24-Sep-2020:  PIA: August 2020: "HEALTHY GROWTH PROSPECTS AT THE MOST ATTRACTIVE VALUATIONS"

COMMENTARY

August was another very strong month for global share markets, with the MSCI World  index returning 6.7% in US dollar terms. This was driven by large cap US technology stocks (and the FAANGs in particular).

Towards the end of the month, as the rally in the FAANGs picked up steam, it became increasingly difficult to find any fundamental justification for the repricing of the stocks in question. However, there was talk in the market of a “Nasdaq whale” taking huge positions in the tech sector and stoking the gains. It has since come to light that the “whale” in question was the Japanese technology conglomerate Softbank. Various news sources revealed that Softbank began purchasing billions of dollars’ worth of derivative exposure to the large tech names, which forced the investment banks on the other side of those trades to purchase an enormous amount of stock (in order to hedge their own exposure).

The other notable development during August was the strength of the Australian dollar, which rose more than 3% against the US dollar. As a result, the MSCI World index ended up returning 3.5% in Australian dollar terms.

The Portfolio delivered 3.4% for the month. This is a particularly pleasing result given that, for risk management purposes, the portfolio was heavily underweight the US market and the US tech sector in particular. Flow Traders, Vestas, and Alibaba were notable contributors to the Portfolio’s relative return, adding 0.45%, 0.44%, and 0.35% respectively, while Lumentum, Rakuten, and Bharti Airtel detracted 0.23%, 0.20%, and 0.16% respectively from the Portfolio’s relative return.

During the month, the Portfolio increased its position in SIG, took profits on holdings such as Pinterest and Thermo Fisher, and exited in full its remaining positions in Microsoft and Alphabet (Google). This means that the Portfolio is no longer exposed to large-cap tech stocks.

While the FAANGs have been very popular, and now make up approximately 15% of the global benchmark, it is very important that we adhere to our fundamental principles, regardless of the prevailing mood in the market (and especially when the path of least resistance would simply be to follow the herd).

Microsoft and Alphabet are both extraordinary companies. However, given the extent to which their share prices have risen, the justification to hold on to our positions had worn thin. We, therefore, used the surge in the large cap tech space (which, as outlined above, was being driven by some extraordinary forces) as an opportunity to lock in our gains, preserve client capital and minimise volatility risk.

We would like to highlight that the risk to markets (and to the US market in particular) has been mounting in recent times. Challenges include:

• the ongoing impacts of the COVID pandemic,
• the uncertainty surrounding the upcoming US election,
• the continued escalation in US-China tensions,
• as well as the unknown end game from promiscuous global monetary policy.

We continue to allocate client capital into businesses that we see as offering healthy growth prospects at the most attractive valuations. We believe that the US Tech and Financial Tech sectors are very expensive. Therefore, we strongly believe that it is important to be looking elsewhere. We have been able to identify more favourable risk/reward opportunities for our clients in other parts of the market and we are continuing to find pockets of value in different sectors around the world. The Fund remains 86% invested in companies that we believe offer comparable growth prospects, with more favourable valuations.

--- click on the link above for more ---

09-June-2020:  PIA May 2020 Report

That link SHOULD take you to their .pdf report for May.  You can also click here to access their video presentation by Steven Glass, Pengana's International Equities Deputy Portfolio Manager, on their May result.  You may have to scroll down to access the video.  He's developed some wrinkles since I last watched him (last year) and most of those seem to be on his forehead.

Also, here's a link to Pengana's recent webinar where they discussed the latest update to their investment mandate, targetting fully franked dividends for shareholders into the future.  Click HERE to watch.

I don't currently hold any PIA shares, but I have in the past, and Geoff Wilson's WAM Capital (ASX: WAM) and WAM Active (ASX: WAA) still both list PIA as a top-20 position in their respective funds (LICs holding LICs).  I am a shareholder in WAM Capital (WAM) so I do have indirect exposure to PIA.

PIA is of course the old HHV: Hunter Hall Global Value Fund, which Pengana took over after Peter Hall got "Trumped" by the market rising instead of falling when Trump first won the US Presidency - which initially resulted in gold falling instead of rising.  Peter had positioned HHV for a market crash if Trump won, and had a lot of gold exposure in the fund (mostly to up-and-coming gold miners at the time - like Saracen - SAR), and it all went pear shaped for him in the short term.  At the same time a couple of his long term winners were falling hard, one being SRX (Sirtex), the other being Vocus Communications (VOC).  SRX and VOC had both recently come out with earnings downgrades and were being smashed.  Everything was going against him, and he just threw in the towel and sold his HHV and HHL shares to Soul Patts (SOL) for a lot less than their market value at the time.  A bunfight then occurred for control of HHV - the LIC, and HHL - the management company, with Pengana eventually winning, with SOL's backing, and Geoff Wilson's WAM Funds losing, but not before Geoff had bought up quite a lot of HHV.  I'm sure Geoff has lightened the load, or his portfolio managers (previously Martin Hickson, now Oscar Oberg) have, but WAM & WAA still hold plenty of PIA.

