10/19/2021 11:00:00 PM

Market Update - October 2021

Welcome to the October market update. 

In our latest video, we were joined by Mark Devcich, Chief Investment Officer and Portfolio Manager, and Toby Woods, Senior Investment Analyst for Global and UK and Europe funds. We covered off these questions.

  • It has been a bumpy couple of weeks in markets. How could the rest of the year play out in the lead up to Christmas?
  • Pie's Australasian Dividend Growth Fund has reached a 10-year milestone. What is the strategy behind this fund?
  • October is traditionally another busy month for reporting. What companies are we looking forward to seeing the results for?
  • We've recently invested in Swedish company Bufab. What is this company doing and why are we excited about its prospects?

We have also included a transcript.

Kind regards,

Mike Taylor
CEO + Founder



Transcript:

Sam De Court: Hi everyone, my name is Sam De Court, and with me today we have Mike Taylor, founder and CEO of Pie Funds, Mark Devcich, Chief Investment Officer with a great looking hedge behind him, and Toby Woods, who is dialling in from our new London office. Toby is our Senior Analyst over there.

So Mike, we will start with you today. It's been a bumpy couple of weeks in markets. Can you touch on this and talk us through how you're feeling about how the rest of the year might play out?

Mike Taylor: So my prediction for Christmas. I've consulted with Nostradamus, and I think that... you know, markets have actually gone through quite a turbulent period in September and we just talked in our investment team meeting, just prior to this, that actually underneath the surface, there's been significant correction in stocks. For example, the Russell 2000 which tracks the US small caps, almost the entire index has been in a bear market. So the average fall into the early October was about 38% for the bulk of the Russell 2000 stocks. However, the headline numbers that we're seeing, the S&P 500 or the Dow, the big companies, haven’t actually fallen as much so there's a very narrow breadth of market which has held things up. 

So the reason why markets, or smaller companies, have actually been selling off is due to what we already know about, which is growth slowing from supply constraints. So, we're seeing out there as the companies just simply cannot get the supply of goods they need to be able to sell. And we don't really see this problem alleviating anytime soon, so it could start to impact earnings coming into the fourth quarter, and potentially even into next year as well.

Lastly, there's also the concerns about inflation. Yesterday [Monday] in New Zealand we had a very big inflation number which seems to have spooked a few people. So if that remains persistent, inflation is never a good friend for equity markets. Having said all that, it seems that no matter what news we get, the market still wants to go up. And I think that is because of the strong appetite for risk at the moment that remains around. We see Bitcoin going to new highs and often when Bitcoin goes to new highs, it's got a strong correlation with equity prices. So that seems to be the flavor of the moment. If everyone remains positive, we can probably expect a Santa rally.

SDC: That would be good. Mike, a couple of weeks ago we had our Australasian Dividend Growth Fund turned 10 years old. Internally we're hugely proud of this track record. Can you talk us through a little bit about this strategy and how the team's been able to achieve such a strong return?

MT: Yeah, I'm really proud of the 10-year achievement because everyone in the Australasian team has actually worked on this product at some point over the last decade. Of course we can't tell everyone too much otherwise we'll be revealing our secret herbs and spices. However, in saying that what we do is relatively simple. So we run a concentrated portfolio, and we invest in small companies that we feel are undervalued, relative to their future growth prospects. And if you do that well and consistently for a long period of time, with a long term investment horizon, then you'll outperform. And that's what we've done.

SDC: Good work. Turning to you now Mark Devcich. So October's traditionally another busy month for reporting. Are there some particular companies that you're really looking forward to results for?

Mark Devcich: Yeah, that's right, Sam. So, in October we get quite a few companies releasing quarterly updates, and also AGMs start in October and follow into November as well. So a few companies that we're looking forward to, we've got Aussie Broadband, that's an ultra fast broadband provider in Australia. They're going to give an update on their quarterly connections and revenue, which we expect to be strong because we've already seen the data for July and August, released by the company. And perhaps more importantly they’ve raised $120 million recently for acquisition so they haven't made an acquisition yet, so we're looking for any progress on what they're likely to acquire which would be potentially very accretive.

Another few companies, Tyro, this is a payments business, they do point of sale terminals. It’s a company that’s actually giving weekly updates right now, every Monday morning, because of the lockdowns. These have really impacted trading in the hospitality industry which they mainly service. So we saw the most recent updates that came out this Monday, showing a big step up as New South Wales came out of lockdown, and Victoria is supposed to come out of their lockdowns later this week, so expect another increase in their trading activity as well, which bodes well for that position. 

And then some other companies that we're seeing updates or investor days for this week, we've got Whispir that's coming out with quarterly numbers, Nearmap’s got an investor day, and Adairs which is a homewares retailer, they've also got an update coming out. So very busy time, but looking forward to seeing how the companies are performing so far and it's gonna be interesting as well because the lockdowns have really impacted trading. So we want to see how retailers in particular are trading, during the lockdowns and coming out of lockdowns.

SDC: Great thanks a lot Mark. Over to you Toby, it’s now I believe 10.15pm in London, is there a particular reason you’re dialling in from the office and not from your home?

Toby Woods: Because I've been in the office all day. We just had our investment team meeting so it's often easier just to do that from here. And we've got a nice new office so we might as well be using it.

SDC: So, Toby, you've recently initiated a position in a Swedish company called Bufab, which is probably not operating in the most glamorous industry. Can you tell us a bit about this company and why you're excited about its prospects?

TW: Yeah, sure. Well, I think it's a great little company and it kind of typifies almost perfectly what we're trying to invest into. So Bufab is a supplier of so-called c-parts to manufacturing industries in Europe and the US. So c-parts are like small, yet critical parts - think nuts, bolts, screws, clamps, valves, fasteners, that kind of stuff. And all these types of small products that are individually cheap in value, yet critical to the production of many goods, so without them, the  production of say a car would have to stop. So the real value that Bufab and others like it, supply is the reliability of stock, and the simplicity of ordering. So in other words if you are a manufacturing business and you want to keep your operations as clean as possible, you would have Bufab supply all of the many hundreds, if not thousands of c-parts, and you only deal with one counterparty, eradicating complex negotiations with potentially hundreds of other suppliers, and guaranteeing there's always enough stock, so as not to upset production. For that reason, Bufab trades mainly off its reputation as a reliable outsourcing partner, rather than on the price of the products. So, this gives it pricing power and defendable margins, and in the current market of tight supply lines, the proposition is actually really quite attractive. 

Then the beauty comes to scale, the more customers, one, the bigger the quantity of parts, the better the sourcing, the more reliable it can be. So it becomes a virtuous circle, and really the final piece of the jigsaw for this company is the consolidation of the market through acquisitions. So really, which just makes that strong, stronger if you'd like. So Bufab has a history of buying smaller rivals, having done more than 50 acquisitions in total. And this combination of organic and inorganic growth means that we think there's a multi-year expansion opportunity for the company still. 

So we've been getting to know this company really over the past six months or so. We've met their management team a few times now, and we've been building positions in both the UK and Europe Growth Fund and the Global Growth Fund. So it's now one of the largest positions actually in both, and it's satisfying to see it hitting all time highs in recent trading sessions so the more we can find of these, the better.

SDC: Thank you so much. Thank you everyone for watching, we really appreciate your support and we will see you next month.



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