Lowest risk equity income fund known in Australia¹
The Fund² returned +2.70% net of fees for the March Quarter 2019, comprising 1.87% in distributed yield and 1.01% capital return on a before fees basis.
The Fund has delivered its return at a volatility of 3.50% p.a. since inception, the lowest risk equity income fund known in Australia. “We are different”, said Denis Donohue, Pentalpha’s Executive Chairman and Head of Investments. “We don’t know of any other manager that does what we do. If they exist, we haven’t found them and no one has pointed them out to me.”
Since inception, the total return is +1.35% p.a. after all fees and costs, inclusive of a distributed franked dividend yield of nearly 5.44% p.a.
Even in the face of the headwinds that the Fund has had to contend with in respect of several of its bank, insurance and diversified financial services stocks held since launching in 2017, this performance compares favourably to cash and lower-risk interest rate securities. “Without these head winds, I expect this Fund will deliver a Sharpe Ratio comfortably above 1.0 (the extra return for the risk taken above cash)”, said Donohue.
The March 2019 quarter has seen the recovery of much of the below-par Fund performance in the December 2018 quarter.
Significantly, this “sub-par” December 2018 quarter performance actually highlights the unique benefits and strengths of the Fund. Performance relative to the underlying stock market was exemplary over this period of material market correction, demonstrating Pentalpha’s unique ability to manage drawdowns and sequencing risk. The Fund outperformed the -8.24% return of the S&P/ASX 200 Accumulation Index³ that quarter by +5.20%. This ranked Pentalpha Number 1 among known Australian equity income funds over this period of volatility and market decline.4
Distribution History
Distribution | 2019 FYTD | Mar Qtr 19 | Dec Qtr 18 | Sep Qtr 18 | 2018 FY |
---|---|---|---|---|---|
Cash | 3.03% | 1.00% | 1.00% | 1.00% | 4.06% |
Frank. Credits | 2.43% | 0.86% | 0.35% | 1.20% | 1.67% |
Total | 5.46% | 1.86% | 1.35% | 2.20% | 5.73% |
On an annualised Financial Year to Date basis, the Fund is comfortably running ahead of its annual 6% grossed-up (for franking) distribution objective (7.3% annualised FYTD 2019), enabling Pentalpha to flexibly tailor its strategy to fit the circumstances.
Portfolio Overview at 31 March 2019
Over the March quarter, the Fund positioned itself more defensively ahead of what Pentalpha sees as an increasingly challenging economic environment in Australia and globally. This included reduced exposure to the less resilient regional banks (Bendigo and Adelaide Bank) in favour of Westpac, and increased exposure to less economically sensitive stocks (Crown Resorts and re-entry into Coca-Cola Amatil).
At the end of March 2019, the Fund comprises:
- A concentrated portfolio of 13 stocks diversified across 7 industries with many different economic drivers.
- Unhedged, the largest individual positions are IAG and TABCORP (11.4% and 11.2% respectively).
- Hedged, the physical cash position of 6.3% effectively increases to 69.6% when the stock positions are risk-adjusted for the exchange-traded option strategies that are in place.
- This underwrites the defensive characteristics of the portfolio, hence the lower volatility and low sensitivity to market movements expressed as beta (downside and upside).
Fund Strategy
Pentalpha Income for Life Fund is a capital-protected dividend income fund. The objective of the strategy is to capture the rich dividends that Australian shares offer as a source of tax effective investor income, while participating in the capital growth that equities offer over the longer term. The Fund adopts a prudent approach to limit the downside risk to capital. The strategy delivers certainty by ensuring a defensive line of protection is set under each portfolio stock holding. This is a key differentiator of the Fund.
Pentalpha delivers a risk-managed target return rather than a ‘relative to benchmark’ or return outcome that is materially linked to the performance of the market. In contrast to many other equity-income strategies, every component of the total return is managed, including the risk of that return. Capital stability is delivered by ensuring every share investment is always protected against capital decline below a certain level. This safety net is always in place through the purchase of Put Options, with the protection cost kept low by the sale of Call Options at higher levels over these same stocks. Some potential upside is forgone if the share price appreciation exceeds these higher pre-determined levels. However, when these higher pre-determined levels are met, the upside captured will ensure capital growth above the rate of inflation such as to maintain the real purchasing power of the investor’s investment in the Fund.
Pentalpha was founded in 2014.
1. All performance, distribution and portfolio weights reported herein are sourced or reproduced from the Pentalpha Income for Life Fund Monthly Fact Sheet 31 March 2019 (found at www.pentalpha.com.au)
2. Based on the volatility of Pentalpha Income for Life Fund monthly returns over the period 1 July 2017 to 31 March 2019 compared to the volatility of the monthly returns of fourteen (14) Australian Share equity income funds (Source: Pentalpha, Morningstar)
3. Source: Pentalpha, Iress
4. Based on Pentalpha Income for Life Fund monthly returns over the period October 2018 to 31 December 2018 compared to the monthly returns of fourteen (14) Australian Share equity income funds over the same period (Source: Pentalpha, Morningstar)
Denis Donohue
Executive Chairman and Head of Investments
Pentalpha Investment Management
Tel. 1300 155 664