The Pengana Global Small Companies fund is returning to a more normal level of management after recording ‘elevated levels’ of turnover of 83% in the last 12 months.
In a webcast, portfolio manager, Jon Moog, said turnover was elevated during the crisis as the company saw 700 management teams compared to around 350 to 500 normally.
He said there were also “animal spirits” in the market which led to valuations reaching “staggering levels” in certain sectors such as technology and online retail.
This led to turnover levels in the fund reaching 83% and the number of names in the portfolio up to 70. However, Moog said this was now ‘tapering off’ with the number of constituents falling to 40 to 50 and turnover dropping to 30% to 40%.
“We saw elevated levels of turnover as the team acted first to reduce risk and then to take advantage of opportunities. We are now expecting that to taper off to the 30%-40% rate. We had about 70 names in the fund and this is down to 60 and we are targeting 40-50 names so this is a signal that we are moving back to a normal level,” he said.
However, he said there were still areas that looked high risk and he could see the potential for a correction in the future.
“It feels like early 2000s, if you are holding some assets where you just can’t justify the valuation then you could pay dearly for that.
“There are pockets which will perform quite nicely and pockets which are at risk of a pretty severe correction and we want to avoid those high-risk segments and position ourselves in those attractive areas.”
The fund was now rotating out of successful investments that had become expensive and into growing businesses which had attractive valuations, particularly those businesses which lacked institutional support and were misunderstood by the marketplace. Its largest weightings were currently 26.5% to industrials, 19.2% to technology and 18.9% to consumer discretionary.
“In the business services space, we are seeing companies which have been largely ignored for the last five years given the headwinds they face in low interest rates. They are very cheap, have very attractive business characteristics and they could have very significant tailwinds as interest rates pick up so we are seeing a few opportunities there.”
According to FE Analytics, the Pengana Global Small Companies fund returned 37% over one year to 30 April, 2021, versus returns of 43% by the global small and mid-cap sector within the Australian Core Strategies universe.
