10/7/2021 11:00:00 PM

Fund Reviews: Australasian Growth

Written by Chris Bainbridge, Head of Australasian Equities and Portfolio Manager

Australasian Growth Fund

The Australasian Growth Fund returned -0.7% for the month, bringing it to a 12-month return of 18.2%.
Positive contributors included Mach7 Technologies (contract announcement) and Palla Pharma (investor update). 
Last month we outlined our strategy to deploy our cash reserves into undervalued structural growth companies which fit the four Ps: product, potential, people and predictability. Consistent with that strategy, we’ve added BWX Limited as a new position. BWX is a global natural beauty company with a portfolio of leading brands including Sukin, Andalou and Go-To. Our investment is based on four key points: compelling brands, a global opportunity, excellent management and significant upside to medium term numbers. The market’s disaffection with the recent acquisition of Go-To, coupled with a myopic focus on the impact of Covid-induced lockdowns has provided us with a compelling entry point. BWX is a defensive growth stock poised to re-accelerate as the world’s economies reopen. We’re excited to have skin in the game. 
Detracting from performance were Life360, Plenti, and Zebit. 
After a strong run in recent months, Life360 pulled back in September along with the correction in tech related names. Despite the pullback, we remain enthused about 360’s US App downloads which were up 8% quarter on quarter and 71% year on year. Whilst we don’t place too much importance on the absolute numbers, the trends point to continued strong momentum in the business. 
Plenti and Zebit both declined on no news. We remain particularly excited about the growth prospects for Plenti as Australia emerges from lockdown and Plenti fills the void left by the withdrawal of major bank lending from its verticals. 
Looking ahead, October is a busy month with quarterlies before we head into AGM season. We continue to work on a number of exciting new ideas and look forward to updating you in due course. 

Written by Mike Ross, Portfolio Manager

Australasian Dividend Growth Fund

The Dividend Growth Fund returned 0.3% for the month, bringing it to a 12-month return of 48.2%. Contributors to performance during the month included Karoon, Home Consortium and Smartgroup. Detractors included Uniti, MA Financial and Peter Warren.

Smartgroup (ASX:SIQ) rose 21% in September after receiving a takeover proposal from a financial consortium at the end of the month. Unfortunately this gave the portfolio less juice than it could have, had I not reduced the position size earlier this year. I’ve always appreciated the cash generative nature of the business, cosy industry structure and more recently exposure to a recovery in auto sales. However I lacked conviction that Smartgroup had compelling growth opportunities ahead of it that could really move the meter. The good news is I did not completely exit the position. With the stock still trading at a 10% discount to the takeover bid, it will be interesting to see if it goes ahead and what this means for broader industry consolidation, given our holding in Eclipx.

Karoon (ASX:KAR), a more meaningful position within the portfolio, rose almost 27% as the oil price rallied. As a commodity producer, Karoon is not a typical investment for the fund. The value of a commodity company is heavily dependent on the future commodity price, something we have no edge in predicting. We initially invested in Karoon due to an unusually attractive asymmetric return profile as we were able to buy in at a steep discount to cash backing, as explained in previous newsletters. I have sold more than half the position as it has appreciated closer to fair value, but why hold on at all? First, I saw numerous catalysts that I believed would further re-rate the stock and for much of this time there was still a margin of safety in the valuation. Second, I was conscious that in unloved sectors, a shift in sentiment often takes much longer than one might expect. Oil and gas has arguably been the most unloved sector in recent times. Third, although I claim no special insights in predicting the oil price, our research suggested the demand equation was improving as economies opened up while new supply has been starved of investment and requires reasonable lead times to come onstream.

Despite the investment delivering solid returns so far, it has been a very painful way to make money given the mental anguish that comes with having to worry about the volatile, unpredictable oil price. The experience has only reinforced why it is better to tilt the portfolio towards good businesses that allow you to sleep well at night because they are predictable, backed by structural tailwinds, with more control over their destiny.


