An Introduction to the Katana Australian Equity Fund: Australia’s most consistent fund over 1,3,5,7 and 10 Years?

Now since inception, the Katana Australian Equity Fund has outperformed the All Ordinaries Accumulation Index by more than 2.9% per annum net of all fees.

It has outperformed the market over every timeframe, including one, three, five, and 10 years.

And since inception 16 years ago,

As of April 2023, it was ranked in the top 2% of funds over three years, top 3% over five years, and top 4% over 10 years, according to Morningstar.

Its portfolio manager, Mr. Romano Salatena, is with us today.

Romano is no stranger to the investor community as he appears regularly in the Australian Financial Review, the Sydney Modern Herald, Livewire, First Links, as well as a host of smaller publications.

He also appears on television and radio and has been a keynote speaker at conferences both internationally and domestically.

Romano's topic is an introduction to the Katana Australian Equity Fund, Australia's most consistent fund over one, three, five, seven, and 10 years.

Welcome Romano.

Thanks, Angeline, and nice to be here.

I'll get straight into it, we only have a short time.

I'd like to cover three things today.

Firstly, volatility time and compounding, because that explains how Katana thinks about investing.

I'll give you a brief introduction to who Katana is.

and then finally look at our performance update.

Let's get right into it.

Volatility, timing and compound.

If you could imagine, we've got 147 years of data now, which gives us a lot of data points to look at how markets operate.

Over that timeframe, 147 years, exactly 30 years of markets dropped, 117 years of markets increased.

So that means four out of five years the market will go up, one out of five years the market will go down.

And why is that important?

Because you will come in at some stage and think, my goodness, why did I invest in Katana?

My goodness, why did I invest in the stock market?

We want to make sure that people understand that volatility is a part of investing in the market.

It's a price you pay for a seat at the table.

And then if you are forearm with that information, you'll do the right thing at the wrong time, as opposed to doing the wrong thing at the wrong time.

If you look at that 147 years of data, when the market does drop, it drops by an average of 10.1%.

When it goes up, it goes up by 16.1%.

Combining those years, we get this magical number there, 10.8%.

So over 147 years, the ASX has gone up by 10.8% capital growth and dividends on average.

So really important to understand the context in which we're investing.

We've only got a very short timeframe today, so we are going to just take out two of over 100 slides we have talking about volatility timing and compounding.

But imagine this, imagine that you invested in the index for five years.

So you're no smarter, no dumber, you just put your money into the ASX accumulation index.

You turned your screen off and you came back in five years time.

On average, what do you see?

Well, over 147 years, there's 143 rolling five-year periods.

The average return would have been 65%.

So compounding at 10.8% per annum would have started to see the first effects of compounding cut in.

would have averaged 65% return over the five years and it still would have been seven negative five-year rolling time frame.

So seven periods where you may have been unfortunate enough to have invested and had a negative return over that time frame.

If you do the same thing for seven years, invested in the index, nothing smarter, nothing dumber, shut your screen off, came back in seven years time, what does it look like?

You start to see the effects of compounding, 100.6% return, and there still would have been two periods where you may have been unlucky enough to have a negative return, 73, 74, or years around 2011.

Do go one more year, and even though you're only investing one more year at 10.8%, you're starting to see compounding really kick in, that extra year gives you an extra 20% return,

And there would have been zero occasions over the last 147 years where you would have had a negative return over eight years or more.

So a very quick overview gives you an understanding of how Katana thinks in terms of compounding to overcome volatility and compounding to maximise the impact of time in the market.

Okay, so who's Katana?

Well, Katana is a fund set up in Perth in 2003, issued our first fund in January, 2006.

There's four investment professionals that manage the money.

Brad and myself co-founders, Giuliano joins in 2010 and Hendrix and you'll be there back in his fourth year now working with us.

Now, interestingly enough, what we see there is that Giuliano, Brad and myself are three portfolio managers.

There's a high level of depth and a high level of stability.

Most portfolios will be managed by one or two portfolio managers.

We have three and the three portfolio managers are now 13th year of working together.

So high degree of stability, high degree of tenure.

