5/22/2020 12:00:00 AM

Investor Update (22/05/20)

Dear Investor,

Today is our 10th and final COVID-19 weekly video update.

This week we were joined by Doug Jopling, Portfolio Manager of the Pie Growth Fund, and we covered off these questions:

  1. What lessons have we learned from this crisis?
  2. How is the Growth Fund positioned?
  3. Why are we holding gold?
  4. What is going to set us apart from others going forward?

The team and I have really enjoyed recording these weekly videos over the past ten weeks and we have appreciated your positive feedback.

We will continue these regular videos going forward, however they will become monthly from now on.

Thank you for your amazing support and we look forward to talking soon.

Kind regards,

Founder and CEO



Written version

Sam De Court: Hi everyone, my name is Sam De Court and thank you very much for joining us today for our 10th Covid-19 video update. With me today I have Pie Funds CEO Mike Taylor and Doug Jopling. Doug is the portfolio manager of our longest-standing fund, the Pie Growth Fund, which launched twelve and a half years ago. Hi Mike, and hi Doug.

Mike, let’s start with this question. So, what are the lessons that you and the wider Pie investment team have learned throughout this crisis?

Mike Taylor: There are quite a few lessons, Sam. I think probably the most obvious one is that a business like ours can actually operate in a work-from-home environment, and we’ve got the situation now where you’re at home and Doug and I are in the office – different parts of the office – but that’s proved that businesses such as ours are quite resilient to be able to operate without necessarily anyone being in the office. I think that’s been one of the big beneficiaries for business, and the global economy, is proving that we can actually operate businesses remotely.

Looking at the kind of biggest lessons we’ve learned as a business and an investment team, probably what I’d say is the first one is that we should really have paid more attention to what the Federal Reserve (Fed)was doing and central banks. So, I guess possibly back in March we were very consumed by the effects the virus was having and what the lockdown measures were. Whereas, at the time in late March, really the only game in town from an investment perspective was to look very closely at the Fed’s actions that calmed the financial markets, stopped the financial crisis, and pumped money into the system, which reinvigorated the stock market and has led essentially to the gains and the recovery in the market that we’ve seen so far. It’s an old adage, you know, don’t fight the Fed, but it was particularly important this time around.

The other key lesson we’ve learnt is that whilst cash and hedging do help, and in this case for us they have provided us with additional alpha and performance, really we are a stock-picking business, that’s what we started on and that’s actually what’s delivered performance and helped us recover so quickly.

Sam De Court: Thanks, Mike. All right, Doug, we’re moving to you now. So, how is the Growth Fund currently positioned and have you done much buying and selling over the past few months.

Doug Jopling: (Laughs.) It’s obviously been very, very busy over the last few months. A couple of us have been getting up in the middle of the night to see what’s been going on in the US market and that’s determined whether we needed to increase our hedge, increase our cash, reduce our cash. So, I’ve been very busy. For the fund itself, I’ve entered into about six new positions, the companies I’ve chosen to go for are tech, telcos, pharmaceutical companies, the sort of industries that have been least affected by the market crisis, and the sectors that have rebounded quickest.

On top of that, I’ve exited about four or five positions, and obviously when the market was at its lows in March, I used the high levels of cash I had coming into the crisis to top up positions, so to sum it up, I went from about 50 per cent cash in the fund to about 37 per cent.

The fund’s obviously rebounded quite a bit and I’ve now, actually, been taking profits on a few companies. Some of those are companies I bought in March, and the share prices are now back to actually higher than they were in February, before the crisis. I wanted to take some off the table. Some of the other companies have grown so big in the fund that it just got too large and I needed to trim them back. So, very busy. I can look back, as Mike has said, before at whatever things I would have loved to have done in the Growth Fund, and I think as Mike said, probably I didn’t see the stimulus, how big that stimulus was, and I regret probably not buying a few companies in the funds that I looked at, but by the time I got back wanting to buy them, they’d already rallied, so that’s probably my biggest regret, a couple of missed opportunities.

But overall, I look at the fund over the last couple of months, and all our funds have done really well over the past couple of months and obviously this week is a particular milestone for the Growth Fund because I’m actually now at a unit price that is higher than we were in the peak in the middle of February. So, the fund has recovered everything that it lost in February-March and is now actually higher than it was at the beginning of February, and that compares to the Small Ordinaries index in Australia, which is, although it’s recovered, is still down 17 per cent from its peak. And to me, that demonstrates that active managers can outperform the market, and I think that’s what’s made Pie such a successful company.

Sam De Court: Thanks, Doug. Also, I’m aware that you’ve got a couple of resource stock in the Growth Fund. Can you maybe give an example and explain why you’ve done this?

