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 one of this edition, we're joined by Romano Sala Tenna, co-founder of Katana Asset Management.
The Motley Fool: In November 2021, you told us, "We are seeing some real structural elements [to inflation]… That is going to have an impact on the Australian landscape." That's certainly come to fruition. With interest rates ratcheting up to tame inflation, has that impacted your cash holdings?
Romano Sala Tenna: It has. In terms of our cash weighting, we were up at 38% recently. We've gone back to 30% because we're expecting a short-term bounce. And once we think this current rally's run its course we'll start to build our cash position back up again.
MF: How does that compare to your positioning in early 2021, during the ASX bull run?
RST: We generally hold 15% to 35% cash through the cycle, and only very rarely go above or below those two numbers. So for us to be sitting at 38% is at the very extreme end of where we'd normally have cash.
We're back at 30% at the moment, as I said. But we'd look to build that up to closer to 35% to 40% as we think this current rally runs its course.
MF: Has the higher inflation and interest rate environment changed your investment approach in other ways?
RST: It hasn't had much impact in terms of our weighting across small and large caps. Generally speaking, we don't do a lot in the small-cap space. The vast majority of what we do is in the S&P/ASX 100 Index (ASX: XTO).
At a strategical top-down level, going back six months, with the increased volatility we were seeing then, we did make a conscious decision to reduce illiquid holdings. So, if we were to come in one day and need to increase our cash rating dramatically, we didn't want any anchors in the portfolio that prevented that in terms of liquidity.
Kina Securities Ltd (ASX: KSL) is a great example. A really good company. We are going to own it again at some stage. But the liquidity there was a concern, so we sold our holding.
The major change in the portfolio has been that we normally hold 55 to 65 stocks. We're currently holding 43. That's the smallest number we've held for a long period of time. And that's really predicated on the fact that there are many companies we don't want to hold right at the moment. Great companies with good long-term prospects, but right at the moment, we don't want to be holding them.
We're sitting on a large cash weighting. Once we think we've seen the bottom, there are a lot of companies we'll start to invest in.
MF: Atop Kina Holdings, what other ASX shares are on your watchlist once you're convinced the bottom is in?
RST: For example, the non-bank space is screaming value. All 10% plus yields on a trailing basis, and PEs are four to five times. But they are really in the crosshairs still with what we're seeing here. Because they don't even have what banks have, which is the capacity to use their margin from deposits to fund profits.
We think there are a number of NBFIs, non-bank financial institutions, that are rapidly growing market share and executing well.
There's some like Pepper Money Ltd (ASX: PPM) that will be a big holding in our fund at some stage. Growing at a rapid rate, executing really well, using great fintech, really flexible. We think they'll really hit it out of the park at some point. But we've got to get through the current washout yet before we really start to build a large position.
MF: What do see as the biggest threat for ASX investors in the year ahead?
RST: The washout from central bank policy.
Namely, the impact on consumer spending; the impact on corporate profitability; and the impact on valuations for long-duration assets. Those three things are all directly related to central bank policy and a consequence of inflation.
Those, I think, are the biggest challenges facing our market over the next 12 months.
MF: And what's the biggest opportunity for investors?
RST: I think there are some sectors that have been well and truly oversold. There are some large opportunities in our universe. But you have to be patient. There are a number of cheap sectors, but they are likely to get cheaper.
The non-banks are a great example.
There are also some fantastic long-term consumer discretionary stocks like Wesfarmers Ltd (ASX: WES) or Domino's Pizza Enterprises Ltd (ASX: DMP). Some great long-term opportunities.
We're pretty excited about the next 12 to 24 months. We just think we need to be patient during this phase and make sure we time it as best we can in terms of starting to pick up some of these opportunities.
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Tune in tomorrow for part two of our interview with Romano Sala Tenna.
(You can find out more about the Katana Australia Equity Fund here.)