Every investment that we invest in must cover up on 11 key criteria as listed here.

And these key criteria in approximate order of how we see they're important.

So first and foremost, look for management, try to understand organisational culture management performance.

Look at the business model, what sustainable competitive advantages it has, look at value and growth, macro sentiments, look at balance sheet,

Earnings, you know, if you said to me, what's our big learning over the last 15 years?

It's about quality of earnings.

Why do you pay 25 times for one company and you don't pay eight times for another company?

It comes back to the degree of transparency, consistency, what factors inside or outside of management control, you know, whether there's a high degree of a large number of small customers or a small number of large customers.

All of these things impact your quality of earnings.

Look at cash flow, especially operational cash flow and free cash flow.

Warren Buffett's favourite measure, return on equity, return on equity, return on invested capital, return on assets, understand the power that you're getting from adding an extra dollar to the business.

And then look at liquidity in terms of size.

We are not afraid to invest in smaller companies, but we don't do it often because a smaller company has less liquidity, less diversification, probably less corporate governance, less research coverage, et cetera.

So we'll invest in larger companies generally, and we will happily take a 10% trade in Westpac Bank every month of the year if we've got a line of sight and a trade, but we won't invest in small companies unless we've got line of sight on a 50 to 70% return.

Then in 2022, we added ESG.

We've always been really big on ESG, but more as GSE, looking at corporate governance and the social licence to act in a jurisdiction.

Now we've added ESG because it's now tangibly impacting the valuations that are applied to shares.

As a simple example, where we might've previously bought Woodside on a P of say 13 to 14 times for a trade through to 2021 times with Inland Triggers,

Now we're looking to buy Woodside an eight to nine times with a trade through to probably exit around the 13 to 14 times.

So ESG is tangibly discounting the valuations that investors are prepared to pay for certain sectors of the market.

And then finally, we have up to 155 additional data checks that we can apply depending on how much confidence and familiarity we have with the company.

Over the last 30 years, we've learned a lot of things about how you can lose money

And so we've brought that into a very expensive database of checks that we have to apply if we have some album we're not as confident about.

And there might be things as simple as, has management sold stock in the last three months?

What are the KPIs we have in remuneration?

Has a company done a capital raise in the last six months?

These things in or themselves don't preclude us from investing in the company, but there are things that we need to look at and sign off on to make sure that we understand why they've transpired.

If you look at our typical portfolio, here's a recent portfolio, this is our top 10.

You know, most of what we do is in the ASX20 or ASX50 and yet our returns are substantially above that because of our timing of those stocks.

We generally, we've been above 5% on three stocks in 17 years.

We're very risk averse and very diverse.

We average 55 to 65 stocks through the cycle.

On average, most positions are one to 2%.

It'll be 3% is rare and above 5% has literally only happened on three stocks in 17 years.

Mini Resources, Commonwealth Ceremonies and Commonwealth Bank.

We average 15 to 35% cash through the cycle.

I can criticise for that, but my comment is if we can get the returns that we've achieved with a diverse portfolio and a large cash weighting, then that's a better risk adjusted outcome.

Okay, so let's have a quick look at our performance upgrade there.

One of the things that gives us confidence at Katana is that we haven't just outperformed over the last 12 months or we outperformed five years ago and haven't outperformed since then.

Katana has outperformed over every timeframe since inception 17 years ago.

And it gives us that confidence that there's something that's replicable and sustainable in terms of how we are delivering our performance.

And you can see here, we've just taken some samples over one, three, five, and since inception, to give you an idea of how we've outperformed.

To make that a little bit more meaningful, if we have a look at our since inception numbers, you can imagine this is our long-term returns

That second line from the bottom, 192% return, that is the STW.AXW.

That's the biggest and most widely used ETF in the marketplace at the moment.

And we often get asked, well, why don't I just put my money into an ETF?

Well, I think this chart answers that question.

If you invested in the STW.AXW ETF, since inception, you have 192% return.

Over the same timeframe, you'd have a 402% return,

investing in net of all fees.

