the most part, these businesses have continued to perform strongly, notwithstanding the current environment. We ultimately expect upward earnings revisions of our portfolio companies to be the factor that will drive outperformance at this point in the economic cycle. The Fund continues to be overweight in information technology, consumer discretionary, and industrials and underweight in financials, energy, and materials.