‘Time rewarded conservatism’: Pengana manager warns against over-priced stocks

Pengana Capital’s Ed Prendergast knows more than a few things about investing through market crashes.

Pengana Capital’s Ed Prendergast knows more than a few things about investing through market crashes.

Since its inception in 2004, Mr Prendergast and fellow fund manager Steve Black have led Pengana’s Emerging Companies fund through both the Global Financial Crisis and the more recent COVID downturn.

Despite the challenges each have posed, the fund has outperformed its benchmark, the ASA Small Cap Industrials index, by 6.9% per annum over almost 17 years.

And for the year ending 30 April 2021, Mr Prendergast and Mr Black managed to outperform the benchmark by an impressive 18.9%.

Speaking to Reach Markets, Mr Prendergast said the fund is careful only to invest in companies he and Mr Black believe have the capacity to perform well, regardless of market conditions.

“We’re looking for things we can hands on our hearts, quantify, predict, and understand what the long term trends are for cash flow in the business,” he said.

“Most of our portfolio is in stocks where you don’t need the economy to be particularly strong for the company to succeed; there are plenty of companies out there that can thrive in any environment whatsoever, or are just less cyclical than others.”

By the same token, Mr Prendergast avoids companies where performance outcomes are too speculative, including things like mining stocks.

“Mining companies are largely driven by the price of the commodity or their exploration success, and we find both of those factors are too speculative,” he said.

“We’ve got nothing to add on where copper is going, or gold or anything like that, and more to the point we don’t know if they’re going to find it or be commercially successful mining it.”

The Price is Right

Mr Prendergast said valuations are also important when considering which companies to buy, and adding he won’t deploy capital into a stock if he doesn’t see 30% – 50% upside over a certain period of time.

Even if the company ticks all the other boxes, if the potential for upside is below this threshold the company is priced too high.

And in the current market, Mr Prendergast said, the valuations on a number of companies is concerning – particularly in the tech sector.

He pointed to the late ‘90s tech bubble as an example, noting that when markets run that hot investors with conservative risk controls can appear to be too conservative relative to their peers.

“We saw that with the tech boom in the late ‘90s where slow and steady fund managers were judged to be too conservative” he said.

“But time rewarded that conservatism post the crash.”

“Even Warren Buffet looked a bit slow in the late ‘90s, and it’s because he’s a very disciplined investor.”

Knowing what he knows of the previous tech bubble, Mr Prendergast said he would rather sell out of a company once it reached his valuation than hold it and hope for the best.

Ed Prendergast will be joining us for ‘The Insider: Meet the Fund Manager’ on Friday 4th of June at 12 pm (AEST) where he will provide an overview of  his favourite stocks, his conservative approach to identify value in emerging companies and his unique step-by-step investment methodology, followed by an interactive Q&A. Book here.

‘The Insider: Meet the Fund Manager’ is a free webcast series which gives you direct access to prominent fund managers. This session is live and interactive and includes a live Q&A. Spots are limited, so please book into this session as soon as possible.


Reach does not assume responsibility for the accuracy or completeness of any information provided, and the views expressed are not reflective of Reach Markets position.

Any advice contained within this presentation is general advice and does not consider your personal circumstance, you should consider whether it’s appropriate for you.

The information we are giving you is for educational purposes only. “Investing is about understanding your risk” and every time you invest in the share market there is a risk of loss.


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