Ask a Fund Manager
The Motley Fool chats with fund managers so that you can get an insight into how the professionals think. In part I of this edition, Katana Asset Management's co-founder Romano Sala Tenna shares his insights and reveals the best performing ASX share in the Katana Australian Equity Fund. For part II of this interview, click here.
Motley Fool: How would you describe the Katana Australian Equity Fund to a potential client?
Romano Sala Tenna: What we've tried to do is remove any artificial constraints. So, constraints around sector, style, market capitalisation, etcetera.
We love constraints that add value to the process, but not where they artificially enable us to tick a box, as opposed to actually trying to get maximum returns.
We have 25% of our own monies in the fund under management, so we are very risk averse. That's enabled us, over the longer-term, to be in the top quartile over every time frame.
We're very proud of the fact that we've got a 16-year track record. Some funds have only a fraction of that. And we've delivered a 10.2% return per annum net of fees over that time frame, which puts us in the top-10 funds over 3 and 5 years.
MF: You invest largely without constraint to a company's market cap. What are the pros and cons of investing in ASX small-caps compared to ASX 200 blue chips?
RST: The first thing to understand is that we should be able to invest across the spectrum. We shouldn't artificially be constrained at what we look at.
Now on the downside for the smaller end of the market, you have issues around liquidity. The companies aren't as diversified. And many don't have the same sort of level of track record, as they're in their infancy. You also have potential issues around corporate governance due to lower levels of scrutiny and research coverage.
On the positive side, because they are smaller they do fly under the radar. So you are more able to find diamonds in the rough, and companies early in their infancy. You are more likely to find businesses that are in a very strong growth trajectory, that you can ride for a long period of time. And when you compound those returns, they can be substantially greater than investing in large-cap companies.
MF: Have exchange-traded funds had an impact here?
RST: With the rise of ETFs going mainstream, we are seeing a lot more passive money as opposed to active money. I think passive money generally bodes well for large-cap companies compared to small-caps. So that digression between the small and large-cap part of the market is starting to expand further and you are starting to see more small-cap companies left behind.
MF: What's been your best ASX share investment for the fund over the past year?
RST: Rather surprisingly, because we're not overly strong in the tech sector, Uniti Group Ltd (ASX: UWL) has been our best performing stock over the last 12 months. And we've started to see things there that give us confidence for the future outlook of that company as well.
MF: How long have you been invested in Uniti?
RST: We've been invested for a number of years. But we've scaled that position up as we've grown in confidence. It's now one of the top-3 positions in the fund. For smaller companies it takes time to grow that confidence in the business. So we're more likely, with smaller companies, to scale our position up over time, as opposed to starting with a larger position.
MF: What made you decide to scale up with Uniti?
RST: On the macro level we like the thematic that we're seeing come through and are able to play through Uniti Group. Also, we're starting to see some really smart execution.
Multiple acquisitions are normally a bit of a red flag for us. But that actually worked in reverse here, because they're making these acquisitions at below replacement cost. When they're starting to pick up fibre [optics companies] they're taking out a competitor, they're growing their economies of scale, and they're also doing it below replacement cost. And we like the fact that there's a lot of growth we can tangibly put our finger on.
What we've seen in a very short time is the company generate huge free cash flow, and repair their balance sheet to the point they've announced a buyback. We think the outlook for this company is strong as they continue to grow their earnings.
MF: With Bitcoin (CRYPTO: BTC) and cryptocurrencies going mainstream and packaged in ETFs, what are your thoughts on these new assets?
RST: We're still in that phase where we need to work out, is this a paradigm shift or is this the greatest bubble in history? There are some very convicted people on both sides of the debate.
From our end, we don't have enough data points to know what the answer is. The longer that crypto continues to remain unregulated, the more it's likely to lead to a paradigm shift in financial services. We could be witnessing one of those rare moments in history where we're experiencing a genuinely new asset class being born.
It's still too early to say that definitively, but there are some elements of that emerging.
One of the biggest risks to the market now is some of the irrational exuberance that's occurred in certain sectors. And I'd put crypto into that category. Not so much for Bitcoin and ones that perhaps will survive, but for the 7,000 other cryptos that won't survive. And that will wipe out enormous amounts of capital.
At Katana we are very risk averse. We're going to make sure that we understand things fully, that it's truly in our circle of competence, before we do become involved.
MF: Are you concerned about inflation in the year ahead? What steps are you taking?
RST: We had a big repositioning moment back in February and March this year, when we saw the bond yields have that substantial rally. That was the point we were convinced that inflation had arrived and that it was more than transitory.
That's the big argument at the moment, is inflation structural or is it transitory? We think there are elements of both. There's no doubt there have been some transitory influences, with supply chain disruptions from COVID-19 and the like. But we are also seeing some real structural elements. Hard commodities have increased dramatically. We're seeing offshore rates increase and global freight rates at elevated levels. And we're seeing the labour market tightening. That is going to have an impact on the Australian landscape.
(To learn more about the Katana Australian Equity Fund, click here.)
