5/1/2020 12:00:00 AM

Investor Update (01/05/20)

Dear Investor,

We hope you’ve had a good week.

Please find below our weekly video update along with the transcript so you can read it if you prefer.

This week we cover off the following questions:

  1. What has happened in markets over the past week?
  2. What are you looking for in your calls with management teams?
  3. How are you positioning funds between short and longer-term investments?
  4. What's Pie’s view of a post-lockdown world?

Please send through any questions you have to [email protected]  and we will either respond directly or answer them in the next week’s video update.

I hope you have a great weekend.

Kind regards,

MIKE TAYLOR
Founder and CEO


 

 


Written version

Investor update, written version - 1 May 2020

Sam De Court: Hi, everyone, my name is Sam De Court, and with me I have Pie Funds CEO Mike Taylor and Mark Devcich, Chief Investment Officer and Portfolio Manager. Hi Mike, hi Mark. Just finishing your morning tea there, Mark!

Mike, we’ll start with you this week. Now, what’s been happening in the markets and what’s been happening around the world in the past week?

Mike Taylor: I guess the main thing, I suppose, is the continuing optimism that seems to be going through markets at the moment. Just in the past 24 hours, we’ve seen US markets up another 3 per cent, there’s been talk about a vaccine emerging later this year – faster than anyone anticipated – and it seems to be fuelling this rally. So, what can we take from that? Effectively, investors are saying it’s all over, and that we’ve past the worst of the Covid-19 virus.

Of course, it remains to be seen whether we’ll have a second wave of the virus, but for now, investors seem to be content to say that with the stimulus provided by central banks and in particular the Fed, and also stimulus provided by governments, that we’ve done enough and we’re past the worst.

Sam De Court: Thanks, Mike. And Mark, now, a bit of a change of topic now. We often make calls to management teams. Can you please explain a little bit more about how you prepare for these calls, and what you’re actually talking about?

Mark Devcich: It’s a good topic. We do all the obvious, like anyone else would. We read the company releases, presentations, do the research and talk to the brokers. But I think the most interesting thing is to think about a framework of this – what I think about when I’m having a call with management teams. I’m trying to answer a few questions, and the first question would be: Do I understand the product or the service that the company is providing?

Ultimately, the product or service a company is offering has to create value. We had a few situations in the past where companies have been selling products or services that haven’t added value to the customer and ultimately, they get into trouble. One we had was a funeral insurance company, and another was an education company, and both of them were taking advantage of their customers and they eventually failed, so that’s the first key point. I really want to understand the product or service that they provide.

The second one is, I want to understand how the company makes money. So, do they provide a subscription service? Is there recurring revenue? Is it a one-off sale, is it repeating? Obviously, we like those companies that have more predictable revenue streams and then once they sell the products, how long does it take them to collect the cash? Some companies collect cash much sooner than others, and obviously that’s preferable, and then other companies, it takes a long time and they have trouble collecting from their customers. So, these are companies that are more difficult. In this environment that’s quite important, because a lot of companies are threatening not to pay their suppliers, so that’s another point.

The third one I try to go through is understand how much money they’re going to make. This is key because this obviously informs the valuation of a company, so I’m trying to work out, at least over the next few years, how much money the company’s going to make. It’s difficult, but you assist that through looking at the size of their market, their competition, you look at their kind of historical growth rates as well, and you make an estimate and ask key questions of management to try to work out how much money and profit the company’s going to be making in the next few years.

Then, the last one I think is important is just the motivation of the key people. Often, we’re talking to the CEOs (chief executives) and CFOs (chief financial officers). For a lot of our companies, the CEOs are the founders, so a company’s really just a collection of people, so you want to understand what motivates them and, ultimately, that can be through a number of means. It can be through having a large shareholding, or it can be incentive plans.

There’s a good story, actually, I was watching on YouTube recently. One of the founders of Silicon Valley venture capital firm called Sequoia, a really successful firm, in the 80s, Bill Gates picked him up at the airport at Seattle in his car, and he said to Bill: “Why does your car not have a radio in it?” and Bill said: “Well, I ripped out the radio in it because that would tempt me to listen to the radio and that would mean I wasn’t thinking about Microsoft every minute of the day.” So, those are the kind of founders we want to invest in if we can. They make their business their life’s work – we call them ‘intelligent fanatics’. If you’re going to invest alongside people like that, people like Jeff Bezos, at Amazon, you’re going to do pretty well. That’s a feeling as to what we’re trying to get out of calls with management teams.

Sam De Court: Thanks, Mark, that’s a good story. Over the past, I guess, month or so, members of the investment team have been talking a lot about investing in companies that are benefiting right now from Covid, and also investing in companies that are not necessarily benefiting now, but we expect them to benefit in the mid to long term, as we come out of this. How do you, as a portfolio manager and a CIO (chief investment manager) decide how much to invest in the short term as opposed to the mid to long term?

