Why this top-performing fund manager is shunning the big banks
In the ultra-competitive world of funds management often dominated by big egos and hubris, Perth-based fund manager Katana Asset Management prefers to take a somewhat quieter approach.
The company’s Australian Equity Fund produces returns over the long term that are consistently above the market. That’s no easy feat amid the recent market turbulence of COVID-19 and the more recent surge in inflation.
Katana Asset Management’ co-founder Romano Sala Tenna says the fund manager is not bound by artificial constraints in how it invests.
Romano Sala Tenna, who co-founded Katana with Brad Shallard 17 years ago, says the secret is a keen focus on risk management while also investing the money without any artificial constraints.
“Capital preservation is front and centre of everything we do; it is not something to which we just give lip service,” Sala Tenna says. He knows, first-hand, as a veteran fund manager, that markets go through periods of volatility; so nothing is guaranteed in terms of performance.
The Mercer performance survey of Australian share funds for the period up to December 31, 2022 shows the fund produced an average annual compound return of 13.8 per cent over the five years to that date, compared to the S&P/ASX 300 accumulation index, which returned 7.1 per cent.
For the three years to the same end date, the fund produced an average annual compound return of 17.5 per cent compared to 5.5 per cent for the benchmark. Mercer’s table shows returns before fees and before taxes.
Katana had a minimum initial investment of $250,000, limiting access to wealthy families and individuals, most of whom live in Perth – though the minimum is now $25,000.
Fund managers are notorious for “index hugging”. The further they invest away from the market, the greater the risk they will underperform it. That no longer works for “active” fund managers – those that try to beat the market – as investors can invest in index trackers, such as exchange-traded funds (ETFs) themselves at a low cost.
Active managers have to be prepared to back their convictions. “We understand that we have to benchmark against the market, but we don’t think in those terms,” Sala Tenna says.
Each member of the investment management team has a “dominate personality”, he says. All of them must come to a unanimous decision on whether to buy, sell or hold a stock.
Katana’s fund does not hold any of the big four retail banks.Credit:Karl Hilzinger
The fund does not hold any of the big four retail banks – even though they make up 25 per cent of the Australian Securities Exchange by market capitalisation. That is because of weak credit growth and Sala Tenna’s view that provisions for bad and doubtful debts are likely to rise.
He says another factor for not holding the big banks is that the Term Fund Facility – cheap money provided to the banks by the Reserve Bank of Australia during COVID-19 to encourage them to keep lending – is coming to an end.
The fund has little exposure to the consumer discretionary sector, given rising interest rates, rising energy prices and rising costs generally, as well as the negative wealth effect that falling house prices will have on discretionary spending, Sala Tenna says.
The fund has about 45 holdings that include exposure to some Australian-listed lithium miners, the biggest of which is Mineral Resources, which is also a significant player in mining services, iron ore and gas.
He says his home state is booming with lithium mining “taking off”, with more than 50 per cent of the world’s lithium spodumene, from which lithium is extracted, whose uses include lithium-ion batteries, produced in Western Australia.
- Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
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