So quite a substantial increase as we compound an extra 2.7 to 2.9% per annum over the long term, we start to see the impact that has.

Now there's different ways you can blow a fund up and we've been saying for 17 years that we're a lower risk fund, we've got the data now to prove that.

But why do we say we're a lower risk fund?

Well, first and foremost, there's no gearing and no derivatives.

They're the two big ways that you can potentially blow up a fund.

We have a highly diverse portfolio as I mentioned 55 to 65 stocks we have a high cash weighting 15 to 35 percent through the cycle.

High quality stocks every stock must go through a defined process and check off on very clear criteria before it makes in the portfolio.

And the third way can potentially blow up a portfolio is to have unlisted investments as you saw during the GFC.

Everything we invest in is ASX listed.

There's no offshore exposure.

There's no offshore currency or whatever else.

It's all ASX listed investments.

There's no short selling.

Again, that can add a high level of risk to a portfolio.

And finally, this point is very, very important.

There's the highest level of alignment.

The management team own over 20% of the funds on management.

So capital preservation is at the forefront of everything we do.

We are not going to invest this money to get a performance fee or to try and get a spectacular return.

What we're about doing is ensuring we preserve our capital and then get the best risk adjusted return we can, given that our capital is going to be here in the next 12 months.

I said we've got the data now to start to support this over the medium term.

the market drops we outperform the index 83.3% of the time and by an average of 1.34% per annum.

So if you suspect we're heading to a more volatile period then downside protection becomes as important as upside performance and you can see here that we've got a very high level of downside protection

outperforming 83.3% of the time in down markets and I think that's especially important for advisors you know it's hard to sit in front of a client and say hey you know we've lost the market's down 10% but it's even harder when you say the market's down 10% but your portfolio is now down 12%.

Just pulling some data off Morningstar this is the most recent data we've got the due numbers aren't through Morningstar as yet.

31st of May you can see here that

over three, five, and 10 years we've substantially outperformed our peer groups.

You can also see here that if you look on the right-hand bars there, you'll see that over, and the data's just slightly changing, but over three years we're in the top 4% of managers, over five years the top 3% of managers, and over 10 years the top 3% of managers as per the Morningstar database.

So we're arguably Australia's most consistent manager, and you've probably never heard of us.

Morningstar put out quantitative ratings over three, five, 10 years in overall.

They're the only four periods they do that.

We've got a five star rating over all four timeframes.

We have a high investment grade rating or superior rating with SQM.

And in 2022, we received one of 10 star manager awards given out of a starting put around about 10,000 funds.

So as you can see, we're starting to get some recognition for our consistent performance.

And we hope that they'll continue over the coming months and years.

So Angel, that's a very brief overview.

Did you have any questions you'd like to put to us?

Thanks Romana.

Yes, I do have a question for you.

So I'm aware that a lot of us have been successful, but over different periods.

consistency to?

Well it's a good question, I think it's a couple of things.

Firstly I think we made a lot of mistakes before we started in funds management so we're professional advisors and investors for nearly 15 years prior to that and we learned a lot of the things that where people go wrong and we've had the opportunity to see a lot of professional managers over time firsthand as well and learn from some of the very best there.

I think the second thing though is that we've also tried to remove any artificial constraints

And one simple example is, you know, you might see yourself as a value investor or a growth investor.

While thinking of the Australian landscape, you don't have the luxury to be a value investor or to be a growth investor.

You know, growth outperformed for 10 years, values outperformed for the last two years, you've outperformed all the way through.

So I think you've got to try and remove artificial constraints around style, around market capitalisation, around sector, you know, around how you think about investing, you know, not be

restricted to looking at the index.

Obviously, we need to mark our performance of the index so people can see how we performed, but not to restrain or restrict your thinking to say, hey, the banking sector makes up 25% of the market, therefore the default position is 25%.

Our thinking is the banking sector makes up 25% of the market.

Our default position is 0% unless we can come up with a reason why we think the banking sector will outperform or it'll have genuine alpha above and beyond the market.

Thank you Romana.

It's great to see you today and thank you for the presentation and the Q&A.

Take care.