CPM Funds Manager
Spotlight on the Pengana Global Small Companies Fund
The Pengana Global Small Companies Fund is one of the main fund managers we use in the Clearwater Dynamic Portfolio (CDP).
How does Pengana fit into the CDP?
The CDP targets 90% in growth assets, combining shares from Australia, overseas, large and small companies like Pengana, together with unlisted businesses and emerging markets. We also invest in infrastructure, property in the healthcare sector, alternative assets, and government bonds.
The CDP is designed as a long-term investment, which will deliver above-average returns over ten years. You can use the CDP as the core of your portfolio or as a total investment solution, depending on how you feel about risk.
We understand that investors can only achieve higher returns by taking on higher levels of risk. However, we apply this principle carefully, accepting that returns will vary. That’s why we include investments like Pengana to help offset a drop in the market.
What is Pengana's investment approach?
Pengana is a high conviction portfolio, which means it includes a small number of stocks picked out as the best, high-performance bets for the coming years. The fund is managed by Jon Moog and David Li from Lizard Investors, who are based in Chicago, USA.
Despite the term ‘small companies’, this isn’t a fund that invests in ‘start-ups’ or ‘venture capital’. The managers have a strong focus on the foundations of a company, including recurring revenue, with a bias toward buying companies at a low price. Pengana only invests in high-quality businesses with strong balance sheets, expert management teams, and what they believe to be a long-lasting competitive advantage.
Furthermore, Pengana always carries out in-depth research. This involves meeting with approximately 350-400 company management teams every year.
It’s fair to say that Pengana is a well-diversified portfolio across different countries and industries. What’s more, the team has an extensive ‘watch list’, so they will quickly buy up the businesses on their list when the price is right.
Risk is methodically calculated and never taken unnecessarily. Pendana always places a strong emphasis on preserving capital.
Why does CPM invest in global small companies?
Once small companies move past the start-up phase, they enter the small company stage, which is the sweet spot where their business model has been proven. At this point, they’ve achieved product and customer diversification, so they’re building a strong franchise with an improving balance sheet and increasing cash flow.
Beyond this stage, there are plenty of growth opportunities available. This can lead to consistently above-average revenue, earnings growth, and strong returns over time.
Anything else I should know about small companies?
Global small companies are a component of the listed company stock market. This part of the market holds companies of less than US$3 billion.
Smaller companies tend to be under-researched by institutional investors, brokers, and analysts. That’s because there are so many companies you could invest in, it’s hard to know about all of them unless you’re a specialist in the field. Nonetheless, if you decide to invest in small companies, research is crucial.
A lack of publicly available information and the significant growth opportunity small companies offer means that detailed investigations and in-depth analysis are required. This makes global small companies a good choice for investors who want to focus on a specific company and its fundamentals, rather than the larger economy and the ups and downs of the market.
Global small companies are typically under-owned even though they make up 92% of the global listed market. If chosen carefully, there’s plenty of room for diversification and the opportunity to outperform other segments.
What makes Pengana different?
Three key factors make Pengana stand out:
- The team has more than 80 years of combined experience through the highs and lows of the financial market.
- The team work hard to make a difference. They’re willing to do everything possible to ensure the best outcome for their investors.
- The portfolio managers are experienced at finding up and coming businesses that are often overlooked by others. They investigate peers and competitors to ensure they’re buying into the best opportunity of its kind.
Has Pengana had any successes that our investors may have heard of?
There are two standouts you may have heard of. Dino and Avast Software.
Dino Polska (Poland)
Dino is the second-largest food retailer in Poland, with a business model very similar to the early days of Walmart. Operating in smaller towns or on the outskirts of large towns, before Dino moved in, consumers living in these towns didn’t have much choice in the products on offer.
Dino started with one store twenty years ago. Today there are over 1,300 stores, and the founder still owns 50% of the business.
For every $1 of capital expenditure Dino puts into opening a new store, they get that $1 back within four years. This makes it possibly the most efficient food retailer in the world. Especially if you factor in the capital intensity of the business; in that, they buy the land, build the building and own the real estate freehold.
Over the last few years, same-store sales growth has been 15% versus 4% inflation in Poland. This is the best same-store sales growth number the team has seen during the previous ten years in food retailing. And they’ve researched most of the discount food retailers around the world.