Pengana - the management company (PCG) then changed the name of the Hunter Hall Global Value Fund to Pengana International Equities and the ticker code from HHV to PIA.  They have underperformed up until this year, but the 2020 volatility - particularly in Feb and March - has suited their style and they have done really well this year so far.

Disclosure:  I don't hold PIA or PCG shares, but I do hold WAM shares.  I used to be a HHV shareholder and I did hold PIA shares for a couple of years after HHV became PIA, but I eventually exited based on continuing relative underperformance by the fund.  They seem to be hitting their straps this year however.

Further Reading:  https://www.afr.com/markets/peter-hall-on-why-he-quit-hunter-hall-and-sold-to-out-to-soul-patts-20170101-gtkgee

Peter Hall on why he quit Hunter Hall and sold to Soul Patts

by Vesna Poljak, Senior markets reporter, AFR.  Updated Jan 2, 2017 – 2.41pm, first published at Jan 1, 2017 – 11.00pm:

A stoush with the board of Hunter Hall's listed investment company in 2015 sowed the seeds of Peter Hall's dissatisfaction with life at the helm of his eponymous fund manager, culminating in his shock exit.

In his first interview since resigning last week as the chief investment officer at Hunter Hall, Mr Hall, 56, has vowed to return to stockpicking as an "aggressive" private investor after his six-month handover is complete.

Hunter Hall investors including Microequities Asset Management and Wilson Asset Management have questioned Mr Hall's deal to sell a 19.9 per cent stake in Hunter Hall International to Washington H. Soul Pattinson at less than a third of face value, or $1 a share, describing the sale process as illogical, disorderly and poorly conceived.

But Mr Hall said it was the right thing to do by Hunter Hall clients because "for me, money has never been the primary thing". Soul Patts intends to bid for the entire company.

"In the context of a bigger world of friendships and interests, this is no big deal frankly," Mr Hall told The Australian Financial Review on Sunday.

A combination of the relentless compliance burden of running the business, portfolio losses incurred by being positioned for a downturn when the market rallied, and the knowledge that it could take years to restore outperformance wore the fund manager down late last year.

After deciding 24 years was enough, and knowing that two earlier approaches from prospective buyers and an informal sales process had failed, Mr Hall figured the only way to make something happen was to quit and finally end speculation around his tenure.

He concluded Hunter Hall could either be liquidated, returning the money back to investors, or the news would smoke out bidders before the stock resumed trading on December 30.

But it is his decision to dent his personal fortune by forging a deal with Soul Patts to keep Hunter Hall alive that was the most sensational development of all. The intrigue thickened once outsiders made the link between Mr Hall – a hardcore environmentalist and ethical investor – and Soul Patts with its New Hope coal interests.

Mr Hall said the stewardship of more than $1 billion in clients' funds had to take priority.

Guessing wrong

At a time when board meetings and managerial responsibilities were distracting from his investment thinking, (he was also Hunter Hall International's chief executive) Mr Hall called the market wrong heading into the United States election by holding a large cash balance and retaining exposures to gold miners. Two other big positions, in biotech company Sirtex and telecommunications group Vocus, also copped downgrades.

"Basically we zigged and the rest of the world zagged so we lost about 7 per cent as a result of the Trump victory and Sirtex and Vocus, and the market went up 10 per cent. In one month we lost 20 percentage points of relative value. In the past I would have been willing to wear that and get it back," he said, recalling how he had recovered from the financial crisis.

"I have total confidence in my ability to do that, but given the circumstances and my age I just thought this is the right time to go given we're at or near all time highs in our unit trusts."

He added that he is still confident in the outlook for Sirtex, a stock Mr Hall has staked his career on having earned hundreds of millions backing it as a biotech junior.

It wasn't the first time he felt uneasy about his role at the firm. In the first-half of 2015, the $300 million LIC, Hunter Hall Global Value, conducted a heavily discounted capital raising that Mr Hall disagreed with. (He was not a board member until October 2015). In doing so, the LIC saw Geoff Wilson's Wilson Asset Management lift its interest above 12 per cent at one stage, giving Mr Wilson the right to call an extraordinary general meeting at any time.

