Update: Australian Companies Fund

Portfolio update – PM Capital Australian Companies Fund

Dear Investor,

As at the end of February the net invested equity position of the Fund was 35.5% and total invested positioning including debt securities was 55%. This meant that the Fund had natural downside protection owing to its significant cash weighting.  

We had decreased our net invested position during the last quarter in response to concerns about stretched valuations in the domestic market. We sold out of the domestic banks and retained no exposure to retail-exposed businesses. The businesses retained in the portfolio consisted of those we believe have idiosyncratic growth opportunities that will continue to play out over the long run. 

 The international portion of the portfolio has greater exposure to macro conditions, largely in  leading banking franchises in USA and Europe.  We expect these businesses may be challenged in the short term but expect their market strength and robust capital positions will allow them to recover as current volatility subsides.  


The hardest part of managing money in the current unique and volatile market environment is to break down the external shock to economic markets into cyclical and structural elements. We do not believe the medical pandemic of its own has a direct structural implication for the market landscape. However, the scale of its negative cyclical impact – the closure of borders, of offices, of education systems – will be large and the market is fearful that this cyclical damage could have a knock-on structural effect on the economic landscape.

 Not many economists, if any, have modelled pandemic-related economic shocks and how this will flow through the real economy (there have been many papers on the Spanish flu, but it happening so close to World War 1 make it a poor comparable example). A quick look at what is happening in China, where initial evidence appears to suggest that after the lockdowns of their cities were relaxed, economic activity has started picking up quickly, appears to indicate that the structural damage in Australia can be contained though policy measures. 

 The very volatile moves in equity markets is a result of investors trying to forecast what economic conditions will look like in the near term. To us, near term predictions are thoroughly unreliable and basing investment decisions on near term conditions will result in poor long term outcomes for investors.  Depending on how quickly the corona pandemic can be contained, the near term economic damage will have a wide range of possible cyclical effects.

The pandemic  is unlikely to have similar structural impacts as the global financial crisis and European sovereign debt crises. What we have now is a demand shock, that can be softened by co-ordinated global fiscal stimulus. The aftermath of the financial crises in 2008 and 2012 showed structural weakness in the banking system and government funding markets. We expect this crisis to have larger near term impact on economic conditions, but less structural changes are likely to be needed for the global financial system.

 With governments starting to put in place large stimulus packages to help economic activity, we believe the current volatile market conditions are providing a unique opportunity to invest in high quality businesses, which in the near term will see a large impact to their earnings, but will provide good long term returns.

 Current activity

We believe now is the time to be picky rather than fearful.

 By no means are we suggesting that investor pile back into the market. However, we are starting to redeploy capital. We have increased weightings in our existing positions and have taken initial (small) positions in the domestic banks and mining companies. 

 We expect our net equity position to start drifting north of 50% in the near term and continue to go higher if the market continues to sell down.

 What we are not doing is buying the defensive sectors such as healthcare, utilities and supermarkets which remain in top quartile valuation.

 Our focus remains on stocks with idiosyncratic growth opportunities, industrial- and resource-related stocks which are likely to benefit from fiscal stimulus and companies with strong balance sheets but near term earnings headwinds from the sharp decline in current economic activity.

 We have the cash to invest and investment process to take advantage of the (now broader) opportunity set that is now being presented to us. 


Uday Cheruvu

Portfolio Manager

PM Capital Australian Companies Fund


More on the Australian Companies Fund

This note is issued by PM Capital Limited ABN 69 083 644 731 AFSL 230222 as responsible entity for the PM Capital Enhanced Yield Fund (ARSN 092 434 467). It contains summary information only to provide an insight into how we make our investment decisions. This information does not constitute advice or a recommendation, and is subject to change without notice. It does not take into account the objectives, financial situation or needs of any investor which should be considered before investing. Investors should consider a copy of the Product Disclosure Statement which is available from us, and seek their own financial advice prior to investing. Past performance is not a reliable guide to future performance and the capital and income of any investment may go down as well as up.