Pengana Australian Equities Market Neutral Fund, which aims to provide a yearly return of 5-10 per cent, is net short miners, consumer staples, mining services and industrial stocks and net long financial, real estate, telecommunication and energy shares.
The fund, which has recorded annual net returns of 9.3 per cent since September 2008, says in the forthcoming company reporting season mining services company Fleetwood, Virgin Australia and Origin Energy are likely to report earnings that will be treated negatively by the stock market.
Meanwhile, iron ore miner Fortescue Metals, shopping mall developer and manager Westfield Group and retailer JB Hi-Fi are likely to post earnings that will be treated by the stock market as positive, says Pengana senior portfolio manager Elan Miller.
Every morning Miller reads broker notes for about two hours and then looks at the data collected and analysed by the fund’s quantitative model that recommends whether the 143 stocks in the portfolio should be sold short or a share should be bought as a long position. The fund currently has about 74 long positions and 69 short positions. No single position is greater than 3.5 per cent of the portfolio.
“We neutralise ourselves to movements in the market,” says Pengana's director of portfolio management and strategy, Philip Boustridge. In market shocks similar to the bankruptcy of Lehman Brothers, “we’ll make money,” he says.
Miller is 'long' Westfield because there are signs of an improvement in the UK economy amid rent reviews, signalling potential for further Westfield mall developments. The company’s exposure to a more robust US economy is also helpful for the stock, he says
As for Virgin Australia, the airline downgraded its earnings a couple of months ago and Miller says the company is now dealing with higher fuel prices amid a weakening Australian dollar, while the Australian economy remains subdued. Virgin Australia also has to execute its takeover of budget airline Tiger, which he says poses some risk to the stock.
Fleetwood, which manufactures and sells caravans and builds mining camps, is facing less demand for its products with some mining camps – notably in Western Australia – empty of workers due to a slowing in mining activity. Fleetwood’s Searipple Village in Karratha is shorn of residents, Miller says, and Australians are increasingly holidaying abroad, meaning there is less demand for its caravans.
Fortescue Metals remains a long bet for Pengana. Miller says the miner is meeting its production targets, its costs are under control and its cash flow is covering its debt payments.
And finally, when it comes to gold stocks, Boustridge says gains since June have been a “deep value rally on low volumes and little information." He says “there’s been no real fundamentals underpinning the rise” of gold mining stocks.