How does the Pie Funds team use volatility to create opportunities? Mark Devcich, Pie’s Chief Investment Officer & Portfolio Manager, explains.
Volatility can create real opportunities for an active manager like Pie, if we can successfully control our emotions.
Over the long term, investment returns on a fund will mimic the returns of the investments, which should mimic the returns on incremental capital the businesses can generate.
For example, if we are aiming for a certain minimum return figure for a fund, we need to look for businesses that can compound capital at rates of at least that figure, to achieve the returns in our funds.
So what happens when the share prices are volatile? This often happens. Most of our positions in the fund, the difference between the 52 week high and low can be well over 100%, per year. There can be more extreme examples like A2 Milk. At its high, its share price was $21.75, and at it’s low, $5.40, over 52 weeks. That’s showing extreme volatility.
Even a predictable business like Xero, which has nearly all of its revenue as recurring (it’s a subscription model) has had a 52-week high and low difference of 100%. What this means is the volatility of the market in assessing the valuation of a company is far greater than the change in actual business value.
The challenge that we have is to try and use the volatility of the market to our advantage. There's a couple of quotes from the father of value investing Benjamin Graham around volatility and managing our emotions and investing in general. What he says is, ‘in the end how your investments behave is much less important than how you behave. It requires a strength of character in order to think and act in an opposite fashion to the crowd and also, be patient and wait for those opportunities,’ and: ‘In short, investing isn't about beating others at the game, it's about controlling yourself at your own game.”
By trying to act contrarian and stay rational, which is difficult especially in times of market dislocation, means you can buy stocks at unjustifiably low valuations, which will eventually revert over time to a more normalised valuation. This is how you build excess returns, on top of the returns the business can generate.
This is how we think about investing at Pie. We are investing in businesses, but we try to use the market to our advantage to amplify our returns on the underlying investments.
It is difficult to do, especially consistently, but we strive to manage our emotions and just try to take advantage of the opportunities that the market presents us.
Information is current as at July 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.