6/30/2022 12:00:00 AM

Fund Reviews: Global Growth

Written by Guy Thornewill, Head of Global Research

Global Growth Fund 

The Global Growth Fund returned -7.1% for the month, bringing it to a 12-month return of -14.4%, and 9.2% annualised since inception.

June was another brutal month in markets as recession fears dominated and central banks continued to hike rates aggressively to combat inflation. We expect the upcoming second quarter earnings season to lead to substantial earnings downgrades across markets. There really was nowhere to hide in June, even energy stocks which had outperformed so far this year and where we have no exposure, sold off about 20%. Many commodities fell sharply, and travel stocks were also hit hard despite the current high demand for travel services. Our cash levels remained high, although had dipped to 16% by month-end as we added a couple of new ideas.   Overall, we are staying cautious, and will gradually deploy more cash if markets fall further or central banks pivot away from rate hikes. Putin’s war also remains a great source of uncertainty.

We remain confident in the fund’s current holdings: a mixture of defensive growth, companies with high recurring revenues, strong themes like renewables and some companies with very cheap valuations. None of our portfolio holdings had major earnings downgrades during the month, but this didn’t stop share prices declining in holdings like Bufab, Sdiptech and DiscoverIE. These are high quality industrial businesses that now look cheap, but they won’t be immune to a recession. Traxion and Sixt shares were also hit despite strong current trading. GB Group fell despite solid earnings guidance, and after a placement of shares from their Acuant acquisition.

We added new positions in Grenergy and Crocs. Grenergy is a Spanish renewables company with global operations. The company executed a capital increase to invest in faster growth and we took the opportunity to buy a position. The renewables theme is working well and we expect this to continue. Crocs is a very cheap footwear manufacturer, trading on just 4x earnings. Although we expect some downgrades, we believe this is more than priced in and current sales trends are encouraging. We have mostly avoided the consumer discretionary sector, but some opportunities are emerging where we feel valuations are now much too low.

Written by Toby Woods, Senior Investment Analyst

Growth UK & Europe Fund

The Growth UK and Europe Fund returned -8.2% for the month, bringing it to a 12-month return of -18.6%, and 8.7% annualised since inception.

June was one of the worst months in the fund’s history, yet it outperformed the European small-cap market by 1.9% in New Zealand dollar terms. The fund was helped by having high cash levels and some market hedging. June was an ugly month across all major indices as the fear of global recession started to grip the markets. 

In this backdrop we have been relatively busy adjusting positions. We reduced exposure to Thermador, SES-imagotag, Gamma, Boku and Brickability. While all these businesses exhibit good long-term prospects, a recession could impact their short-term earnings. We added to our positions in FRP, Netcompany and Grenergy, which should have resilient earnings. FRP provides administration and restructuring services to UK businesses. It is naturally counter cyclical, which is why it’s now the largest weight in the fund.

In these more sombre times, we rate visibility of earnings very highly so we have a bias towards recurring revenue businesses. Roughly half the weight of the portfolio is in companies where recurring revenues are dominant. An example is Marlowe, which offers safety and compliance services to small businesses across the UK. Roughly 85-90% of revenues are underpinned by regulations that cannot be avoided in any market condition. The company delivered results during the month ahead of analyst expectations and continues to guide for robust earnings growth.

A final word needs to go to Swedencare, which we exited during the period. We first bought Swedencare after meeting the management team in their unassumingly small office in Malmo, southern Sweden in November 2019. It was establishing a portfolio of health supplement products for pets and, although small at the time, it was delivering high returns alongside extraordinary growth. We immediately took a position, and after a very successful journey with the company growing almost 10-fold in less than three years, we have exited with the shares >6x higher than our original entry price, even after a 40% drop in the share price this year. This trade highlights the potential returns available from small-cap investing. 

Written by Guy Thornewill, Head of Global Research

Global Growth 2 Fund 

The Global Growth 2 Fund returned -6.1% for the month, bringing it to a 12-month return of -16.5%, and 1.2% annualised since inception.

Recession fears dominated markets in June and every asset class was impacted.  In equities even energy stocks, which had outperformed so far this year, fell about 20%. Commodities declined despite tight supply in many areas. Putin also ramped up pressure on Europe by restricting gas supplies in a form of economic war. We remain cautious, with cash levels of 13%, slightly down from May. We expect the upcoming second quarter reporting season to lead to estimate cuts for the market, although we expect many of our portfolio holdings to be robust. This is because they are either in defensive growth sectors like healthcare or strong themes like renewables.

However, our holdings will not be immune to the worsening earnings outlook, and indeed during the month several companies such as Schneider Electric, Sika, and Keyence underperformed as investors anticipated an industrial slowdown. This will provide an opportunity for us to increase weightings in high-quality holdings such as these, which are global leaders with good margins and return profiles.  Travel stocks were not spared either, despite strong current trading, with Sixt and Airbnb declining sharply on fears of consumers retrenching.  

We remain underweight in the consumer sector, having been concerned about spending levels for many months. In June we exited another small holding, Shimano, the bicycle gear manufacturer. Although the shares look cheap, we now think high-end bicycle demand will inevitably slow given pressures on household budgets. The sell-off in consumer stocks will yield opportunities though, and some shares now look very oversold. With this in mind, we started a position in Crocs.  This is a very cheap footwear manufacturer, trading on just 4x earnings. Although we expect some downgrades, we believe this is more than priced in and current sales trends are encouraging.  

Finally, we bought a position in Nutrien at the end of June, which is a global leader in potash and nitrogen fertiliser production. The shares had fallen 30% from April, yet we expect fertiliser prices to remain high due to Putin’s war restraining supply amid ongoing strong demand.

Information is current as at 30 June 2022. 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.