Written by Chris Bainbridge, Head of Australasian Equities and Portfolio Manager

Australasian Emerging Companies Fund

The Australasian Emerging Companies Fund returned 1.1% for the month, bringing it to a 12-month return of 16.7%.  
Positive contributions included Aussie Broadband, Calix and Viva Leisure. 
Aussie Broadband (ABB), which we highlighted in our last newsletter, continued to re-rate in September. ABB followed up a strategic swap fibre agreement with a capital raise to fund future acquisitions. We participated in the capital raise and back management to execute on an accretive deal given ABB’s multiple and synergies generally on offer in telco related mergers. 
Calix, an environment technology company that allows us to tap into the decarbonisation theme, had a strong month. Cement production is the world’s single biggest industrial cause of carbon pollution, responsible for 8% of global emissions. European cement producers are under significant pressure to reduce their CO2 emissions to reach the EU’s sustainability goals. One application of Calix’s technology offers a solution to this problem. During September, Calix sold a 7% stake in its CO2 venture for $24.5m, implying a $350m-$500m valuation for its LEILAC subsidiary and technology alone (Calix’s commercial business and other developing verticals are in addition to this valuation). We believe there’s upside to that valuation as the commercialisation pipeline progresses and are excited about Calix’s ability to monetise its technology in other verticals. 
Viva Leisure, an operator of health clubs in Australia, re-rated as parts of its portfolio started to reopen in NSW. 
Detractors for the month included Kip McGrath and Bigtincan, both on no news. We remain confident in the outlook for both companies. 
October is a busier month for news as many of our companies are expected to provide quarterly updates. We look forward to updating you on their progress.

Written by Chris Bainbridge, Head of Australasian Equities and Portfolio Manager

Australasian Growth 2 Fund

The Australasian Growth 2 Fund returned -1.2% for the month, bringing it to a 12-month return of 24.0%.  
From a macro perspective, September was noisier than a Wallabies fan after four wins on the trot. The selloff that began on the back of Evergrande fears found extra velocity as inflationary concerns stoked a rapid rise in bond rates. 
Whilst we don’t spend time attempting to forecast macro events, our view is: 
• There’s an 80% probability Evergrande will be contained. Evergrande is a property company backed by real assets. Having lost 85% of its value over six months, it’s hardly a Black Swan event. More broadly, we’re mindful that construction linked activity accounts for 25% of China’s GDP. G2 doesn’t have any direct exposure to Chinese construction (e.g. via resources), but we’ll continue to monitor the situation given the global ripple effects a sharper than expected slowdown in this area could have.
• Inflationary concerns reflect a supply problem, not a demand problem. Positive sentiment will return as supply issues are worked through and the focus shifts to the outlook for solid growth as economies reopen. 
Accordingly, we have used the correction to increase our exposure to structural growth companies which should benefit from a reopening of the global economies.
From a company point of view, September was a quiet month. 
Positive contributors for the month included IDP Education, Nitro and Aroa Biosurgery, all with no news. 
Detractors for the month included EML Payments, Nearmap and Uniti Group. Vaughn Bowen, a Director of Uniti Group was charged with insider trading relating to a prior role. Mr Bowen denied the allegations and Uniti Group confirmed that the operations of the business will not be impacted. We respect Mr Bowen’s right to be presumed innocent and used the dip to add to our position. 
Looking ahead, October is a busy month as a number of companies provide updates on their first quarter performance. Longer term, we have positioned the fund to benefit from a global reopening. Delta has delayed the impact, but with vaccination rates rising faster than Auckland house prices, we’re confident share prices will reflect the momentum in our companies once the current correction abates. 

Information is current as at 30 September 2021. Pie Funds Management Limited is the manager of the funds in the Pie Funds Management Scheme. Any advice is given by Pie Funds Management Limited and is general only. Our advice relates only to the specific financial products mentioned and does not account for personal circumstances or financial goals. Please see a financial adviser for tailored advice. You may have to pay product or other fees, like brokerage, if you act on any advice. As manager of the Pie Funds Management Scheme investment funds, we receive fees determined by your balance and we benefit financially if you invest in our products. We manage this conflict of interest via an internal compliance framework designed to help us meet our duties to you. For information about how we can help you, our duties and complaint process and how disputes can be resolved, or to see our product disclosure statement, please visit www.piefunds.co.nz. Please let us know if you would like a hard copy of this disclosure information. Past performance is not a guarantee of future returns. Returns can be negative as well as positive and returns over different periods may vary.