Rhett Kessler’s fund doesn’t own a single resource stock.
Ask the Pengana Capital fund manager and principal about the market’s direction, whether the Australian dollar will appreciate or depreciate or what will happen to global iron ore prices, Kessler will wave these questions away saying he finds such things hard to predict. Pengana’s $250 million Australian equities fund, started three months before the bankruptcy of Lehman Brothers in September 2008, has made a 13.6 per cent net annual return by investing in good businesses, competent management and stocks at the “right price,” says Kessler.
Woolworths, says Kessler, is a “good business” for the fund’s investment parameters. He says that within reason he can predict what Woolworths food and liquor businesses are going to do. Companies dependent on economic cycles, the government or mergers and acquisitions for earnings growth are treated very circumspectly by Kessler’s fund.
Kessler likes Woolworths as it is to some extent a “toothpaste and toilet paper type company.” Businesses have to have power, he says. Woolworths has 60 days' credit from its suppliers. That more than funds the stock on its shelves. Moreover it does not have a debtors’ book, meaning that it doesn’t require working capital to expand.
“If Goodman Fielder wants to increase the price of bread, Woolworths can say no and Goodman would find it extremely difficult to do it,” says Kessler. “But if Woolworths says the price of a can of tuna is going up, it is definitely going up.”
The 47-year old South African born Kessler also favors businesses with streetwise capable management. For Woolworths that means executives who can manage people, logistics, control costs and are able to generate additional revenue. Kessler is a fierce cross-examiner of management, preparing questions that he knows the answers to but when answered by a chief executive may show whether they are avoiding talking about areas of the business that are doing poorly.
Kessler likes to analyse a chief executive’s body language, the language they use and whether they are prepared to volunteer negative information so that Pengana can make a better assessment of the true state of their companies.
“Never confuse good management and good business with a good investment,” says Kessler. “Cochlear and Coca-Cola Amatil are good businesses but it’s difficult to make money out of them at current share prices.”