3/14/2022 11:00:00 PM

Market Update 15 March 2022

Welcome to the March market update.

In our latest video, we were joined by Mark Devcich, Portfolio Manager, and Guy Thornewill, Head of Research UK & Europe and Senior Investment Analyst. We covered off these topics:

  • I have taken on the role of Acting Chief Investment Officer. I explain why I've done this, and what my key focus is right now.
  • What is the Australasian investment team doing to manage portfolios and protect capital at the moment?
  • How is our London-based investment team managing portfolios, and what is the feeling on the ground in the UK?

We have also included a transcript.

Kind regards,

Mike Taylor
CEO + Founder


Sam De Court: Hi everyone, my name is Sam De Court and thanks for joining us today. With me on the video is Mike Taylor, Founder of Pie Funds, along with Guy Thornewill from our London-based investment team, and Mark Devcich, calling from the Auckland Office, covering the Australasian investment team. Hi everyone.

SDC: Mike, we will start with you today. So last week we saw a note that you are shifting roles back to being Chief Investment Officer. Can you talk us through why you're doing this and what's your key focus right now?

Mike Taylor: Sure. We've always had an attitude of kind of rolling up our sleeves at Pie. And Sam, you and Mark will remember when there was a time where we would actually clean the office and clean the toilets because that’s what we needed to do. And today, when we see market volatility, and a lot of uncertainty, and world geopolitical spheres, I felt that the best use of my time and energy was to dedicate it to the investment team. And for Mark specifically to get back into what he’s known for, specifically stock picking. So to give Mark the freedom to do that, and for me to come in as Chief Investment Officer. And really as well, what my key focus is is allowing the team to do their job and helping them with risk management, mentorship, and guidance really, because these are difficult times. And I've got, you know, 15-20 years experience so hopefully I can add value to the team that way.

SDC: Thank you Mike. Over to you Mark Devcich. So can you give us a bit of a rundown on what the Australasian investment team is doing to manage portfolios and protect capital at the moment?

Mark Devcich: Yes, it has been a very volatile time and there have been unfortunate events in the Ukraine with the invasion from Russia. So luckily, in this part of the world, we have very little exposure to Ukraine and Russia, through our companies, and you can probably see the Australian stock market has actually been one of the best performers since the invasion on February 24th because it is probably as far away as you can get from all the events that are happening over there. 

So we actually haven't added too many companies to the portfolio recently. We've gone through our portfolios, we've had a lot of calls with the management teams just to see how the outlook has changed, potentially. People have been concerned recently around inflation, obviously we're seeing the oil price increase, food inflation, and interest rates are going up. So there's been some pressure on sectors such as consumer discretionary and technology. We've seen a few of our companies in those sectors fall with the poor sentiment. We’ve been checking with the management teams, seeing if the outlook is still intact for those companies. In the most case it is, obviously it can change at any time and we're probably just doing more calls to these management teams at the minute.

The other thing we're trying to do is also ensure all our companies are sustainable, so they're not needing to come back to equity markets right now for further capital raisings because, like I said, it is a volatile time and those companies that are needing to raise further capital, they're really coming under pressure from the stock market as well because people are just not willing to fund loss-making companies right now. 

The other thing that we're seeing is attractiveness of more defensive sectors like infrastructure, education, and health care. That’s obviously important when consumer discretionary is under pressure, and the outlook is uncertain. Some of our largest holdings in the Australasian funds are in these sectors. We've got Uniti, which is across a couple of our funds, the Dividend Growth and Growth 2 funds. They provide broadband internet infrastructure. So very defensive, you all need your broadband internet. And infrastructure is probably one of the most offensive ways you can play that thematic. Macquarie Telecom is another investment. They own data centres, mainly in Sydney. And again, it's leveraged to that cloud computing and internet. They host data center capacity servers on behalf of some of the biggest companies in the world. So that's another very defensive asset in our portfolios and a large holding in the Dividend Growth Fund. 

We've also got in the education sector, Kip McGrath. This has been a long standing position in the Emerging Companies Fund. They provide remedial education services. They had a tough time during the lockdowns during Covid, because obviously a lot of their centres couldn't open, but they pivoted well with their online offering. And now, as you probably know if you've got young kids, a lot of them haven't had the best kind of education environment over the last couple of years. So the need for remedial education is increasing significantly. Kip McGrath is in a great position now as the economy's opened back up and demand for these services is increasing. We recently chatted to the company, chatted to the chairman, and we think that stock is well placed for the recovery. Another position, IDP Education, again this is in the education sector. It’s a big position in the Growth 2 Fund. This company services mainly the international education market. Again, it has suffered during the lockdowns because there were no inbound education student arrivals. That's now changing. They're well placed with their English language test, and also their student placement business. So, again, education is one of those defensive sectors. It holds up well, especially in volatile times and IDP has got a very nice outlook for the next couple of years we believe, and that’s in the Growth 2 Fund.

Overall many stocks are being impacted by poor sentiment right now. However, as long as the outlooks for these companies are still intact, the forward return profile for the next couple of years is looking outstanding for our companies in the portfolio. 

Sam De Court: Thank you Mark. Over to you Guy. Can you give a bit of an update also on how the London-based team is managing portfolios and maybe a bit of a feeling from on the ground in the UK?

Guy Thornewill: Yeah, thank you, Sam. Firstly, I just want to acknowledge the humanitarian aspect of the tragedy which is happening in Ukraine. It's really appalling obviously. It's exposing the worst in human nature but in other ways it's highlighting the best in us too. There are so many people all trying to help the refugees across all the different European countries, which is really great to see. For example, our London colleague Toby Woods, he ran 50 kilometers at the weekend, and he helped to raise about 20,000 pounds for the British Red Cross to help people in Ukraine. So that was a huge effort from him. 

