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Rudi’s View: Charter Hall, Lendlease & Pengana

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Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

Rudi's View | May 10 2019

In this week's Weekly Insights (this is Part Two):

Value & The Eye Of The Beholder
Conviction Calls
-Helping Pengana Selling The ESG Message

CSL Challenge: The Winners
-Rudi On TV
-Rudi On Tour

[Non-highlighted parts appeared in Part One on Thursday]

By Rudi Filapek-Vandyck, Editor FNArena

Conviction Calls

The latest update on Wilsons' select list of Conviction Calls contains 14 inclusions of ASX-listed small caps stocks that carry the analysts' conviction of providing a better return than their peers or major market indices.

Wilsons' regularly updated selection underperformed the 6.30% gain of the S&P/ASX Small Ords Industrials Accumulation index in April, but is otherwise well ahead of its benchmark on a 3 or 12-month horizon.

Removed since the last update: mining services provider NRW Holdings ((NWH)), following hefty share price appreciation. Two new inclusions have now been added: National Veterinary Care ((NVL)) and Whitehaven Coal ((WHC)).

Other stocks still included are ARQ Group ((ARQ), Bravura Solutions ((BVS)), EML Payments ((EML)), Collins Foods ((CKF)), Ridley Corp ((RIC)), Citadel Group ((CGL)), ImpediMed ((IPD)), EQT Holdings ((EQT)), Pinnacle Investment ((PNI)), Noni B ((NBL)), Ausdrill ((ASL)), and Mastermyne ((MYE)).

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Analysts at stockbroker also updated their selection of High Conviction Stocks which has triggered the removal of PWR Holdings ((PWH)) and Volpara Health Technologies ((VHT)).

Remaining on the list: ResMed ((RMD)), Sonic Healthcare ((SHL)), Reliance Worldwide ((RWC)), Westpac ((WBC)), and Oil Search ((OSH)) among large caps and Kina Securities ((KSL)), Senex Energy ((SXY)), and Australian Finance Group ((AFG)) outside of the ASX-100.

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Plenty of stockbrokers have been updating their views and assessments of A-REITs recently, which has generated the following lists of sector favourites:

-Citi: Charter Hall ((CHC)), Goodman Group ((GMG)), Lendlease ((LLC)), Dexus Property Group ((DXS)), and Mirvac ((MGR));
-JPMorgan: Vicinity Centres ((VCX)), Charter Hall, Lendlease, Shopping Centres Australasia ((SCP)), National Storage REIT ((NSR)), and Aveo Group ((AOG));
-Macquarie: Lendlease, Goodman Group, Charter Hall, and Mirvac ((MGR));
-Stockbroker Morgans: Aventus Group ((AVN)), Centuria Metropolitan REIT ((CMA)), APN Convenience Retail REIT ((AQR)) and Viva Energy REIT ((VVR));
-Shaw and Partners: Lendlease, Stockland ((SGP)), Scentre Group ((SCG)), Vicinity Centres, Centuria Industrial REIT ((CIP)), and Centuria Metropolitan REIT

The list of least liked A-REITs:

-Citi: Scentre Group, GPT ((GPT)), Charter Hall Retail ((CQR)), Shopping Centres Australasia and BWP Trust ((BWP))
-JPMorgan: Mirvac, Goodman Group and Ale Property Group ((LEP))
-Macquarie: Charter Hall Long Wale REIT ((CLW)), Charter Hall Retail, Cromwell Property Group ((CMW)), Dexus Property Group, Growthpoint Properties ((GOZ)), National Storage REIT, Scentre Group, Shopping Centres Australasia, and Unibail-Rodamco-Westfield ((URW))
-Stockbroker Morgans: Centuria Industrial REIT, National Storage REIT, and Hotel Property Investments ((HPI))
-Shaw and Partners: Goodman Group and BWP Trust

The (sharp) differences in views expressed by the various teams of sector analysts comes down to one question: do you believe the pressure on bricks and mortar retailers has much further to run, with noticeable negative consequences for landlords of retail assets?

If the answer is "yes", then those retail landlords are automatically relegated to one's selection of least preferred/best to avoid sector exposures. If the answer is "no" then those lagging retail landlords are seen as offering excellent value for long term yield investors.

As expressed many times over in the past, I am on the side of the investors and analysts that respond to the crucial question with a firm "yes".

Helping Pengana Selling The ESG Message

Peter Hall, the driving force behind what once was one of Australia's successful and leading ethical investors, Hunter Hall, saw his career abruptly cut short when a too confident bet on local biotech Syrtex turned sour. Since June 2017 Pengana Capital Group is managing the fund renamed Pengana International Equities ((PIA)), which still operates within an ethical framework but solely in international markets.

The new managers in charge have deliberately scaled back the volatility in the fund's performance, and made its dividends to shareholders more reliable and stable, but, nearly two years after taking control, one niggling problem remains unaddressed: a severe lack in liquidity means the ASX-listed shares continue to trade well below the fund's Net Tangible Assets (NTA) valuation, to just about every stakeholder's frustration.

