8/20/2020 12:00:00 AM

Investor Update (20/08/20)

Dear Investor,

Welcome to the August video update.

We were joined by Doug Jopling and covered off these questions:

  1. Auckland is back in lockdown due to Covid-19. As investors, should we be worried?
  2. August is traditionally an important month for Pie, known as ‘reporting season’ where our Australian companies report their full year results. How have the results been so far?
  3. The Pie Growth fund has had a strong run so far in 2020, as of 18 August it is up over 17% since the beginning of January. How could the remainder of the year play out?
  4. When markets drop, how do you deal with emotions?

We have also included a written version below.

Kind regards,

Mike

MIKE TAYLOR
Founder and CEO


 



Written version

Sam De Court: Hi everyone, my name is Sam De Court and thank you very much for tuning in today. With me I have Mike Taylor and Doug Jopling. Hi Mike and hi Doug.

SDC: So we’ll start with you today Mike, up here in Auckland we are obviously back in lockdown, and COVID’s back in the community. For yourself and Doug, you're both based in our Hawke's Bay office at the moment. So it's not so much of a problem for you. But as investors should we be worried about this latest resurgence?

Mike Taylor: Look, we've seen the resurgence of COVID in a number of countries, in particular the US for example. So dealing with a resurgence in COVID or a second wave, however you want to refer to it, is something we've been thinking about and prepared for anyway. Most portfolios have been positioned for some time to invest in companies that are COVID beneficiaries. Or we're looking for companies that have minimal impact from COVID. But with the odd exception, we do have some companies in the portfolio where we purchased that are positioned for a recovery. And sure, those particular ones might feel a bit of a bump if that recovery’s pushed out, but by and large, we still remain in COVID beneficiaries.

SDC: Thanks, Mike. And Doug, over to you. August the month we’re in at the moment is traditionally an extremely important and extremely busy month for the Pie Funds investment team. I know for example, it's been very, very hard to lock you down for this video today. And the reason being is we call it reporting season because it's the month when our Australian companies report their full year results. So how have the results been so far Doug?

Doug Jopling: I think it's safe to say a lot of people are saying this is one of the strangest reporting seasons for years. COVID’s made it very hard to forecast company's earnings in some sectors.

To manage this, a large amount of companies have been providing updates over the last few months to help manage investors’ expectations and keep them informed. So for some companies, the results that are coming out now were well flanked. But there's still a lot of companies to report.

But a broad summary of what's been happening and some sort of flavors that we're seeing is let's take Australian retailers, they had a terrible March/April due to lockdowns, but then we've seen a massive increase in sales in May/June and continuing into July. Now that's been boosted by the stimulus cheques that the governments have been doing. But also in Australia people have had the ability to withdraw $20,000 from their Super funds, the equivalent of KiwiSaver. And that's really given certain retailers a real tailwind. So, retailers have generally been reporting well recently.

Turning to the gold sector, gold companies tend to pre report their quarterly reports in July. So we sort of know what their results are. And generally gold companies have been doing well, because the gold price has been going up. Although the costs to mine have gone up. That's because they've taken the chance opportunity to mine what normally would be uneconomical gold, so low grade gold. So while gold’s high in price they can mine more expensive gold.

Tech and smaller communication companies, telecom companies, they've generally been very big beneficiaries of COVID. They've had very good share price runs over the last few months. So we're actually waiting to see how their results are going to go over the next week or two, we're just starting to see those results come out now.

Turning to industrials, that's a real mixed bag. There's some evidence in certain sectors that demand’s recovering. So again, wait and see. Then we turn to what I'd call the most impacted sectors, the hospitality, tourist, the travel agents sector. And obviously, their results are bad. But it's what we're seeing when they post results. It's more nearly a relief rally, that the loss isn't as bad as people were expecting. Results aren't good at all, but it's nearly a bit of a, “Well it wasn't as bad as we thought”. So that's the sort of things we're seeing at the moment. What it's really shown though, it's been very important to invest in companies with high recurring revenues, long term contracts. So that really forms like a tech company's high recurring incomes. And those companies have been benefiting from stimulus, you know with retailers benefiting from stimulus.

But also, iron ore producers, they're benefiting from China's infrastructure spending stimulus. So that's kept the iron ore price high, or those companies benefiting from higher increased commodity prices, such as gold miners. So that's sort of the flavor of the month.

SDC: Excellent, thanks Doug. The fund that you personally manage, the Pie Growth Fund, it’s had a particularly strong run so far in 2020, and last checked I see that as of the 18 August, your fund was up 17% since the beginning of January. So can this continue? And how do you see the rest of the year playing out?