We clearly understand that this is also a concerning time for clients invested in Pie’s international funds. So what have we been doing? Well, before the war even started, we had been raising cash levels in the funds. That's because we had concerns about rising interest rates, and stubborn inflation levels caused by all the global supply chain difficulties. And in the last three weeks, we accelerated that. So the cash level in the UK and Europe Fund is now nearly 30%. The Global Growth and Global Growth 2 funds are over 20%. So that represents increases of between five and 10%, compared to a month ago. So we've achieved this by a combination of reducing some of our high-risk equity exposure, reducing our less-liquid positions as well, and certainly cutting holdings in areas where high energy and food costs could really hurt profits, such as consumer discretionary spending, companies exposed to that sector such as Mark mentioned. 

Secondly, we employed some market hedging at the outbreak of the war which helped protect capital. We actually don't have any of that in place right now as markets have already fallen quite a long way and they remain extremely volatile, however, it’s clearly a tool that we can use again. Thirdly, although we knew the portfolios had very limited exposure to Russia or Ukraine in terms of sales, profits, or indeed people, we still went through all our companies with a fine-tooth comb to see if there were any hidden surprises. So we did that by speaking to the management teams, by going through the annual reports and by speaking to analysts. So I'm pleased to say that there were not any hidden surprises. The only direct listed exposure to Russia as far as the emerging markets fund that’s held in Global Growth [fund] and the Russian exposure there accounted for less than 0.1% of our fund when the war started. So really minimal. Several of our portfolio companies do have sales and profits coming from Russia or Ukraine, as we often invest in businesses with global operations, but our analysis showed that it was usually only one or 2% of the total and in fact, the highest was a UK-listed diagnostic company with 3% of its sales in Russia. And probably at least half of our portfolios had absolutely zero exposure. 

So this doesn't mean we’re complacent. There could well be side effects from supply chain or other disruptions still to come. But our company-specific risk here is very low, so this work was certainly reassuring. So what are we doing currently? We’re looking to pivot the portfolios towards more sectors which are likely to perform better in this new market environment. We do think things have changed for a while. For example, the unfolding energy crisis which is not just happening in Europe, is likely a catalyst for further investment into renewable energy. We’ve been bullish on the renewable energy sector in the past, and one of our best performing stocks in recent weeks has been in Encavis, which is a German operator of solar and wind farms, which is held in a couple of funds. So we think increasing our exposure to this sector will generate good future returns so we're working hard on that right now. 

And then finally, there are still opportunities to make money in growth companies despite the current tough market. I'll give you one example. All three international funds own shares in a company called SES-imagotag. That's a leader in electronic shelf labels which are bought by retailers, especially supermarket retailers. Last week, the company announced that it had won one Walmart USA as a new customer and this big contract win propelled their stock 24% higher to new all-time highs. So there's a small ray of sunshine there, amidst the current gloom.

SDC: Guy, thank you very much, really detailed answers. Mike, back to you. So as you know, we have had a few calls from clients in the last few weeks saying should I pull my money out now and reinvest at a better time? What would you say to those people?

MT: What I would say is that that's a very difficult proposition. And I've heard people try to do it over the years, and it's kind of for that reason that we don't take our funds to 100% cash. The future is uncertain and often we think we find times where things look really dark or what are we going to do about petrol prices and then something unpredictable will happen. For example, governments can cut taxes on petrol, which is exactly what we saw yesterday [Monday]. So no one would have forecast that a week or two ago. And in terms of trying to find the bottom… in all the market turns I've seen over the years, no one rings a bell. It's very, very hard even for us to determine exactly when the market’s going to bottom out. Usually, it's the time when you feel the worst, when you really feel like, ‘This is terrible, I need to just sell everything and crawl underneath the couch’. That’s actually the time you probably need to be buying. Always have in the back of your mind that markets recover. The world has been through a lot worse than what we're currently experiencing and it's always gone on to bigger and better things. I guess that’s a great thing about human society, we always want to improve and get better. So I think it's worthwhile being somewhat positive and optimistic in these scenarios. You’ve entrusted your capital with Pie, let us do the worrying, and relax in terms of don't look at your balance every day, that's not really going to help. And really have faith in us. We've been through a number of these events in the past. Pie’s been going for 15 years. And like I said earlier, it is really in situations like this where we bring all hands to the pump.

SDC:  Thank you, Mike, thank you very much for joining us. And thank you everyone very much for watching, and we look forward to seeing you next month. 

Information is current as at 15 March 2022. Pie Funds Management Limited is the manager of the funds in the Pie Funds Management Scheme. Any advice is given by Pie Funds Management Limited and is general only. Our advice relates only to the specific financial products mentioned and does not account for personal circumstances or financial goals. Please see a financial adviser for tailored advice. You may have to pay product or other fees, like brokerage, if you act on any advice. As manager of the Pie Funds Management Scheme investment funds, we receive fees determined by your balance and we benefit financially if you invest in our products. We manage this conflict of interest via an internal compliance framework designed to help us meet our duties to you. For information about how we can help you, our duties and complaint process and how disputes can be resolved, or to see our product disclosure statement, please visit www.piefunds.co.nz. Please let us know if you would like a hard copy of this disclosure information.? Past performance is not a guarantee of future returns. Returns can be negative as well as positive and returns over different periods may vary.?