Mark Devcich: I think right now, the easy money’s been made from investing in those companies that are beneficiaries in the coronavirus situation. We’ve seen companies like Amazon, Hello Fresh – we’ve talked about these in previous videos – they’ve done well, they’ve outperformed the market, because people have been clamouring into these beneficiaries but to me, the opportunity now is trying to work out what companies look like in one to two years’ time.

Again, watching another video recently, Stanley Druckenmiller, one of the most successful multi-asset investors globally, had a good point. He said basically, the best edge you can get in the markets is by thinking one or two years out. So, everyone’s trying to predict the next quarterly or half-year’s earnings and it’s a very competitive game and difficult to do, but to get a real edge, looking at what companies will do or look like on a one to two-year basis provides good insight and not many people are doing it, so that’s where you can get a good edge.

So, what we’re trying to do now is think about, what will the world look like in one to two years’ time and some interesting opportunities that’s providing. So, for example, you could think about airports. They probably, in one to two years’ time, won’t be back to where they were pre-coronavirus, but there’ll be a lot more traffic than where they are now. And then you think, well, does that mean they should be deserving a 50 per cent discount to the current valuation, given airports are long-life assets, like Sydney Airport’s got a 100-year lease on it. A couple of years of bad earnings actually doesn’t mean that much to the overall long-term valuation, so you can think about, if you’re buying it 50 per cent off, in two years’ time, traffic starts to get better, the valuation will increase, and situations like that are probably pretty good opportunities.

We’ve got another company, EML. We’ve talked about this a lot in the past – it’s one of our biggest positions. They provide electronic gift cards for shopping malls, so, they’ve been impacted quite significantly, with shopping malls closed, especially in Europe. But my view on this one is, in one to two years’ time, if you take that timeframe as well, shopping malls will reopen and human society, we’re social, and a lot of the shopping malls they’re in are actually A-grade shopping malls, so they’ve got good food courts, some of them have got movie theatres, ice-skating rinks, that type of thing.

People will be going back to the malls and even though it’s had a short-term impact – the stock’s off more than 50 per cent from where it was trading – if you can just look through for a year, maybe 18 months, they’ll probably be back to pre-coronavirus levels and potentially even in a stronger position because a lot of the competitors, they’ll have gone out of the market. So, I like to think, a company like that, I can buy at 50 per cent off, providing really good opportunities right now.

So, that’s kind of how we’ve adjusted our thinking, not so much on the coronavirus beneficiaries. That’s all played out. It’s all looking at how do we maximise our opportunities from these stocks that have been sold off significantly, but the impact will be transitory.

Sam De Court: Thanks, Mark, and last question for you, Mike. What does the post-lockdown world look like to you?

Mike Taylor: I think it’s really interesting to observe human behaviour through times like this. Firstly, I guess, how compliant people have been with what has been very draconian measures, to stay at home. If you look at some European countries, I think Spain is one of the ones where the restrictions have been the most stringent, in that I don’t even think you’re allowed to take your children outside at all,or maybe they’re allowed outside for an hour a day.

People have been very compliant with this and, I think, what I’ve observed in New Zealand is that, once we’ve had our Level 4 lifted, people are very keen to get back to a normal sense of life, and I think certainly some positives have come out of this. Certainly, we’ve all enjoyed spending a little bit more time with family and also enjoyed a slightly different pace of life, and in fact, where previously companies might have thought that working from home was an opportunity for someone to slacken off, it’s actually been realised that working from actually actually improves productivity, so now we’ll be able to get a lot more flexibility in our work-life balance, which I think is a really positive thing.

Echoing what Mark said is that, a month ago, we really did believe that we were going to hell in a hand-basket and you might have thought at that time, “I’m never going to get on a plane again.” “How many jobs is the US economy losing this week?” But it’s quite possible that in a month’s time or in three months’ time, we might be celebrating that the US economy’s added three million jobs in a short period of time.

Yeah, you can certainly see that travel is probably going to come back. Certainly, as soon as we can be comfortable that we can vaccinated, travel is gong to come back quite quickly. And just on that, for example, some of our international team have already started to run the ruler over travel opportunities. Certainly, we wouldn’t have been doing this a month ago, but we are doing that now and looking at ones that might potentially survive the current environment.

So, we are looking a little bit wider in terms of opportunities, and I think now that we’ve had the rally back, this is more becoming a bit of a stock picker’s market – and that’s pretty good for Pie.

Sam De Court: Thank you very much, Mike, and thank you, Mark, and thanks to everybody watching. We look forward to seeing you next week.


To download our product disclosure statements, go to www.piefunds.co.nz.  Past performance is not an indicator for future returns. This information is general in nature only. Before relying it on it, we recommend you discuss with an expert