Market commentary: Mar 2022

Portfolio returns

The big story in investment markets is expectation that interest rates are on the rise for the foreseeable future. Rising interest rates impact both sides of a diversified portfolio. On the growth side it will mean reduced share valuations especially for high growth companies. Over the last 6 months share prices have generally fallen. On the defensive side of a portfolio rising interest rates reduce the value of existing bonds creating unrealised losses which looks concerning but will reverse as bonds mature and the full amount is repaid. The positive news is that assuming rates do continue to rise, maturing bonds will be reinvested into bonds at higher rates.

Investment philosophy

When selecting managed funds for inclusion in our portfolios we look at 4 key areas: performance, people, process, and investment philosophy. An example of investment philosophy we like is the criteria Pengana use to select companies to invest in. Basically, they like companies that don’t rely on the state of the economy to make money. They have 3 selection criteria:
1. The company must have pricing power (can pass on increases in costs),
2. Demand for the company’s product or service doesn’t change in recession,
and 3. The company must be able to generate free cashflow return of at least 6% (net of tax).

Telstra

Telstra is a good example of a business that meets all three of the criteria mentioned above. It provides telecommunication products and services to consumers, small businesses and large enterprise customers in Australia and globally. It has pricing power as the main costs are depreciation and wages which can be passed on to customers. Wi-Fi is rightly regarded by some as “today’s oxygen” so demand for this isn’t affected by the state of the economy. The company produces free cashflow more than 6%, and due to its dominance in the Australian telecom industry this is likely to continue for at least the next 5 years. Because of these qualities Telstra is one of the top 10 holdings in the Pengana Australian Equities Fund.

Richard Grimes, Director and Financial Adviser