3/17/2021 11:00:00 PM

Market Update (18/03/21)

Welcome to the March market update.

In our latest video, we were joined by Doug Jopling, senior investment analyst and portfolio manager. We covered off these questions:

  1. What's been happening in markets?
  2. What's happened to bond yields?
  3. Are interest rates set to go higher?
  4. Conservative funds had a tough month in January and February. How is Pie managing this volatility?

We have also included a transcript.

Kind regards,

Founder and CEO


Sam De Court: Hi everyone, my name is Sam De Court, and thank you for tuning in today. With me I have Mike Taylor and one of our Australasian portfolio managers Doug Jopling.

Mike Taylor: Hi Sam. I’m loving the t-shirt Sam. You’re a loyal fan.

SDC: I thought it was very appropriate. You probably won’t see it again, but I think it's appropriate today. So Doug, we'll start with you this week. It's been a pretty fascinating past month or so in markets, what's been going on?

Doug Jopling: There’s really been two things going on in the markets, probably the past four or five months. First, there was a start of a rotation in the market which goes back to November, when the vaccines were announced. Why did it cause a rotation? Well go back to Covid in March, what did well post-Covid? It was the IT sector that did very well. November vaccines come along and people go oh, the economies are going to reopen, let's go back into the sectors that haven’t done well, which should do well, when the economy reopens. So things into travel, hospitality, into industrials, so that's what we've been seeing - a general rotation. But then more importantly over the last sort of one to two months, we've seen the rotation change a little bit and that's to do with long-term bond yields going up. So, the long-term bond yields have been sort of going up in the last sort of one to two months, and it's caused a further rotation out of sectors such as IT again into things like oil companies, financials, and cyclicals. There was a bit of froth in certain sectors of the market. And this higher interest rate has been a catalyst to take some of that frothiness away from certain sectors. But that's good for us because when we have certain sectors come down a bit like the IT sector in the last couple of weeks, that's created opportunities for us to buy good companies that have been beaten up with the rest. So that's a good opportunity to buy something, which we want to buy, but at a more reasonable value. 

So the next question I get asked, well, are rates going to go any higher? As we've seen in Australia and New Zealand, the rates have got back to pre-Covid. So given that the US rate is still at 1.6, it was 1.9 before Covid, I would expect over the next six to 12 months the US rate to probably get back to 1.9% as their economy reopens like what we’ve already seen in Australia and New Zealand. But then, for the rates to go even higher than those, you’ve really got to see sort of two things. Inflation expectations getting even higher, or actual high inflation to eventuate. We've got to wait to see what happens. 

So it comes back to what are we doing at Pie, trying to encounter that? In terms of inflation, we're starting to research sectors which will outperform if inflation does go higher and stays high. And then sectors that tend to do well historically, you actually have to go back a long way since the world's had a long period of high inflation, tends to be obviously commodities. So mining companies that mined those commodities tend to do well, cyclicals of financials tend to do well as well. Some people believe that the tech sector doesn't do well in periods of high inflation. But that's not necessarily true. And I've seen research that counters that. Look at the end of the day companies that can grow the dividends each year tend to do well, and companies that can build new markets for innovation also tend to do well. So as a team as well, as well as looking at will inflation occur or not, and looking at the sort of sectors that will do well. The other things that we've been working on more recently is reporting season’s just finished in Australia, the quarterly US reporting season’s just finished as well. So there's a hell of a lot of news flow and information to digest. So we're out there talking to lots of companies and researching new ideas, but given how quickly the markets have bounced back and the current debate on are interest rates going to go higher, it's really important that we're looking at sectors and companies that we believe will outperform in the current market. Stock picking is key to this type of market.

SDC: Thanks Doug, that's a lot of good information there. Just another quick question, back on your point about the rotation out of IT earlier in the year. That's obviously a sector where Pie traditionally has a good exposure. Can you just cast a little bit more light on what the wider investment team's been doing to ensure we don't give back too much of the gains we've generated there?

DJ: It sort of goes back into some of the things I've just said. I believe the IT sector will always do well, parts of it. Yes, there will still be parts that have been frothy, things that don't make any profits might never make profits, but there's always companies that will do well in the IT sector, under any environment. And it goes back to that real fundamental research and looking for companies that will prosper in the long term. And as I said, I personally and I know in some of the other funds, during this recent IT sell off, we've been buying those good IT stocks, so it creates opportunities, these selloffs.

SDC: Thanks a lot Doug. A bit of a change in topic now. Mike, so the Conservative Fund, which you manage, has had a couple of tough months in January, February. It has now bounced back quite strongly so far in March. Can you give some insight into what's caused this volatility and what you were doing to overcome it and manage it?

MT: It’s actually got a very similar theme to what Doug has been talking about. So, with the Conservative Fund it’s slightly more constrained than the other particular funds and that we've got certain parameters we have to work towards, which is around 20-25% in growth assets, and then 75-80% in income assets or cash. Of course with term deposit rates as low as they are, cash is not that beneficial for the funds. So there's a good portion of the fund that sits in fixed income, so corporate bonds, government bonds, both here and in the US. So, for New Zealand in particular, late last year when things were looking quite dire with a second wave of Covid that hit Europe and the US in November, December, the long term rates for 10-year in New Zealand, where the majority of our fixed interest is, has got down to about half a percent. And then in January, February, we saw that rally to a high of 2%. So what that means, when we’ve got a bond portfolio, is that the value of those bonds goes down because people are demanding a higher interest rate for their return on their bonds. So fortunately we don't have too many long-dated bonds within the fund. So we could have been hit harder if we had.. that’s what they call duration. So, the longer the bond is to maturity, is the longer the duration of the holding and in particular the portfolio. So, of course, when we had that move in bonds which was uncharacteristically sharp and quick, this had a negative effect on the portfolio. 

Normally when you have a conservative fund you have equities and bonds moving in different directions. So that's how you provide a bit of a hedge. So if equities sell-off you know your bonds will do well. In this case, we have a sell-off in tech and equities at the same time bonds had their move, so that's why the fund had a negative return for the month of January and February. This month, although bonds haven't really come back down particularly, they are off their highs. But the equity market has bounced back, and the equity market has gone to new highs in the States. So, what I've tried to do over the last month, is actually increase the equity allocation from about 19%, trying to grow that through into the low 20s. The types of things that I'm buying now are more focused on recovery names. So we recently bought hotel and pub operator Whitbread, in the UK. We've also been adding some more energy names and travel related names so recently bought Flight Centre Australia during the month so specifically the extra equity that I'm adding to the portfolio is focusing on sectors that have either lagged so far in terms of the recovery, or I think will benefit from a wave of money from investors who are wanting to get exposure to those sectors.

SDC: Thank you very much, good explanation. Thank you Doug as well. You have a good day and thank you everyone for watching. We will see you next time. 

Information is current as at 18 March 2021. 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.?

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