06 December 2016

Pengana sticks to its guns and cracks $2 billion (AFR)

James Frost

Boutique fund manager Pengana has cracked the $2 billion mark as investors have become more comfortable with absolute return style funds according to chief investment officer Russel Pillemer.

Mr Pillemer said the milestone was the result of staying true to the label and sticking to its guns. The firm passed the $1 billion in funds under management just three years ago.

Founded by Mr Pillemer and Prime Minister Malcolm Turnbull in 2003, the firm initially struggled to gain traction among investors who had traditionally invested in benchmark-aware large cap domestic equity strategies.

Absolute return strategies eschew equity market benchmarks in favour of cash or inflation rate plus targets. This reflects their aim to perform even when markets are weak.

"When we came out we were index agnostic, we were focused on generating absolute style returns but back then the market did not have much interest," Mr Pillemer said.

"It viewed the notion of returns diverging from the index as a negative, higher risk. Which is absurd. Our definition of risk is the potential to lose your money."

The first fund launched by Pengana was the Emerging Companies fund which has FUM of $750 million and has outperformed the Small Ordinaries Index by 10.3 per cent since inception.

Pengana’s Australian Equities has FUM of $1.1 billion and has outperformed the benchmark by 6.9 per cent since since inception.

Mr Pillemer said that although the global financial crisis was a difficult time for fund managers such as Pengana, the silver lining was that investors quickly became educated about the risks of highly correlated large cap equity strategies.

‘‘The GFC was very much a turning point in the fund management industry, investors got very interested in absolute return strategies after that,’’Mr Pillemer said.

‘‘When the market goes up modestly, when the market goes sideways and especially when the market goes down, those are the times when our funds outperform.’’

More recently Pengana has added a global small caps and a global absolute return strategy to its suite of funds.

The respective funds are operated by the highly regarded small caps expert Leah Zell of the Chicago-based Lizard Investors and George Mussalli of PanAgora Asset Management.

Mr Pillemer said that he believed that now the Australian investor had become comfortable investing in international large caps, that appetite would soon flow to both international small caps and international absolute return funds.

It hasn’t all been smooth sailing for the firm, however, which has shuttered a number of funds over the years, including an Australian Equities Market Neutral Fund in 2015 and a Global Resources Fund six months ago.

Mr Pillemer maintained that although the stocks of global resources companies had been on the rise since then, the decision to close the fund was the right one.

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