Welcome to the April market update.
In our latest video, we were joined by Mike Ross, Portfolio Manager, and Guy Thornewill, Head of Research UK & Europe and Senior Investment Analyst. We covered off these topics:
- How have the markets performed over the past month and are we seeing any positive signs yet?
- Share prices of growth stocks have struggled this year. What changes have been made in the Australian Dividend Growth Fund and what sectors/industries are we focusing on at the moment?
- What is the feeling on the ground in Europe at the moment and are there any new investment themes or trends to get excited about?
We have also included a transcript.
Founder + CEO
Market Update April 2022 from Pie Funds on Vimeo.
Sam De Court: Hi everyone. My name is Sam De Court and thank you for tuning in to watch this monthly update. With me today is Pie Funds Founder and Chief Investment Officer Mike Taylor from the Hawke's Bay, Guy Thornewill from our London office and Mike Ross from our Sydney office. Hi everyone. We were actually just joking before that in the last two years of doing these videos, I think this is the first time Mike Taylor and I have actually been on the nighttime option. And we were just joking with Guy before that Guy just had his chocolate croissant for breakfast, whereas Mike and I are having a cup of tea before bed. So I think it's a good example of how the Pie Funds investment team never sleeps and there are eyes are watching the markets 24/7, literally.
All right, Mike Taylor over to you to start. How have the markets performed over the past month and are we seeing any positive signs yet?
Mike Taylor: So over the past month, probably going back to mid March, that's around the time when markets put in a low and then so the last two weeks of March was quite a strong rally. For us in the investment team we were scratching our heads a little bit. We were quite surprised at the extent and speed of the rally. We weren't really sure whether it was short covering or retail investors kind of buying the dip coming back into the market. But nevertheless, that rally has kind of run out of puff as we roll into April. And the same concerns that were plaguing the market through January and February remain around, and those concerns are the ongoing war in Eastern Europe, through the Ukraine and Russia, and what that's doing to commodity prices. We've also seen higher and higher inflation prints around the world and we are seeing increasing pressure on central banks, reserve banks, to raise interest rates much faster than had been anticipated. So RBNZ obviously meets this week. And we’ve had other central banks looking to hike quite aggressively, being very hawkish, so generally markets don't like those kind of things in combination. So we've probably in for a softer patch again this month.
SDC: Thanks Mike. And over to you in Sydney, Mike Ross. So as we've talked about in the last couple of video updates, share prices of growth stocks have struggled this year. What changes have you been making in the Australasian Dividend Growth Fund? And what sectors and industries are you focusing on the moment?
Mike Ross: So just to recap, firstly, I'm typically looking for two types of investments for the Dividend Growth Fund. Number one, high quality businesses with defensive growing earnings that can prosper regardless of the economic backdrop, number two, quality great businesses that we believe are mispriced because we think their prospects are better than what the market is pricing. So nothing's really changed there from an investment philosophy perspective. We're just having to question how these companies will perform in a rapidly changing environment and an inflationary one. This means increasingly we're looking for companies with pricing power to offset or even better, benefit, from an inflationary environment. And so what have we actually done? We've added to a number of our existing holdings that already fit this bill. But we've also added a few newer positions. One example of a long-standing holding is Johns Lyng, an insurance, building, and restoration group. They operate in a very defensive industry. They have a number of exciting growth opportunities ahead of them in both Australia and the US. They also predominantly operate with cost-plus contracts which protect margins in this kind of environment. Another example might be People Infrastructure, a workforce management company and recruitment business that's focused on growth sectors, health care and IT, where we believe they'll benefit from higher wages, and they also have a strong acquisition pipeline ahead of them.
Finally, our long standing position in Uniti Group. Uniti sells internet connectivity on its fibre network, and we think it'll benefit from speed price inflation over time on what is largely a sunk cost base. We've also added some positions that were negatively impacted by Covid and where we believe they'll benefit as economies open up and people get out and about. So one example there is oOh!media, the number one out of home media group in Australia. We've also cut or reduced the number of positions we believe will face continued cost pressures but where they have limited pricing power or ability to offset those cost pressures. So examples here include the homewares retailer Adairs, and City Chic the ecommerce company.
Also to point out that portfolio management is a gradual process, and we don't tend to make these wholesale changes overnight. So a lot of these changes have been in the works since last year.
SDC: All right. Thank you very much Mike Ross. So over to you in London Guy. What's the feeling on the ground over in Europe? And what are the industry sectors/themes that you're starting to see emerge that you’re possibly excited about?
Guy Thornewill: Thanks Sam. So the war in Ukraine is nearly two months old now. And there is certainly still some nervousness about that in Europe, especially in those countries which are nearer to the conflict. However, it's the secondary impacts which are more worrying. Consumers are now starting to feel the effects of some pretty steep prices in food and energy. A lot of basic foodstuffs are rising by double digit amounts and that’s starting to affect consumer confidence. And rising inflation will also lead to further interest rate hikes at a central bank level. This is impacting the UK more than Europe at the moment. Wage inflation in the UK is running at around 5%, that's according to a lot of companies we’ve spoken to in recent weeks, whereas in Europe, it's more like 3% so not quite as bad. This means we’re pretty cautious on consumer-related stocks although we actually don't have much exposure at all to that area in the funds.
I mentioned rising energy prices just now. It's clear that European governments are going to move as fast as they can to reduce future purchases of oil and gas from Russia. That’s not going to happen overnight. But in our view, one sector that will clearly benefit is the renewable sector. By that I mean companies that supply into, develop, or own wind and solar farms. We already held a position in Encavis in our funds, which is a German owner of wind and solar farms. They sign long term power purchase agreements with large corporates, and the prices of these agreements are going up which is helping them. Recently, we've added more exposure through purchases of Grenergy in Spain and EDP Renováveis in Portugal. Both of these companies develop or operate wind and solar farms globally. We think this is a pretty exciting theme, this is going to see much higher levels of investment going forward. Encavis is now a sizeable position in the Global Growth and Growth UK & Europe funds and it’s risen about 20% this year.
We've also been looking in areas where we wouldn't normally look for returns, for example, we bought some shares in K+S Aktiengesellschaft. This is a German producer of potash, which is a key fertiliser ingredient. With potash supplies from Russia and Belarus severely curtailed, this has led to increasing prices. We're up about 40% on this investment in the last month, and so we've been taking some profits. We don't view it as a long-term investment, it’s more of a shorter term trade. So in the current environment, we do need to stay agile and flexible to find good returns. But there are definitely opportunities out there to make good money for clients.
SDC: Thank you very much Guy and thank you also Mike Taylor and Mike Ross for joining. And of course, more importantly, thank you to our clients for tuning in and watching and also for your support. And as always, please pick up the phone and give us a call if you want to talk. Thank you everyone.
Information is current as at 12 April 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 reliable indicator of future returns. Returns can be negative as well as positive and returns over different periods may vary.