4/6/2022 12:00:00 AM

How Pie Funds is navigating global uncertainty


The year 2022 has started with significant global uncertainty which is impacting investments. How is Pie navigating this?

There’s a lot going on for global markets right now. The war in Eastern Europe, inflation, rising interest rates, energy security, and don’t forget the Covid-19 pandemic too.

2022 started off with a high level of uncertainty given the Federal Reserve’s fear about being behind the curve on inflation. This led to higher short-term interest rates and a sell-off in growth stocks. The Covid-19 variant of Omicron was still affecting countries, as well as global supply chains. Furthermore, commodity prices were rising and many companies were seeing cost pressures from wages and materials. Much of this was likely to be temporary, but the invasion of Ukraine by Russia has changed that for the time being. 

The war in Eastern Europe has exacerbated the commodity price rises and brings a whole new level of risk, especially if NATO countries get drawn into conflict. Russia and Ukraine are important exporters of wheat and many other foodstuffs, which will cause food prices to rise. For example, Russia and Ukraine together account for almost 30% of global wheat exports. As well as the humanitarian crisis, another major concern is energy security – so far Russia has not cut off oil or gas supplies to Europe, but this could happen. Oil and gas prices have risen sharply, which will hit consumer spending.

So how has Pie been navigating this volatile period? 

Increased cash levels
Pie Funds has kept relatively high cash levels of between 20% to 30% across the international funds. We've achieved this through a combination of reducing some of our higher-risk equity exposure, reducing our less-liquid positions as well, and cutting holdings in areas where high energy and food costs could really hurt profits. This means companies that could be affected by a drop in consumer discretionary spending.

Using market hedging
We have been using market hedging to protect the portfolios, but the very high level of volatility makes this difficult. We employed some market hedging at the outbreak of the war which helped protect capital. After the market moved higher in March we put some hedging back on.

Adjusting portfolios to lower risk
We have been adjusting the portfolio positions to lower risk, either by reducing weightings or selling out of some positions entirely. This means we have extensively reviewed the companies we’re invested in. We’ve gone through our portfolios and spoken to management teams to see if or how their outlook has changed. Overall many stocks are being impacted by poor sentiment right now. However, as long as the outlook for these companies are still intact, the forward return profile for the next couple of years is looking outstanding for our companies in the portfolio.

Finding growth companies that can excel in the current climate
We have not stopped looking for investment opportunities. In the current volatile climate, we’re seeing attractiveness of more defensive sectors like infrastructure, education, and health care. That’s obviously important when consumer discretionary is under pressure, and the outlook is uncertain. Some of our largest holdings in the Australasian funds are in these sectors. There are still opportunities to make money in growth companies despite the current tough market, and we are looking to pivot the portfolios towards more sectors which are likely to perform better in this new market environment.

Reviewing exposure to Russia and Ukraine
Although we knew the portfolios had very limited exposure to Russia or Ukraine in terms of sales, profits, or indeed people, we still went through all our companies with a fine-tooth comb. Pie’s international funds have had no or extremely low (less than 0.1%) direct listed exposure to the conflict region. Some of our portfolio companies do have business in Russia or Ukraine, but it is very small, usually only about 1%-2% of sales. We have no or very low exposure to financials which could see counter-party risk from the sanctions imposed on Russia by the West.

Information is current as at April 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 reliable indicator of future returns. Returns can be negative as well as positive and returns over different periods may vary.