4/17/2020 12:00:00 AM

Investor Update (17/04/20)

Dear Investor,

We hope you’ve had a good week.

Please find below our weekly video update along with the written version.

This week we cover off the following questions:

  1. Why have markets rallied so strongly over the past three weeks?
  2. What changes have been made in the Growth 2 Fund over the past few months?
  3. Can you give some background around your recent Marley Spoon investment in Australia?
  4. How is the Pie investment team currently positioning funds?

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

Sam De Court: I’m here with Pie Funds’ CEO Mike Taylor and Chris Bainbridge. A lot of you will know Chris. Chris is the portfolio manager of our Growth 2 Fund and also co-portfolio manager of our Emerging Fund. As you may have noticed, Chris isn’t actually at his home. He’s at the Pie office, but I assure you he is the only person in the Pie office.

Mike, we’ll get started with you today. So, economic data seems to be getting worse and there’s a lot of uncertainty out there, however share markets have rallied quite strongly in the last three weeks. Why is this?

Mike Taylor: There’s a couple of reasons why the market has had a fast and furious rally in the past couple of weeks. The first reason for that rally, essentially, is that with COVID-19, the expectation had been that it would be much more widespread through communities, and the peak level of infections would be higher than it has been. So, the virus has been contained more easily than we thought it might be. Effectively, social distancing globally has worked. So that’s why the market has had a bit of a rally.

The second point is just the level of global stimulus. At the moment, it stands at over 20 per cent of global domestic product (GDP). In countries such as the US, it’s as much as 45 per cent of GDP pledged. Some of the way that stimulus is finding its way into markets is that, if you take the Federal Reserve, for example, they’ve been increasing the money supply, and they’ve been doing that by essentially buying everything. And whilst they haven’t bought stocks specifically, if they’re buying bonds, that money will then find its way back into equities. So that’s been the fuel for the rally that we’ve just seen.

Sam De Court: Chris, a word to you now. In the Growth 2 fund, which you manage, can you give us an update as to what changes you’ve made in the last couple of months.

Chris Bainbridge: Maybe some context would be helpful. In early January, pre-COVID, one of our investors contacted me and asked me when I expected the markets to turn down. At the time I pointed out that large drawdowns in global OECD GDP are rare. People think that they happen often, but they don’t. Therefore, I said, I think everything’s going to be fine. Well, I was 100 per cent wrong. I didn’t see this coming. Now, I’d like to say that I reacted quickly to the crisis. When China was saying, “There’s nothing to see here,” but building a hospital within three days, that it was obvious that the virus was serious. However, it took the virus moving into Italy and then through Europe before I flipped into capital preservation mode. Now, capital preservation mode sort of falls broadly into two buckets: equities and the capital preservation tools we have at our disposal, which is cash and hedging. In previous videos, we’ve delved deeply into those capital preservation tools, so for the purpose of this, I’ll just concentrate on the equities and how we managed those in the fund.

We began with a rigorous review of the companies in the portfolio, focusing on two points. One, their capacity to weather a downturn in demand, and two, their balance-sheet strength, in other words, could they weather a storm? The good news is that Growth 2 is aligned to companies with strong structural tailwinds. What that means is that we’ve got a lot of exposure to cyclical companies, therefore no travel, no tourism and no property in the portfolio. Small positions in retail, advertising and mining services were quickly cut. At the same time, rather than just going to cash, I rotated into those areas which I thought would be a net beneficiary to the current conditions. This is where we come back to those companies with strong structural tailwinds. I would aim to align larger positions in the fund into those sorts of companies and I’ll touch on three of those here.

The first would be the move online. We know that for the past 10 years there’s been a steady and increasing move to online and COVID, I believe, is simply a catalyst to accelerate this process. Therefore, whether it’s online, such as e-commerce or buying your food online through meal-kit delivery providers such as Marley Spoon, we’ve simply increased our weights in those areas.

The second theme I’d like to call a tailwind could be connectivity. This is essentially a move to cloud computing, which has been appearing before the crisis which, as we all know, with the huge demand to work from home, has again accelerated, so we have exposure there through data centre providers such as NXTDC and connectivity providers such as Superloop. It was more of a case of leaning into these positions which we already had.

The third and final structural tailwind which we’d aligned the fund to is the digitisation of payments. Now, this is actually one area which has taken a hit in the current environment, because for a lot of those companies, demand has dried up for their services, but this is a strong thematic which I believe will further accelerate once we come out of this crisis, as people move away from cash. So that’s how we’ve aligned the fund in the current environment.

Sam De Court: Thanks, Chris. One of the companies you’ve just mentioned was Marley Spoon. Can you give a little bit more information about the background behind that investment, when you invested in it, and how it’s gone recently?

Chris Bainbridge: Marley Spoon, simply put, is like the My Food Bag of Australia. It provides meal-kit deliveries, which are ordered online to residents in Australia, the US and Europe. We first invested in Marley Spoon three weeks ago at 40 cents, and the share price is now $1.10, so we’re up nearly 200 per cent in the last couple of weeks just on that investment. Marley Spoon has made an announcement late last month, saying that demand had hugely accelerated for their services due to the impact of COVID, and that demand was so strong that they had turned off their marketing, which was a large cost for the company. They’ll be updating the market later, so we’ll be watching that.

Sam De Court: Thanks, Chris. Now Mike, we’ll turn back to you. What’s the latest updates you can give about the wider Pie investment team, in terms of how they’re positioning funds in the last week, and also going into next week?

Mike Taylor: I guess at this point we’re sort of at a bit of a crossroads as to where the market goes from here. We obviously had the crash that occurred in March as COVID spread globally, and then we’ve had a rally back, as I said for two reasons: one, because the virus is starting to abate, and secondly, because the stimulus is increasing the money supply.

So, where we’re at now is that we need more data points to see how economies are going to effectively unlock in the next three to six months. Some countries are talking about how they’re going to come out of the lockdown process. New Zealand will have ours later today, so once we start to have that information and we can see how consumers start to behave in an environment when they aren’t confined to their homes, we’ll get a better picture of how the global economy is going to emerge.

It would appear that most market participants have come to the conclusion that 2020 will be a bit of a write-off in terms of earnings – and the further we get through the year, the more the focus will be on 2021 and actually how companies that have survived start to look through 2021. So, we’ve had the sell-off; we’ve had the rally back; and most likely now we’re going through the digestion as we see what unfolds from here.

So, what does that mean as we look at the portfolios? I guess we’ve done most of the adjustment that we needed to do. Chris has talked through some really good examples just now, and effectively we’re just going to be patient at the moment.

Sam De Court: Great. Thank you, Mike, and thank you, Chris, and thanks everybody for watching. We hope you have a great weekend and we’ll see you again 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