Avast Software (Czech Republic) – listed on the London Exchange
Avast Software is a global market leader in virus protection software. They operate a freemium model, which means that you download the base offer for free. Then you’re offered a range of additional services with a price attached, such as enhanced virus protection or virtual private networks (VPN).
The business has gone from a standing start to 400 million users over the last 20 years. That’s because the need for virus protection and VPN is at a global, all-time high, due to the increase in people working from home.
Pengana saw the opportunity offered by Avast during the March downturn, so they quickly invested in the company to increase their returns.
What kind of returns does Pengana deliver?
Pengana’s investment objective is to obtain returns greater than the MSCI All Country World Index SMID Cap Index unhedged in Australian dollars over a three-year rolling period, after fees. It’s important to note that because Pengana’s returns are unhedged, investors are exposed to fluctuations in the value of the Australian dollar.
Does Pengana consistently hit their target? If so, how?
Pengana has a history of delivering high returns through capital preservation. This approach protects the investor from risk, and Pengana’s Global Small Companies Fund is managed in the same way.
The team firmly believe the best form of capital preservation is to invest in a portfolio of high-quality businesses. That’s because quality companies tend to perform in a crisis, often by taking market share from competitors and bolstering their competitive position. In contrast, a highly leveraged, cyclical company needs the market to rise to sell their stocks, making them a significant risk in tough economic times.
Pengana’s approach has delivered outstanding results throughout the COVID19 pandemic.
GLOBAL SMALL COMPANIES FUND – AUGUST 2020 CYTD FYTD 1 Year 3 Years 5 Years Inception Global Small Co’s -2.45% 3.51% 6.69% 4.68% 8.02% 7.11% Index -7.27% 2.40% -1.10% 7.12% 6.54% 6.36% Excess 4.82% 1.11% 7.79% -2.44% 1.48% 0.75%
The slight underperformance at the three-year mark is due to the team being extremely valuation aware. That said, we know how difficult it was to invest in anything related to value late last year.
Lizard Investors also tend to invest in smaller companies than the average investor within the small to mid-cap index. In fact, much of last year’s performance came from mid-caps – companies valued between $5-10 billion. The average market cap for companies within the Pengana Global Small Companies Fund sit at $1.5 billion.
Is Pengana expecting low, medium or high volatility over the coming months?
Small companies tend to show slightly higher volatility in the short term in comparison with large caps. This is due to perceptions around a company’s cash flow and the fact that they don’t trade so often.
However, compared to its peers, the Pengana GSC Fund tends to show less volatility due to the conservative nature of its approach. Lizard Management favour companies with strong balance sheets, sound management, and consistent cash flows. The result is a high-quality portfolio of companies that are well diversified in terms of country, sector, and size.
How has Pengana performed in 2020? How are they preparing for the months ahead?
As a result of COVID 19, the team quickly responded to the increase in volatility. They actively reassessed each investment in the portfolio so they could understand the impact on business models and future earnings.
Pengana’s goal is to preserve capital in the short term and buy high-quality businesses at discounted prices to drive portfolio returns in the medium term. That’s why they quickly reduced their position in companies and sectors affected by the crisis, such as investments in the travel industry. At the same time, they increased positions that would benefit from the crisis, such as online business. On top of that, they increased communications with company management, making sure that everyone was on the same page.
The recent market disruption has led the team to discover unique and exciting investments that they believe will drive the portfolio over the medium to long term.
Since the lows of the market, Pengana has taken full advantage of opportunities as they come up. While there continues to be short-term uncertainty, as long as the investor resists knee-jerk reactions, the investment will ride out the turbulent market.
Comments on Pengana
By Gary Lucas, CEO of Clearwater Portfolio Management (CPM)
At CPM, our approach to building our portfolio starts with an overall asset allocation. Once this first step is complete, we then work our way through asset classes and sub-sectors. Pengana’s fund is a perfect example of the rewards of going deep into sub-sectors.
Small companies, if managed well, can outperform large companies. To gain good returns, we accept that there are risks. But we also keep in mind that these are small global companies, which are generally much larger than small Australian companies.
We believe that an allocation to small global companies is a logical fit with our overall investment approach and our return targets.