Pengana stands for quality in small caps

In the four years since Pengana Capital established its Emerging Companies Fund, portfolio managers Steve Black and Ed Prendergast have held in excess of 2,000 meetings assessing potential investment companies.

And for Lonsec, the judge of this year’s Fund Manager of the Year awards, quality was the bottom line when naming Pengana the winner of the Australian Equities (Small Cap) category.

Given the fact that Pengana’s investment team and business is focused solely on small caps, quality management was a no-brainer.

“There are no other funds managed by Pengana that could potentially distract staff from their small cap responsibilities.

“Lonsec is particularly supportive of the significant emphasis placed on assessing company management and the extensive company visitation program adopted by Pengana,” Lonsec said.

Asked to describe Pengana’s management, Black said the company adopted a “bottom-up fundamental” style, which means considering all small industrial stocks on their merits, without the bias of targeting a particular sector or type of company for investment.

“Before we invest in any company we need to spend time with management, and we value each company by forecasting what we believe the company’s future cash flow generation will be,” Black said.

And while the Pengana fund is a less structured investment, it does have a number of unique attributes that helped distinguish it from market competitors, including the alignment of interests between the investment team and unit holders, which Lonsec described as a major strength.

“This alignment is supported by the ownership structure in place, a high level of co-investment in the fund by the investment team and the performance fee structure,” Lonsec said.

While Black was reluctant to boast, he does believe there is a reason for the firm’s success.

“We are closing this fund at quite a low level of funds under management to help preserve the ability for the fund to outperform into the future,” Black said.

Souls Funds Management and Kinetic Investment Partners were named finalists in this category.

According to Kinetic director Richard Sharp, recent successes can be attributed to a disciplined investment process that has produced a consistent long-term track record.

“We use cash flow analysis to identify companies that we believe have been undervalued or undiscovered by the market.

“Companies create shareholder wealth by increasing their return on assets and by investing capital in a way that generates returns above the cost of capital.

“By focusing on cash flow, we minimise our exposure to accounting manipulations and changes in accounting standards,” Sharp said.

Frank Villante, chief investment officer of Souls, attributes the firm’s successes to a consistent investment process, his team’s depth of experience and valuation.

“For us to undertake an investment, our process requires that valuation is thoroughly considered in the context of alpha generating opportunity, alpha destruction opportunity, and the milestones/catalysts that need to be identified to deliver either outcome,” Villante said.