12/10/2020 11:00:00 PM

Market Update (11/12/20)

Welcome to the December market update.

In our latest video, we were joined by Pie's Chief Investment Officer and Portfolio Manager Mark Devcich, and covered off these questions:

  1. Pie Funds had one of its best ever years in 2020. How has the investment team achieved this?
  2. What are the key learnings from 2020?
  3. How will these learnings be used to better position Pie for next year and beyond?
  4. What's getting us excited about being an investor in 2021 and beyond?

We have also included a transcript.

Kind regards,

Mike

MIKE TAYLOR
Founder and CEO


TRANSCRIPT

Sam De Court:  Hi everyone, my name is Sam De Court and thank you for tuning in today. With me I have Pie Funds Founder and CEO Mike Taylor and Chief Investment Officer Mark Devcich.  Mike, Pie Funds has had one of its best ever years in 2020. The average return for our growth funds was 23% between 1 January and 7 December. How has the Pie Funds investment team achieved this?


Mike Taylor: Yes, it's certainly been a remarkable year from an investing standpoint, and we're really pleased with the results that we've achieved. So we've done that in three ways. The first way is that in late February and early March, we took the decision that there was a global pandemic, and it was going to have a negative effect on equity prices. As such, we made a decision to take as much risk off the table as we could. So we did that by shorting the market and raising cash. And we've got to the position by the middle of March where we were sort of over net 50% cash in our funds. So that helped us with downside protection on the way down. Then in late March and early April, when it became apparent that the central banks and governments were really stepping in to shore up employment and financial conditions, we made the decision to start reinvesting. So the second point is that after protecting capital we then decided to redeploy the money into April and May of this year. And then the third point is that we focus particularly on companies that were going to be what we would call Covid beneficiaries. And by and large, this was companies in the tech sector or e-commerce. And those are the companies that have really done or performed spectacularly in 2020.


SDC: Mark, what have been the key lessons that you've learned, personally, this year?


Mark Devcich: There has been a number of key lessons fortunately taken out from this year and it's been said, never let a good crisis go to waste. So, I'll run through a few of them. The first one for me is really don't fight the Fed. There was substantial liquidity injected into the markets around March/mid March and then basically the Fed on 23 March said they'll do whatever it takes. And what this has done is basically underwrote the performance of the stock market. It has pushed stock valuations much higher, even though a lot of companies' earnings are still behind where they were expected to be 12 months ago but the valuations are now much higher so that was the first one. The second one is that it's always darkest before the dawn. So, the markets actually bottomed on 23 March around the same time that the Fed underwrote the markets but also that was the day that New Zealand went into lockdown so that was maximum uncertainty at that time. In hindsight that was the time to buy, but you never know when the markets are going to bottom because you only know after the fact. The other ones would be it's just impossible to try and call the stock market's outlook. So there's a lot of market strategists and some were getting a lot of air time in March, and then February, calling the stock market correction, back in January. However, a lot of them just kept being bearish way too long, and they missed the market turn, and that's why it's so difficult around market timing. You can get the call right but if you get your timing wrong, you can lose a lot of money and we actually went, we were on to the coronavirus quite early, but it was actually too early. We started shorting even back in January, and the markets just kept going higher so it's a difficult thing to do. Just a couple of other ones. In a panic, time horizons drop to zero. So, you see people just be extremely short-term focused and that meant some assets were just really attractively priced. Like the airports. The retirement villages in New Zealand, some of them dropped up to 70%, and this is despite them being quite consistent predictable income streams over the long term, and there were just fire sale prices available. Another one is just history. It kind of rhymes but it doesn't repeat. So I was looking at what happened in the SARS epidemic, as kind of a base case for what happened in the coronavirus but it actually turned out to be completely different. SARS, and this is what experts are saying at the time, it only lasted really six months. And people were saying the same with coronavirus. That by the time the northern hemisphere summer came along, it would burn out. And as we know we've had a second wave, a third wave, so coronavirus just has been a lot more tricky, a lot more severe, than the SARS pandemic was. Then I guess from a practical point of view, a key lesson has been just how much business can be done and how quickly people can adapt to working from home. So we haven't done much traveling this year, but we've probably had the most interaction with management teams we've ever had, and it's just been far more productive so hopefully some of that continues into the next year as well.


SDC: Thanks Mark. So following on from that point, how are you able to take these learnings to better position Pie for next year and beyond?


MD: That's a good question. What I think is that there's always places to make money. So what we saw this year is, despite there being a recession, there were still parts of the market where you can make a lot of money so you just have to hunt hard enough, and be creative in your thinking. So ecommerce was an obvious one, work from home was obvious but maybe a less obvious one at the time was home improvement. Those sectors, because people were staying at home a lot, those sectors did extremely well so now we're going to think forward 12 months to get an edge on the market. What will the world look like? And then there's obvious ones like travel and leisure. Or maybe themes like clean energy, those type of things start to play out so we're going to look forward now as to what are going to be the next things that the market will be appreciating in six to 12 months time and get ahead of the market. 


Another thing is, I think, the strong companies heading into the crisis will just get stronger. So the government's bailed out a lot of kind of more marginal companies this year, there haven't been that many business failures. But heading into 2021, we will probably see a lot of this stimulus and government support start to wind down. So I think that the strong companies will just get stronger and actually the recession was so short this time it wasn't a good cleanout. It didn't take a lot of excess out of the system. I kind of make the analogy to a wildfire. They're part of nature, an integral part of the health of the forest, by they thin the trees, all the decaying matter gets burnt away, then the nutrients are returned to the soil. And I think that's going to happen sometime in 2021 where you get a lot of these companies that were more marginal that just survived on government stimulus actually kind of disappearing and the strong will get stronger. And then the last one I think, to take into next year, is basically equity markets in a still very good position and there's a lot of reinvestment risk around so we hear from a lot of our clients they've got term deposits that are rolling off, they're rolling off onto very low rates - 1%, 1.5% type reinvestment rates so a lot of clients are now looking for those higher returns. The same with fixed income, if your fixed income's rolling off, you need to invest it somewhere and equities still look the most attractive asset class so that will inform our asset allocation. The markets have gone up a lot this year but given where interest rates are, I think equities still look really attractive.


SDC: Thank you Mark. Back to you Mike, what gets you excited about being an investor in 2021 and beyond?


MT: Mark's done a pretty good job of covering a lot of those points that I'd probably talk about but just a couple more to add would be is that, I think what always gets us excited in the investment team is being able to pick the winners. In this case, pick the winners in a global recovery, so we're spending quite a lot of time talking and thinking about what companies will be leading the global recovery. The other key point which we discuss quite a bit is sort of analysing the change in consumer behavior. So, we have seen a change in consumer behavior this year, obviously towards a shift to online. Now it's just about whether that behavior is permanent, or how much of that change to the extent where people who might previously have bought a t-shirt by walking to the high street store now will prefer to continue shopping online. People that have ordered meal-kits, got used to it. Are they happy they're going to continue ordering meal kits once it's safe to go outside and back to the supermarket. Obviously we don't really understand that that much in New Zealand, but it is much more prevalent throughout Europe and the US, where people are really still staying at home, not because it's winter but because there's a high risk of infection if you head out. So those are the two main ones that we'll be thinking and talking about over January and the holiday break. 


SDC: Thank you Mike and thank you Mark, and thank you everybody for watching. As we've said before, we've really enjoyed doing these video updates this year, and we'll certainly be continuing them next year. Have a fantastic and safe Christmas and holiday period with your family and friends, and we look forward to seeing you next year. 



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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