Doug Jopling: Yes, I obviously get asked this question quite a lot by people – about resource companies. Well, the first thing that I’d like to say is that I’m actually agnostic about which sector I look at. And I think that’s shown by, if I look at the largest positions that I have in the fund, I’ve got a data centre, I’ve got a telco company and I’ve got a pharmaceutical company, I’ve got an electronic payments company and a gold. Those are sort of the five biggest positions and obviously I’m not a resource fund.

Sometimes I’ll have maybe no resource companies in the fund, sometimes I’ll have several, which I have at the moment. I’m pretty neutral, I’ll go where the opportunities are, but let’s just go back to your question about resource stocks, one of the things I’ve discovered about resource stocks is you have to invest where there’s a tailwind, so there’s no point in investing in a resource sector commodity where that commodity is probably going to fall over the next year. Those are too big a headwind, so even if you invest in the best company in that sector, it’s not going to go well.

So, it’s always good to look at a sector where there’s tailwind and so probably the best example of that is gold. I’ve said in the ‘Slice of Pie’ recently, that I always like to have probably one gold company in the fund. Why? It’s a bit of diversity in the fund, it’s a bit of a natural hedge, and gold has had a tailwind since June last year. It started rising in June 2019, but gold isn’t immune to the crisis, and what I did was I actually studied what happened in the 2008 financial crisis and gold in October 2008 actually fell when all assets were being liquidated, but as soon as the Fed started to print money, gold started to rally back in November 2009 and then rallied to probably 2011.

So, this time I already had a bit of gold in the fund going into this crisis. But as soon as the Fed, towards the end of March, started saying they were going to print more money, I knew gold was about to rally, so I topped up on some of my existing gold positions and actually bought a couple of other gold companies, and sure enough, gold rallied. So, that’s the tailwind.

Going back to what I look for in a gold company, one thing I don’t do is just rely on that tailwind. So I’m not just buying a gold company just because I think it’s going to go up, I still look for a typical Pie thing, I look for a smaller company that’s under-researched, under-owned by the institutions, but has some catalysts coming and that could be, it’s opening a new mine, and it’s got a growth profile, it’s going to cut costs, so there’s got to be an underlying catalyst where I can see the company’s profits are going to increase, even if gold prices stay the same. If gold’s going up, that’s great, that’s a tailwind, but I want to know that this company’s profits are going to go up, even if gold’s price stays the same.

So, an example of that is a company I bought back in November. It was about to start producing gold, it was actually scheduled to actually produce gold in June 2020 for the first time. It actually got there early, it got there in March, so I bought the company probably in the low 40 cents in November and this company had de-risked. It had produced gold in March, but the market was just obviously falling quickly, so it allowed me to top up and actually double my position in that company, even though the company had de-risked because it had started producing gold. Three weeks later, that company was up 90 per cent. As always in that case, it’s prudent to take some profits, so I probably sold about 20 per cent of that company. Since then, I still think there’s up side but there’s still some risks. Gold could fall back, I don’t think it will fall back that much, or there could be problems. It’s still a new company, so sometimes it pays not to be too greedy and just take a bit of profit.

Sam De Court: Thanks, Doug, that’s really interesting. Mike, we’ll move back to you now, So, I guess, continuing from my first question, how are you going to ensure that the Pie investment team continues to learn and improve, and what sort of part of our investing approach do you think really sets us apart from others out there?

Mike Taylor: I don’t think there’s too much I need to do to encourage the investment team to continually improve. That’s inbuilt into their DNA. We spend a lot of time reviewing investment decisions and talking about ideas, so that is very much part of the investment team culture. That doesn’t need too much work on that. I think one of the hardest things for any portfolio manager and for any investor is knowing when to buy and when to sell. That’s obviously the biggest challenge.

I was reminded this morning of a quote from Charlie Munger which said: “The wise ones bet heavily when they have the odds and the rest of the time they don’t.” And, as I alluded to earlier is that, what we’ve found through the crisis is that we can add value through having cash and we can add value through hedging, but where the rubber really hits the road for us, is the stock-picks, and so that’s what the investment team have come out of this saying, is the most important thing for us to focus on is always putting our money into the right companies and the companies which we think have got the largest upside.

Looking at some of the funds that have tilted and recovered in the last couple of months, I think Growth 2 for example is up over 60 per cent from its low and again that comes back to Pie’s sort of pedigree is that we started this business as stock-pickers and some of our best-performing years, such as 2009 and also after the Eurozone crisis, came in the situation where we went back into the market and were stock-picking and that’s the message, that’s what we’ve learned and that’s what we’re going to focus on going forward, to make sure we’ve got the right ideas in the funds.

Sam De Court: Great, thanks very much, Mike, thanks Doug and thanks to everyone for watching. So, after today’s update, we’re going to change the frequency of these videos to monthly, and I guess on behalf of myself and the team, we really appreciate all the feedback over the 10 weeks, and we’ve actually really enjoyed filming these videos as well. So, we look forward to continuing them on a monthly basis going forward, and we look forward to catching up with you soon.

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