"We let the tiger into the castle and no longer were we on a secure base, the whole structure became imperiled at that point," Mr Hall says, emphasising he has no agenda with Mr Wilson. "He has been relatively gentle in the way that he has used his power in the LIC and he has gently been encouraging us to increase dividend payments and decrease the discount between the intrinsic value of the shares and the share price. He has behaved with 100 per cent probity and I have an amicable and very respectful relationship with him."

Mr Hall declined to say how much he is worth, but agreed his financial position is comfortable and he owns two houses. His motivation as a fund manager has been his philanthropic work, supporting staff and making money for clients. Hunter Hall International donates 5 per cent of pre-tax profit to charity and Mr Hall directly put millions of dollars into conservation initiatives. He is especially proud of his work protecting the Sumatran and Javan rhinos, the most threatened of their species.

"It's nice to have money but what is the marginal utility of the next bit of money when you've already got a certain minimum level of security and comfort?" he asked. He is planning to drive from Lisbon to Madrid on his next holiday, try writing, and become more involved in biodiversity work. He will continue as an investor in one of Hunter Hall's trusts, the high conviction trust. "I love the portfolio," he said.

'Very happy with that balance'

Mr Hall underscored that he is taking the haircut on his stake to "entice [Soul Patts] to come in and take on the responsibility for this institution". It is understood he received two other offers for his share, one of them higher, but deemed Soul Patts the superior bid.

"I am reconciled to the balance of me making some money and having Souls there to protect everyone's interests and the security of other people's interests. I'm very happy with that balance."

As a private investor, he can deploy his money without the risk constraints that institutional fund managers impose to avoid concentrated bets than can blow up clients' funds. "I will live by the sword, die by the sword."

Because most of Hunter Hall International's funds are structured as retail unit trusts, about $700 million all together, they are not permanent capital the way the LIC is. That means, within reason, investors in the trusts can leave if they want to and that future fee income is not guaranteed. So any bidder for Hunter Hall International takes a significant degree of risk there is a run on the funds without Peter Hall making the investment decisions. The board intends to name a replacement and Mr Hall confirmed he will work alongside his deputies Jim McDonald and Jonathan Rabinovitz until the end of June.

A rough estimate sees Hunter Hall International earn $5 million a year in fees from Hunter Hall Global Value's 25-year management agreement signed in 2004, which has 12 years left to run. That might only be worth between 80¢ to $1 a share to an acquirer, before factoring in the value of the retail unit trusts and other assets that the market prices at $3.10 a share.

"I thought plan A is to liquidate the company, give the money back to investors. And plan B was to flush out a bid, which would have a successor organisation takeover my role of leadership in the company and provide a future for the shareholders, the investors and the employees," Mr Hall said.

After informing Kevin Eley, Hunter Hall International's chairman, of his intentions Christmas Eve, the pair met on Boxing Day at one of Circular Quay's utilitarian cafes. Mr Hall returns to London this week.

"I've achieved all of the objectives and I'm extremely happy because Washington Soul are a financial gorilla. They've got $4 billion of asset value and they're an extremely long-term institution. They will be a very good shareholder and co-shareholder for all the Hunter Hall shareholders and a responsible steward of our investors and give our employees opportunities as well."

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25-Mar-2020:  Investment Update (Letter to Shareholders)

Excerpt:  

PIA’s net tangible asset value before provision for tax on unrealised income and gains (“NTA”) was $1.15 as at 20 March 2020. This is a decrease of 10.8% since 1 January 2020.  [my note:  PIA closed at 76.5 cents ($0.765) yesterday]

The broader equity market, as defined by the MSCI World Total Return Index, Net Dividends Reinvested, in A$ (MSCI World), has decreased by 15.5% in the same period.

The aim of PIA’s investment strategy is to generate consistent long-term returns whilst reducing volatility and the risk of losing capital. As at the time of writing this letter the team has delivered on these objectives - over a complete cycle, encompassing both a bull and a bear market, the strategy has kept up with a roaring bull market and has declined less than the current bear market.

The investment team’s portfolio construction as well as its stock selection across a wide range of businesses in a variety of regions were the major contributing factors to this outcome.

[click on link above for more]

The Pengana team have sometimes struggled to keep up during raging bull markets, but have said that they really hoped to stand out in a Bear market as outperforming their index, although that of course (this month at least) means they simply lose less money.  I still view the discount-to-NTA in their SP as being very attractive at current levels, although I note they are up over 10% today.