Pengana fund rides small cap rally amid anniversary

Pengana Capital has affirmed its success in small cap stock investing with an active management style as its Emerging Companies Fund reaches the 20-year milestone.

Launched in November 2004 and managed by Ed Prendergast and Steve Black, the fund has leveraged active stock picking to withstand the challenges of tumultuous market cycles and continue to identify key opportunities that may normally go underappreciated by the majority of investors.

“It has been an incredibly interesting time to have been investing in markets. We have seen some extremes and it has been hugely challenging, but it has only galvanised our belief in smaller companies as a critical part of an investment portfolio,” Prendergast said.

“Across bull and bear markets, including major events such as the GFC, Covid, high and low inflation, and high and low interest rates, there have been opportunities to invest.

“This sector has been fertile ground for active managers to add alpha but it doesn’t just fall in your lap – this end of the market requires a special kind of focus, and it demands flexibility.”

Since inception, the Pengana Emerging Companies Fund has returned 12.1 per cent per annum net of fees to investors and outperformed the Small Ordinaries Index by 7.2 per cent per annum net of fees, as of 31 October 2024.

“Smaller companies provide a lot of choice but it all comes back to the people, the process, and the decision-making, and how well you complement each other as a unit,” Black said.

“There may be plenty of choice but there are also many opportunities to make mistakes. And we’ve made our share of mistakes over 20 years, but how we then mitigate those and turn things around comes down to our unique combination of process and people.”

Prendergast said further opportunities lie within niche and “overlooked” spaces of the Australian small caps market such as industrials, creating a “rare environment to invest”.

“This has seen part-time small cap investors leave the market, creating a number of highly attractive overlooked situations,” he said.

“We saw this after the tech boom in 2000, and in the aftermath of the GFC and Covid. We love uncrowded markets, confident that our patient, long term approach is likely to be rewarded. Our preference is for stable, long term growth stocks such as Generation Development, Propel Funerals, TechnologyOne, HUB24, Netwealth and Mainfreight.”

Black also attributed the fund’s success over time to embracing volatility and the opportunities it can provide, rather than take away.

“When markets are weak there is often money taken away from small caps, and that disruption can result in incredible buying opportunities in companies with proven management, with longevity, and predictable earnings streams,” he said.

“Active stock picking works in the small cap space – it’s all enduring, delivers strong outperformance and strong alpha when properly managed.”