11/16/2021 11:00:00 PM

Market Update - November 2021

Welcome to the November market update. 

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

  • October was the worst month for New Zealand bonds since 1994. What's the current bond market situation in New Zealand and offshore?
  • What has been a key lesson from investing this year?
  • Praemium, a large holding in our Australasian Dividend Growth Fund, recently received a takeover offer. What's the latest?
  • German car rental company Sixt, held in some of the Pie international funds, has had a couple of profit upgrades recently. What has been driving this growth?

We have also included a transcript.

Kind regards,

Mike Taylor
CEO + Founder


Sam De Court: Hi everyone, my name is Sam De Court and thank you for tuning in for our November video update. With me today is Pie Funds Founder and CEO Mike Taylor, Chief Investment Officer Mark Devcich, and Head of Research for UK and Europe Guy Thornewill.

Mike, we will start with you. So October was I think the worst month for New Zealand bonds since something like 1994. What's the current bond market situation in New Zealand and offshore?

Mike Taylor: I think, Sam, first of all we’ve got to address your moustache which is growing for Movember. I’m sure the clients will be impressed. Pretty good. We've had a few comparisons to David Warner, but we won't go into too much detail on that.

So yes, you're right. The bond market did have a sell off in October, the worst since 1994. Not just in New Zealand, it was around the globe, Australia as well, US. And the key concern really is inflation figures. So in New Zealand, we had an inflation print of 5%, the US has had one recently of 6%. Talking with an economist in the last few days, he has a view that New Zealand inflation will be between 6% and 7% early next year. So this has got the bond market quite concerned. However, it doesn't seem to be that central banks are really moving aggressively enough. So we are in this position of who's going to blink first, is inflation going to come back down or will central banks have to act? The market of course has made its own decision and short-term rates have moved significantly higher.

SDC: Thanks, Mike. So I guess with the exception of the New Zealand share market, which is pretty flat this year, international markets it's been a big year. For you personally, what's kind of been the key lessons that you've learned this year?

MT: I think it wouldn't so much be about learning a new lesson. It's about relearning an old one. So one of the things I talked about in the recent newsletter was Tesla, and this year we've had the emergence of meme stocks. This is stocks which have effectively been heavily shorted by the hedge fund community in the US, the business is effectively bankrupt or broke and all of a sudden we've had retail investors getting behind this and driving prices to stratospheric levels. We've had retail investors getting particularly euphoric about electric vehicles. Tesla, as I mentioned, has gone through a US$1 trillion market cap in recent days. There's another electric vehicle maker in the States called Rivian. I see this morning it's up again. It has a valuation of US$120 billion. They are yet to manufacture a vehicle for commercial sale. So I guess the lesson from this is that, you know, don't underestimate how far people can push prices either up or down. And so what surprised me really is that we have a situation with these outrageous prices but they just keep going up. So yeah, that's the lesson.

SDC: Thanks, Mike. Over to you now Mark. So Praemium, which is a large holding in our Australasian Dividend Growth Fund, recently received a takeover offer. Can you give a bit of an update on that please?

Mark Devcich: Yes, so this has been a good call from [portfolio manager] Mike Ross. The shares are up at around 25% in November. A few videos ago, I mentioned there are a series of companies that we thought potentially could be taken over in our portfolios and this was one of them, and it's been taken over by Netwealth, which is another wealth management platform in Australia. Both these companies are listed. And it's a script deal. So Praemium shareholders will be receiving Netwealth shares as part of it and it values Praemium at around $1.50. The board's actually just come out recently from Praemium and they said they're not supportive of the consideration, they think it undervalues the company and this leaves the door open to other suitors potentially making a higher bid for Praemium. And it's interesting because Praemium actually has a business in Australia but also in the UK as well. So they're actively looking to sell their UK business and the consideration they could receive from that, it’s likely to be over US$50 million dollars. So overall, it's been a good outcome. 

It's not our core kind of investment strategy to invest for potential takeovers, but this was an asset that was in an industry where there's been a lot of M&A (mergers and acquisitions) recently. Another business that we own in the Australasian Growth 2 portfolio called Hub24, which is a competitor to Netwealth. They actually did some M&A just last month as well. So they bought another listed company called Class, which is a super fund and trust accounting software business. So it's just a sector that is seeing a lot of consolidation. Praemium was an asset that was likely to be taken over. The first bid has come in. We think there could be some more bids. So we're holding on to Praemium at this stage and potentially there's more upside if another bidder comes into the mix.

SDC: Thank you very much Mark. Guy over to you. German car rental company Sixt, which is held in a number of the Pie international funds, has had a couple of profit upgrades recently. What's been driving this?

Guy Thornewill: Yeah, that's right Sam. Sixt has certainly had a very impressive profit recovery this year, having been initially being hit quite hard by the pandemic and all the travel restrictions as you can imagine. So when this company reported its second quarter results in July, it guided towards earnings before tax of around 200 million euros for 2021. At the end of September, it increased the guidance to just over 300 million euros. And then just a month later, last month, it was increased again to over 400 million euros. So what's going on here? As is often the case it's a combination of factors, but really two of them stand out for us. Firstly, Sixt has always had a strong balance sheet compared to its peers in the car rental sector. And this is one of the reasons that we liked it in the first place. During the pandemic it used its balance sheet to acquire 10 airport locations in the US from a competitor that went bankrupt and then, as travel picked up in the US faster than many other regions, this certainly helped. Secondly, and probably more importantly, Sixt enjoyed really high car rental prices over the last few months in both the US and other regions. 

So as you might be aware during the pandemic a lot of rental companies including Sixt cut their fleet sizes, but as demand recovered, many companies were unable to get enough cars back into their fleets due to global shortages, such as the ongoing supply chain issues, semiconductor issues, which have caused car production to be lower than expected. Therefore, we’ve got more demand than supply and that's caused prices to go much higher than normal. And this has actually helped Sixt more than others as it was able to secure more supply than its peers. So originally, the company in the summer expected these high prices to fall in the autumn but they've actually stayed really high due to persistent demand, people are taking vacations a lot later than usual in the US and also in Europe. This meant the company was able to upgrade its earnings really sharply as these higher prices have dropped straight through to the profit line.

In our view, Sixt is the best listed car rental company. As well as the basic rental business, it has launched Sixt+, which is a subscription service for car usage. And it's even investing in an autonomous ride hailing service as well. So that's really innovative. It's also got a high family ownership, which we like, and the Sixt family actually control over 50% of the share capital. So these really high car rental prices are clearly not sustainable -  supply will improve over time. But we think Sixt has got the right business model. It’s innovative, as I said, meaning that we view it as a longer term investment, not just a recovery trade from the pandemic. Just to give you an idea, we started buying into Sixt at the share price of around 85 euros a year ago, and today the shares are trading at 160 euros, so up almost 100%, making it one of our best performing stocks over that time.

SDC: Thank you very much Guy and well explained. Thank you also Mike and Mark, and thank you to the audience so much for watching. Have a great month ahead and we will see you next month. 

Information is current as at 15 November 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 reliable indicator of future returns. Returns can be negative as well as positive and returns over different periods may vary.?