Written by Doug Jopling, Senior Investment Analyst and Portfolio Manager
The fund was up 2.9% in June. The market was in consolidation mode after large gains in April and May. The ASX small ordinaries index was up 3.5% by 10 June, before finishing the month 2.2% lower. Some recovery stocks such as travel stocks (not owned by the fund) had run up too quickly and gave up some of their gains as people started to question how quick things will get back to normal.
I increased position sizes in six of the 21 stocks in the fund. I added only one new company to the fund, the New Zealand retirement village provider Metlifecare. This company was subject to a takeover bid at $7 a share from a private equity company which withdrew its bid in early April. I managed to pick up some shares for about $4.40 this month which equated to about 63% of its net asset value (as stated in its half year report in Feb 2020). The shares have increased by about 15% since I purchased them.
Meanwhile, I have trimmed three of our gold positions as the share prices continued to rise. To illustrate why it is important to take some profits after a large price rise, RED 5’s share price went from 20 cents at the beginning of April to 34.5 cents in late June before finishing at 20 cents (I had purchased them for 21 cents in March to May). I sold about 45% of the holding between 28 to 34 cents, as I believed they had hit fair value at around 31 cents. This meant I was still in profit in this trade when the share price fell on poor quarterly production results. I also sold my remaining stake in Altium, a software provider as I believed the share price had run its course and there was more downside risk to holding, this proved correct as shortly after I had sold the position the company downgraded its results. However, while I got it right on that stock, I sold Appen too early and have watched it increase by another 20% (I made 30% on the trade but could have made 50%). We don’t get every decision right.
In other major movements, Strandline Resources was up 62% in the month and has doubled since I bought them in January. Macquarie Telecom, a datacentre provider was up 33% in the month and is now the largest position in the fund. Geopacific Resources’ CEO resigned in June which knocked the share price down by 25%, the long-term thesis hasn’t changed.
As Mike mentioned in his introduction, we are now not accepting more money into this fund as we have reached our capacity.
Written by Mike Ross, Senior Investment Analyst
The Dividend Fund returned 0.7% in June versus the benchmark return of -2.3%.
The main driver of performance was our longstanding investment in Macquarie Telecom. Macquarie Telecom is an owner of data centres and vendor of cloud and telecommunications services. In addition to operating in a sector with strong tailwinds, the company offers strong shareholder alignment as the co-founders and management own 55% of the business.
The company’s share price increased by 33% during June after it made a number of announcements indicating the business had avoided any major disruption from Covid-19, and was benefiting from increased demand for cloud services and data-centre capacity. Macquarie announced it would increase and bring forward capacity, including an additional 4MW of initial capacity at its IC3 East development, on track for completion by January. Macquarie also announced a new data centre in Canberra and was approved to bid for Department of Defence contracts, highlighting the company’s close relationship with the Australian Government.
Another contributor to performance in June was Adairs, a retailer of homewares. The company’s share price finished the month 23% higher after it released a positive trading update. Despite rising unemployment and the bearish headlines, it is clear Australian and Kiwi consumers are, for now, addicted to spending their money. Stimulus, reallocated travel budgets and even the draw-down of superannuation is being redirected into consumer goods including homewares, footwear, apparel, and even larger ticket discretionary items such as luxury cars and motorbikes. In all likelihood, some of this spending is a one-off sugar hit or “pull forward” of demand. However certain businesses, especially those with effective online capabilities or favourable competition positions, will be able to retain additional customers and come out of this crisis even stronger.
Written by Chris Bainbridge, Senior Investment Analyst and Portfolio Manager
After a disappointing May, it was pleasing to provide a better performance in June, with ECF up 3.3% during the month versus the Emerging Companies Index which was up 1%.
Performance was driven by companies exposed variously to meal-kit delivery, enterprise software and healthcare. Meal-kit delivery provider Marley Spoon continued to re-rate during the month on the back of a positive trading update from its competitor HelloFresh and renewed concerns about the spread of Covid-19 in the US, its largest market. During the month we used a capital raise to add to our existing position in enterprise imaging software provider, Mach7. Mach7 raised capital to acquire Client Outlook, an enterprise viewing and integration platform. We view the acquisition as highly synergistic, bringing together M7T’s data platform (the back end) with Client Outlook’s viewer (front end) in a move which significantly expands the addressable market for the combined entity and creates a compelling opportunity for clients.
Underperformance during the month came from Bigtincan and Aeris, with no news.
Many ECF companies remain dormant outside key market updates. July and August will provide all our companies with an opportunity to update the market on their recent performance. The coming months are a key barometer of performance and we’re confident that we’ve positioned the portfolio to align with those companies benefitting from the current environment.
Written by Chris Bainbridge, Senior Investment Analyst and Portfolio Manager
Growth 2 Fund
Following the strong rebound in April and May, global equity market performance was muted in June as concerns around the US’ (in)ability to contain the spread of Covid-19 tempered expectations around the shape of a recovery there. Growth 2 ended the month up 0.4% versus the Australian Small Ordinaries Index which was down -2.3%.
It was a tough month as large positions which had provided positive trading updates in May such as EML Payments and Superloop dragged on performance. Performance during the month was driven by smaller positions in companies which continued to benefit from structural tailwinds discussed in previous updates, including meal-kit delivery, online shopping and Buy-now-pay-later (BNPL). Meal-kit delivery provider Marley Spoon continued to re-rate during the month on the back of a positive trading update from its competitor HelloFresh and renewed concerns about the spread of Covid-19 in the US, its largest market. Redbubble and Adairs also provided positive trading updates, underlining the continued shift to online shopping. Whilst the rate of online penetration for these services will likely slow, it’s unlikely to retreat and Growth 2 will remain tilted toward companies benefiting from these structural tailwinds.
It’s important to discuss Freedom as it revealed a flaw in my process. Process makes the implicit, explicit. Put another way, under stress, process comes through. Unfortunately, sometimes it’s only in extreme movements where you discover whether you’ve equipped yourself with the right process to take the correct action. Freedom revealed that I hadn’t. Following an update to market that both its CEO and CFO had departed, Freedom traded for a number of hours before being placed in a halt. Investing is a probabilistic game based on imperfect information. I should have weighed the probabilities and used the trading window as an opportunity to reduce the position. Instead I held. Regardless of the eventual outcome, Freedom revealed a flaw in my process which I have now corrected.
Looking ahead, we have an exciting couple of months. July provides certain companies with an opportunity to update on quarterly performance before we head into full year reporting in August. Whilst the economic backdrop remains challenging, Growth 2 remains leveraged to companies with strong structural tailwinds which I expect to perform regardless of the broader economic conditions.
Past performance is not an indicator for future performance. This is not intended to be financial advice and does not take into account any particular person’s circumstances. Before relying on this information, please speak to an independent financial adviser. Pie Funds is the issuer of the Pie Funds Management Scheme. For access to the PDSs, please click here.