By Pengana Capital
While much has been said about the current investment environment, Pengana sees opportunities for smart investors who stick to the basics, remain vigilant and patient, and focus on research.
While the current investment environment is confusing, it does present opportunities if looked at in the right context. For example, the low interest rate environment is partly due to low inflation which implies that the actual real rates of return are higher. Furthermore, the low cost of money benefits certain companies, particularly those that can operate with lots of debt and pricing power. Pengana believes innovative research techniques to identify these companies should provide excellent returns irrespective of the investment environment backdrop.
One example is the opportunity presented by our observation that the regulators are forcing the Australian banks to ‘retreat’ into their core business of borrowing from and lending to home owners and businesses. As they withdraw from some of the adjacent niches - motor vehicle leasing, point of sale consumer finance and life insurance - they create profitable spaces that are being filled by nimble, focused and efficient small businesses. Our focus has been to identify the ‘tallest dwarves’ in these niche markets that are capable of thriving in the low interest rate environment – remember that if the widgets you make are loans to consumers then low interest rates equal an attractive consumer product and a low cost of sales. Examples include SG Fleet, McMillans Shakespeare, Clearview and Credit Corp.
We believe difficult or complex investment environments are best simplified by focusing on the basics. Most people invest to either create or maintain financial independence. In our view this can be achieved by firstly preserving capital in real Australian dollars and secondly, generating an acceptable return for the risk we are willing to assume. Innovating and moving away from these principles is dangerous because it implies that we may be diluting our objectives at a point in time when discipline is most needed.
Paradoxically we have found that when we are optimistic about the outlook it usually means that most others are too. Consequently when share prices are high, opportunities to generate future returns are scarce. Our default position in this environment is cash – a risk-free interest earning option to buy value if, and when, it emerges. The challenge in this environment is to remain disciplined.
On the flip side, rampant pessimism creates an environment that may be full of good opportunities. Having the courage to reach across the ‘abyss’ and deploy capital at prices that provide large margins of safety becomes the core skill requirement.
Building a well-diversified portfolio of ever growing income streams will provide the stable, inflation beating cash flows required to service future expenditure demands. Our experience has been that good businesses, run by competent management, acquired at the right price, remain a reliable formula for finding these “gifts that keep on giving” irrespective of the investment environment.
Investors should remember that to achieve and maintain financial independence they should be in the business of preserving capital and generating acceptable returns, as opposed to beating the market.
Find out more - Talk to us about our investment solutions
This article is issued by nabInvest Capital Partners Pty Limited (ABN 44 106 427 472, AFSL 308953) (“NCP”), a member of the National Australia Bank Limited (ABN 12 004 044 937, AFSL 230686) (“NAB”) group of companies (“NAB Group”). An investment in any product or service referred to in this publication does not represent a deposit or liability of, and is not guaranteed by NAB or any other member of the NAB Group.
This information may constitute general advice. It has been prepared without taking account of an investor’s objectives, financial situation or needs and because of that an investor should, before acting on the advice, consider the appropriateness of the advice having regard to their personal objectives, financial situation and needs.
MLC Investments Limited (ABN 30 002 641 661, AFSL 230705) (“MLC”) is the issuer of the MLC Wholesale Inflation Plus – Conservative Portfolio, MLC Wholesale Inflation Plus – Moderate Portfolio and the MLC Wholesale Inflation Plus – Assertive Portfolio (collectively, the “MLC Inflation Plus portfolios”). The MLC Inflation Plus portfolios are also available via the MLC MasterKey Super & Pension Fundamentals and the MLC MasterKey Business Super products issued by NULIS Nominees (Australia) Limited (ABN 80 008 515 633, AFSL 236465) and the MasterKey Investment Service Fundamentals investor directed portfolio service operated by MLC . You should obtain the relevant Product Disclosure Statement (“PDS”) or Financial Services Guide (“FSG”) relating to the MLC Inflation Plus portfolios and consider them before making any decision about whether to acquire or continue to hold the product. A copy of the PDS and FSG is available upon request by contacting our call centre on 1300 738 355 or on our website at nabam.com.au.
Any references in this publication to specific companies are for illustrative purposes only and should not be taken as a recommendation to buy, sell or hold securities in these companies.
Any opinions expressed in this document constitute NCP’s judgement at the time of issue and are subject to change. NCP believes that the information contained in this publication is correct and that any estimates, opinions, forecasts, conclusions or recommendations are reasonably held or made as at the time of compilation. However, no warranty is made as to the accuracy or reliability of this information (which may change without notice) and actual events may vary materially. NCP relies on third parties to provide certain information and is not responsible for its accuracy. NCP is not liable for any loss arising from any person relying on information provided by third parties.
Investment managers are current as at the date this communication was prepared. Investment managers are regularly reviewed and may be appointed or removed at any time without prior notice to you.
Past performance is not a reliable indicator of future performance. The value of an investment may rise or fall with the changes in the market. This information is directed to and prepared for Australian residents only. Bloomberg Finance L.P. and its affiliates (collectively, “Bloomberg”) do not approve or endorse any information included in this material and disclaim all liability for any loss or damage of any kind arising out of the use of all or any part of this material.
The funds referred to herein are not sponsored, endorsed, or promoted by MSCI, and MSCI bears no liability with respect to any such funds.