DJ: All of our Australasian funds have done very well over the last six months or year, compared to the benchmark. So you know, you're correct. I think I'm actually up about 16 to 17% from the peak of the market. So 20th of February was the peak of the market in Australia, and I'm now up to 16% from that date, while the actual rest of the index is still down 11%. So yeah, we've done very well over the last six months.

So the answer is, while I still think we can outperform the markets over the next year, it's going to be harder to outperform by the same quantum as we have in the last six months. The actual crash gave us an opportunity. Why did it give us an opportunity? Because we're active fund managers. I had some cash I could invest at the lows, we could rotate into the sectors that we thought were going to do well during COVID, that's allowed us to outperform the index over the last six months. And going forward, again, it comes down to being active because things will change. We've got to identify the new trends early like when will it be time to move into tourist entertainment companies that have been beaten up? No, it might not be now, but it might be soon. What will be the trigger? And then we'll have to move quickly if we want to see those sort of increases.

And the other thing I’ve just mentioned, retail’s done really well. But part of the reason retail’s done really well is stimulus. So will retail perform as well once that stimulus ends, will the economy be self sustaining and fine? Or will they come off? So again, we've got to look for the evidence and be able to switch quickly. And then I've got to look at things like commodity prices, has gold peaked? I don't know is the question but again, I've got to be mindful that some commodity prices could change. And that might mean I need to take action.

So in the last sort of month, I've sold quite a few positions. And I've sold those positions where I felt the price has gone up and it's unlikely to go any higher. Or I've reduced positions, and I've done very well. So for example, some of my tech positions had had very big runs and I just felt everything was baked into those prices. So I still like the company but I just took some profits to trim the position side. Same for some of my gold companies that have gone up 150%. We still have some, but I might have half of what I owned a few months ago.

And what am I looking at now? There have been quite a few IPOs at the moment and capital raises and from diverse subjects, such as medical devices, fintechs and iron ore companies I'm looking at so there's lots to look at at the moment but it does come to being able to actively manage your fund.

SDC: Thanks, Doug. That was really interesting. So Mike back to you. So when markets dropped like they did back in February and March, human nature is you feel like running for the hills. And likewise when markets surge, human nature is you want to pile in, and we've talked about FOMO or Fear Of Missing Out. We've all heard the experts talking about the importance of not trying to time the market and just to play the long game, ride the ups and downs. How do you personally manage the emotions?

MT: Well, the thing is, we can't definitively say that every time the market sells off, that it’s a buying opportunity, because it might be the beginning of something much larger, you know, not every correction is transitory. And not every fall on the markets is something. You know, for example, if we look at COVID, when we try to analyse as an investment team, we kind of quickly realise that other investors or market participants would look through this particular event and say that it's more like an earthquake or tsunami that we're going to recover from, as opposed to a financial crisis. And so when you see each situation, whether it's markets going higher or markets going lower, you have to look at the underlying reasons as to why that's occurring. And is this sustainable to keep pulling? Is it sustainable to keep going up? Again, go back to COVID. When we looked at the fall, the level of stimulus and financial support is what’s effectively turned around the financial markets. So there's actually more money now being put into the economies globally, in terms of all the stimulus, than has actually been lost.

MT: If we look at the US, for example, typically when there's a recession, the average income falls, but this time, actually the average income’s gone up. So these are important factors to consider. And whilst markets have gone up a lot at the moment, there is a reason for that. And the reason is stimulus. And the reason is that there's been a greater shift than we’ve seen at any time to the online world and the digitalisation of economies, the work from home environment.

You know, Apple’s just gone through a $2 trillion market cap. Why is that? Because people need the hardware to work from home which they might previously not have needed or required. So there are good reasons why some of these companies have actually gone up. And so, like all types of investing, it is always important to strip out your emotions where you can. I think that's kind of the key to being a good investor. If you're too emotional, you will be a bad investor. So I think whilst you wouldn't want to say that the investment team is deadpan boring, I think there's certainly an element of everyone's personality that we've got quite low volatility in the types of people that we are, so we sort of quite steady state.

We wouldn't say that we're, you know, particularly happy all the time, particularly sad. Most investment team professionals are kind of just steady as she goes. And that's kind of what you need to be good in the business.

So yeah, that's what I would say is what we do is we look at the situation and we try to put our emotions to one side and see what's actually driving this event? So as the market’s gone up now we're continually questioning what is going to drive the market higher? Is there a bubble in certain areas, should we be taking profits, should we be rotating to another sector? Hopefully that answers your question.

SDC: It does. Thank you very much Mike and thank you very much Doug for joining us. You guys have a good day, and thank you everybody for watching and we'll look forward to keeping you updated next month. Thanks everyone.


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. You may wish to discuss with an expert before relying on it.

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