5/19/2021 12:00:00 AM

Market Update - May 2021

Welcome to the May market update.

In our latest video, we were joined by Mark Devcich, Chief Investment Officer and Portfolio Manager. We covered off these questions.

    • What's happening in markets?
    • How are Pie's funds currently positioned?
    • There has been a pull-back in growth stocks. Given growth investing is Pie's speciality, what does this mean for the investment team?

We have also included a transcript.

Kind regards,

MIKE TAYLOR
Founder and CEO



TRANSCRIPT

Sam De Court: Hi everyone, my name is Sam De Court, and with me I have Mike Taylor, Pie Funds CEO, and Mark Devcich, Pie Funds’ Chief Investment Officer. Hi Mike and Hi Mark.So first question for you this week, Mike. What's been happening in markets over the last month?

Mike Taylor: It's a continuation of the theme that's been running for a couple of months now Sam, that it's a rotation out of the growth sectors in the market into the value sectors. The reason for that is because interest rates have started to rise or expectations that interest rates are rising. And why is that happening? It’s because the economies are doing well, GDP growth forecast for this year is expected to be very high, 6% or 7% in the US for example. And in addition to that, we're also seeing inflation expectations ratcheting up. So there was a belief for some time that any inflation occurred as a result of Covid would be looked through, and that's still the case at the moment that we're kind of only just clinging on to that. US inflation that was out about 10 days ago, was just over 4%. Now, that is quite high, based on what we've seen before. At Pie though, we're not really concerned by that. We are still of the belief that the inflation that we're seeing is transitory as a result of Covid. 

So, what we've seen is inflation expectations are running higher. And our view is that those inflation expectations will be transitory, and we can look through those because it's the number of deflationary pulses that are actually evident in the market, and we expect those to persist and continue on a longer-term basis. However, markets have pulled back, particularly high growth stocks, and some of those high growth tech names in the US where earnings are very long dated. So that's kind of the wrap for the moment, we're not really concerned on the longer term basis because the fundamentals that are driving this, as in positive economic growth, remain the same. We don't expect central banks to make a move this year, so it's just a bit of digestion at the moment.

SDC: Mark, obviously at the investor days last month you and the team spoke a little bit about how the funds are positioning. Perhaps the next question could be a bit of a recap on that, a bit of an update please on how the funds are currently positioned?

Mark Devcich: Thanks. So what we've done in the last few months is we've actually rotated out of some of the e-commerce winners so these are stocks that were significantly strong performers in calendar year 20. Examples of these being companies in Australia like Kogan, and Redbubble and stocks in Europe like home24 which is an online furnishings company. So these stocks had a once-in-a-lifetime period where their main competition, which is the bricks and mortar retailers, were closed due to lockdowns. And what this meant is that they had captive customers. If you wanted to buy something you could only shop online, and because there was less competition out there, they also have very low customer acquisition costs, or CAC as they call it in the industry. So they're able to acquire customers very cheaply online because everyone was going online anyway. So the combination of high revenue and low costs meant they had supernormal profits. So as we're starting to see in Australia and New Zealand some of these companies being out of lockdown for six months or more now, they're actually starting to see decelerating sales growth, and they’re comping that period last year, April May, when online sales went crazy. So, a lot of their share prices have actually come back significantly and we've managed to kind of...we didn’t get the top but we managed to significantly reduce our positions in a lot of those companies. 

And then the other thing we've done is, we’ve seen economies reopen in Australia/New Zealand, people going back to a normal way of life so we've kind of taken that pattern recognition, what we're seeing in Australia/NZ and applied it globally. So we've been buying businesses like car rental businesses in Europe, car dealerships in the UK, and we've done that because we're seeing what's happened in Australia/NZ and those types of companies have performed particularly well in the Australian stock market. Some other companies we've been buying -  an IVF company in Australia. So people are going back to having babies. Rightmove in the UK, it’s a property portal. Demand for housing is insatiable right now. We're seeing it in Australia/NZ and I think that's going to exactly be replicated in the UK. And payments as well. We’ve been buying a payments business in Australia that’s heavily leveraged to the service industry so people going out spending at cafes, restaurants, that's super positive for this company. So that's on the companies front. The cash levels have actually stayed around the same levels so [we've] done a little bit of transition out of some of those companies that were sitting on big profits and rotating into some, some of the companies have actually been hit pretty hard, like Mike said, in the technology sector. 

And I guess the other thing to just talk about on the technology front is we kind of avoided, luckily, a lot of the super high growth, technology stocks in the US that were... they had a blow off top in February where a lot of them were up over 100% in a couple of months, and I felt a strong pull. I felt like I was missing out and not investing in those companies at the time but luckily we avoided them and a lot of them have come back, and given up all those gains. So, we’re starting to look at a lot of those companies again. They're excellent companies, growing very quickly, fantastic business models, but they just got way too expensive and I think a lot of retail money was chasing them around February and now they've kind of come back to Earth and are looking a lot more attractive now.

SDC: Thanks a lot, Mark. Next question for you Mark. Mike mentioned obviously there’s been a pullback in more of the growth stocks and Pie is obviously a growth specialist investment manager. What does that mean for the Pie investment team?

MD: It's meant a couple of things. You've probably seen the volatility in the unit price. So April there was a big rotation back to growth. A lot of our funds went up significantly. And then in May, it's kind of the opposite’s happened again. Most of our technology exposure is mostly exposed to the software industry. The good thing about the software industry is a lot of the business models now are what they call “software as a service”, or subscription business models, so they have a high degree of recurring revenue and predictability. So they're not likely to suddenly lose a whole lot of revenue or have big profit downgrades so when their stock prices come back a long way, you can actually have the confidence to step in and buy those companies because you've got confidence that the revenue and the earnings are still going to be there. 

Just this morning in our morning meeting, one of the guys in the UK team posted a chart and it showed the multiples on these fast growing “software as a service companies” actually derated, and just two months from 24 times revenue to 13 times revenue. So 24 was far too high. Back to 13 times now which has been the average for the last couple of years. That's a far better level to take positions in these companies and I guess the kind of overall takeaway is the starting price matters. So if you can buy these companies at lower multiples, your forward prospective returns are a lot better. So we're seeing this as an opportunity, lower prices mean better returns in the future, and we're just kind of cherry picking the best business models, the best businesses, we can out there. And we've been able to buy them at prices nearly 50% lower than where they were a couple months ago.

SDC: Fantastic, great update thanks Mark. Thank you very much Mike also. 

MT: Sorry Sam, I just thought I’d add one more thing which I've just been thinking about that is that a lot of people have been concerned about inflation, but if you think back to the 1970s and you take oil prices as an example. Oil went from $4 a barrel to up to $40 a barrel so a tenfold increase. Whereas oil has done nothing... nowhere near like that at the moment, and a lot of other commodities went up significantly. Gold went from $35 an ounce where it was pegged to $950 against the US. So, yes, we have had commodity price increases, which are hopefully transitory, but they're nowhere near what we saw 40 years ago. 

SDC: Okay, great update. Thank you very much, Mike and thank you Mark, and thank you everyone for watching. We'll see you next month. 



Information is current as at May 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.?