And there doesn't seem to be an easy solution at hand either, with the fund's attempt to increase total shares count via the issuance of options likely to prove futile. It's back to the drawing board thus.

In the meantime, the fund managers are touring Australia in a bid to communicate with shareholders, explain their strategy and ask for understanding as far as the heavy discount is concerned that remains embedded in the share price.

Not completely unexpected, the recent shareholders gathering in Sydney elicited mostly questions about Labor's intended franking policy, its potential impact for retirees living off income from investments and what Pengana can possibly do to cushion any negative consequences.

Questions were also asked as to how the manager's ethically oriented investment process could possibly be to shareholder's best interest, and here, on my observation, the fund managers found it rather difficult to state their case in an overly convincing manner. Which is a shame, because ethical investment is not a guaranteed pathway to subpar investment returns (even though PIA's total returns to date have fallen short of the benchmark and of competitors).

Plenty of international academic research supports the notion that ethical investing over time generates superior returns, irrespective of the observation that stocks with inferior qualities can temporarily rally to the moon and back, as we all know. Instead of trying to argue the point that missing out on a temporary rally in, say, oil and gas stocks does not matter long term, I think the managers of PIA can make a much more attractive, and convincing case by referring to what should be missing in their portfolio.

Take Retail Food Group ((RFG)), for example. For years its shares had been a solid performer on the ASX, until the central holding company was exposed for what it is; a badly managed, profits-above-everything, let's squeeze the franchisers to their last breath kind of operation that, in hindsight, was always going to come unstuck at some point.

It's somewhat hard to believe today, but the shares were exchanging hands on the ASX at a price tag of around $7.50 a piece as recently as March 2015. Today, Retail Food Group shares are trading around 21.5c and they almost certainly are not going anywhere in a hurry.

Meanwhile, the negative news flow simply keeps on generating more revelations. If ever Hamlet's statement about something being rotten at the core applied to one company on the ASX, it must be this one.

The point here is that any scrutiny from an ethical or ESG filter perspective should have prevented fund managers such as Pengana (or Hunter Hall in its previous existence) to go anywhere near an investment in Retail Food Group, irrespective of the company's immediate prospects and general popularity at that time.

This is, in essence, the most valuable aspect of using ESG (ethical, social & governance) as a filter in the investment process. Badly managed companies are most likely to attract bad news flow and operational disasters, and badly managed companies score badly on ESG score cards.

A similar case can be made for past assessment of investing in AMP ((AMP)), IOOF ((IFL)), and even the Big Four Banks (though I doubt whether anyone would have scored the banks accurately on ESG measures pre-Royal Commission). Since PIA does not invest in the Australian share market, there should be plenty of suitable examples on offshore exchanges.

I remember reading how the Deepwater Horizon oil spill in 2010 had been preceded by numerous indications BP was not the world's most prudent and risk-conscious operator, to put it mildly. And it certainly seems the bad news flow, and potential financial ramifications from the 737 Max plane disasters for Boeing is nowhere near its end.

Stringently applied ESG filters should keep such disasters out of the portfolio; a message that will be understood by every kind of investor, irrespective whether they have experienced portfolio disaster first hand or not.

CSL Challenge: The Winners

A number of weeks ago, I asked readers of Weekly Insights to send in their personal experiences as an owner of shares in CSL ((CSL)), likely the highest quality corporate success story in Australia over the past three decades.

The response has been both rewarding and surprising, and I intend to combine these stories into a dedicated CSL Challenge update later in the month.

Thanks again to all who took the time to write and submit their own contribution.

In the meantime, I am the temporary guardian of a stunning Pinot Noir, an extremely enticing looking Gruner Veltliner (one of my favourite white varieties), and a mysterious rose with a French name and appearance, but of Greek origin.

The following CSL story writers better make sure the local postman can be trusted when he delivers each of these treasures in the week ahead:

-red: Matthew Southworth
-white: Leon Wiernik
-rose: Josephine Sando

Rudi On TV

Shareholders Nine Entertainment and News Corp have decided to cease financing JV Your Money, which will thus cease operating by mid-May. My final weekly appearance on Your Money is scheduled for Monday, May 13th, midday-2pm.

I will also make an appearance on Wednesday, May 8th, 3.30-4.30pm.

Rudi On Tour In 2019

-ASA Toowoomba, Qld, May 20
-U3A Investor Group Toowoomba, Qld, May 22
-AIA Adelaide, SA, June 11
-AIA National Conference, Gold Coast, Qld, 28-31 July
-AIA and ASA, Perth, WA, October 1

(This story was written on Tuesday 7th May 2019. Part One was published on the day in the form of an email to paying subscribers, and again on Thursday as a story on the website. Part Two appears on the website on Friday).

(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions.)  

P.S. I – All paying members at FNArena are being reminded they can set an email alert for my Rudi's View stories. Go to My Alerts (top bar of the website) and tick the box in front of 'Rudi's View'. You will receive an email alert every time a new Rudi's View story has been published on the website. 

P.S. II – If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.

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