Written by Guy Thornewill, Head of Research UK & Europe and Senior Investment Analyst
Global Growth Fund
The Global Growth Fund returned 0.5% for the month, bringing it to a 12-month return of 29.3%.
We have highlighted in recent fund reports the importance of not having losers. Well, unfortunately we did have one this month, which cost the fund around 1%.Avon Protection downgraded its profit forecast and the shares fell 35%. The crux of the problem stems from supply chain issues, not demand, as it failed to secure enough components to keep up with its delivery schedule. We were taken by surprise, as was the market, because as Avon supplies protection products to the US military, we thought that suppliers would be able to overcome any challenges for this critical customer. This was clearly wrong. This highlights how supply chain issues could affect many companies in the next few months, as the Covid Delta variant runs riot in Asia and closes production lines for many different industries. It is very hard to know where the hits will come, but it is one reason our cash levels are higher than normal at the current time, which will allow us to take advantage of opportunities that arise.
Overcoming a bad loser typically means you need several winners, and fortunately we did have some this month enabling the fund to make a small gain. ATS Automation Tooling and Pets at Home both enjoyed excellent earnings reports and positive share price reactions. These companies are well managed and have strong tailwinds from two of our main themes, automation and pets respectively. We also had a takeover in the fund during the month as Z Energy, the New Zealand fuel retailer, was bid for by the Australian company Ampol. The shares rose 14% on the day and have edged higher since. We will retain our position for now in case another bidder emerges.
Fund activity was muted during the month, but we did exit a position in SP Plus. This US parking operator was bought as a recovery play, and although the company delivered a good earnings upgrade, the shares did not react as well as we had hoped. In our view this is mainly due to the rising Delta variant cases in the US, which may lead to further travel restrictions. Unfortunately the pandemic is not yet in the rear view mirror.
Written by Toby Woods, Senior Investment Analyst
Growth UK & Europe Fund
The Growth UK and Europe Fund returned -1.1% for the month, bringing it to a 12-month return of 42.6%.
August was a humbling month in the fund which reminded us of the risks, as well as the benefits, of stock market investing. We had three stocks which hurt performance badly, but since we are told bad news comes in threes we are hopeful that our period of reckoning is over.
Avon Protection, Fashionette and Acast are the culprits. Avon, which was a stellar performer for the fund last year but which has struggled in 2021, downgraded its profit forecast for the year. The crux of the problem stems from supply chain issues, not demand, as it failed to secure enough components to keep up with its delivery schedule. It has been compounded by a cost base that was already elevated due to a failed body armour contract that we have highlighted before. We were taken by surprise, as was the market, since Avon supplies protection products to the US Department of Defense we thought that suppliers would be able to overcome any challenges for this critical customer. It has not been the case, and the stock has lost 35%.
Fashionette has similarly warned on its guidance, also blaming operations rather than demand. It is in the process of shifting its warehouse and logistics but has been beset by technical issues. We were in the process of selling the stock when the news was delivered as we were starting to be concerned about underlying demand. Although the management have insisted demand is robust, we are sceptical that they are using the operational hiccup to cover slowing customer orders so we accelerated our sale, departing our holding at a loss.
Finally, Acast may have delivered 125% growth in Q2 but it did not prevent the market from selling the stock when Spotify announced that it was exploring various podcast monetisation options, including an open ecosystem rivalling Acast’s. While Spotify is a competitor to be respected, we believe that Acast’s market share of 75% in key markets such as the UK is hard to immediately disrupt, especially while the whole sector is seeing strong structural growth.
Without these three stocks, we would have seen a solid month of returns as core holdings such as Inficon, Sdiptech, Swedencare and Bytes continued to appreciate. August, however, brings to a close our monthly winning streak since March 2020, which is a performance we are proud of.
Written by Guy Thornewill, Head of Research UK & Europe and Senior Investment Analyst
Global Growth 2 Fund
The Global Growth 2 Fund returned 2.8% for the month, bringing it to a 12-month return of 16.6%.
The fund posted another good return for the month, driven by earnings upgrades for several different positions. Alcon reported an excellent set of figures, showing robust demand in its contact lens and eye surgery businesses, accompanied by strong margins. This led to the shares gaining 13% on the day. Demand is rebounding strongly following lockdowns, and the company is gaining market share with new product launches. ATS Automation Tooling also reported very strong earnings and a record order backlog, with the shares rising 12% on the reporting day. Demand for automation systems remains strong and the company continues to make value accretive acquisitions as well.
Other stocks which performed well during the month included Pets at Home, Hellofresh and recent purchase Walmex. Pets at Home is seeing continued strong demand from new pet owners, and our view is that demand will remain elevated for some time. Hellofresh is once again benefitting from renewed lockdowns in certain parts of the world, and it has built what we feel is an unassailable lead over its competitors in meal kit delivery. Finally, Walmex has seen continued sales growth in its main Mexican market, and we still feel its e-commerce business is under-appreciated by the market.
The main hit to performance in August came from the Chinese internet giant Alibaba. The Chinese government has in recent weeks been introducing some draconian new regulations for the ‘benefit of society’. This has included forcing tutoring companies to become not for profit and drastically restricting gaming hours for children. Some share prices have fallen over 80% and hundreds of billions of dollars have been wiped from the market value of Chinese companies. We have had limited exposure here, but nevertheless Alibaba has been caught up in some of the regulations due to its dominant position in e-commerce. In our view the shares have been oversold and we are keeping our position.
In terms of outlook the clouds on the horizon are getting a little darker. The steep rise in Delta cases in Asia is putting further pressure on supply chains, which are already stretched, and shipping costs and raw material prices in some areas remain high. Whilst end demand from businesses and consumers remains solid, we do expect a few nasty surprises from the corporate sector in the next few months. This may provide some good investment opportunities.
Information is current as at 31 August 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.