Equities OK for income: Pengana

Advisers looking to create income for clients can do so via equities if the strategy is right, says Rhett Kessler, of Pengana’s Australasian Equities Fund.

Friday, June 28th 2013, 7:19AM 1 Comment

by Susan Edmunds

He is to speak at the Heathcote Investment Partners and Investment Store Perfecting Investment Portfolios conference next month, arguing that absolute returns are the best way to meet income needs in retirement.

Kessler said his definition of retirement needs was financial independence. “I invest so I can keep my wife and kids in the manner they’d like to become accustomed to…There’s some people who invest and the point is to try to build assets. Some invest for financial independence in the future.”

He said the biggest difference between the two approaches would be the mandate to maintain capital.

Kessler said his fund was not in the business of beating the market but of preserving capital and making money for its clients. “What do investors really need? Everyone wants triple-digit returns and no risk but what they need is capital preservation and a fair return.”

A fair return at present would be the risk-free rate, of about 4%, plus about 5% or 6% to reflect risk taken on, he said. His fund was returning about 14% per annum. “We’ve never lost capital in a year even when the market was down 25%.”

Most equity funds that sought to beat the market would have to be fully invested all the time, he said, which did not work well with the needs of people who were reliant on the investments for income. “If you’re going to have a preserve capital, make money objective, you can’t be in the market all the time.”

At the moment, the fund has about 30% in cash and cash equivalents.

Kessler said it would make sense that when the markets were stronger, the fund’s more conservative approach would be less appealing. But the fund had kept pace with the rest of the market, with a 25.71% return for the financial year to date. “You would expect to easily achieve the risk-free rate plus 6% but not to equal the robust market. But we beat the exuberate market, which worried me a bit.”

The return was down to strong stock picking, he said. On the New Zealand market, he said retirement village operators Ryman and Summerset were good options. “They demonstrate what we look for… we focus on after-tax cash earnings yields.”

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