Welcome to the September Market Update
In our latest video, Sam and I are joined by Michael Goltsman, our Australasian Growth Fund Manager based in Sydney.
We cover:
- The feeling over in the UK and Europe for businesses
- What's driven the performance of Australasian funds
- Why there are reasons to be positive about the topics of inflation, recession and energy prices
We've included the transcript as well.
Kind regards,
Mike Taylor
Founder + Chief Investment Officer
TRANSCRIPT
SAM DE COURT: Hi everyone. My name is Sam de Court. And thank you for joining us for our latest monthly video. Joining us today is Pie Fund's founder and Chief Investment Officer, Mike Taylor. And Australasian portfolio manager Michael Goldsman, joining us from Sydney. Hi, Michael. Hi, Mike.
MIKE TAYLOR: Hi Sam.
MICHAEL GOLTSMAN: Hey there.
SAM DE COURT: Mike Taylor, we'll start with you. You've just got off the plane from visiting our London team, and you spent a bit of time on continental Europe. Can you share a couple of your findings from your trip?
MIKE TAYLOR: A couple of anecdotes? I really like getting over to the UK to actually see the team face-to-face. And, you know, that's so much more meaningful now, given that we weren't able to do it for two years. And yes, I did get over briefly to see them last year and the UK team have been down to New Zealand. But this time, it felt really good to reconnect with the team, I was there for a full week in London, had a chance to adjust to the time zone, and spend some time meeting with companies, attending a conference. And going out for a meal with the team and having a coffee and things like that. All the things we used to take for granted. But now we really appreciate and in a world where much of business is done on Zoom and Teams. That was a good part.
I also got to see firsthand as I took a week's holiday, what they call over in Europe - I hadn't heard this name before - revenge travel. It was really prevalent. Tourism in 2022 was quite challenged because the infrastructure wasn't back in place after COVID. But now the capacity is there, and the people are there. So if you don't like crowds, then probably now's not a good time to go on holiday, but certainly from a perspective of companies that are associated with the travel sector, we can see why they've been booming in these recent months.
SAM DE COURT: So with your company meetings, you mentioned Mike, what was some of the takeaways, feedback from the companies?
MIKE TAYLOR: Some of the key takeaways they took were that wage inflation has really started to normalize. I know we are seeing some of the unions, particularly in the US, with their collective bargaining, still trying to go for much larger wage increases, but corporates we meet, you know, sort of mid to large businesses, with everyone on individual employment agreements, there's got the capacity and labour has returned.
In fact, I checked some stats in the UK to see what the migration is. And migration is actually at a record now. 1.2 million people came into the UK last year. And it's a net migration figure about 660,000, which is double what it was pre-COVID. So there are people coming into the country, like we've seen in Australia, New Zealand, maybe Goltsy can talk a little bit about Australia's migration, which is also off the charts. And so that's helping with employment. And there's more labour around, which is reducing wage inflation.
So that's one of the key takeaways that wage inflation is really starting to normalize. And the other one is that the consumer, despite higher interest rates was still kind of hanging in there, really resilient in most places.
SAM DE COURT: Thank you, Mike, over to you and Sydney, Goltsy. So you run the Australasian Growth Fund, our oldest flagship Fund, which recently reopened and after a pretty challenging year, last year, the fund has had a pretty good run this year. What are the key drivers for that?
MICHAEL GOLTSMAN: Thank you for having me on the call today, Sam. And just to remind everyone, the Australasian Growth Fund invests in small caps that are typically in the $150 million to $1 billion market cap range. This part of the market was really aggressively sold off last year, probably more than any other part of the market. And during this time, we tried our very best to be patient investors. That meant we would double down on core positions, particularly ones where we had conviction on the earnings outlook. And we sold lower quality holdings where we had less certainty about earnings over that medium-term horizon. So when we fast forward to today or this year, we see our core holdings is pleasingly proving themselves in terms of better earnings results.
We're seeing liquidity returned back to the market and it's starting to flow back and reward our holdings. One example of a stock I can give you the best typifies this is probably Life360. Life360 is an app that helps you track family members and loved ones so you can know when they get to school safely, for example. We doubled down on our position during the selloff it was our biggest weight in the fund last year, and in 2023, it's really proven its mettle to investors. It's successfully raised prices, it's growing subscriber numbers, and it's gotten to free cash flow positive. So it's one where we see a big runway for growth, and we continue to hold.
SAM DE COURT: Thanks, Goltsy, and you just had reporting season during the month of August, what was the general feeling from all the companies that reported in Australia.
MICHAEL GOLTSMAN: Overall pleased. 85% of our portfolio companies either beat or had results in line with our expectations. We also ended the month outperforming the benchmark by over 3%, which was pleasing to see. But, I don't want to make it sound any easier than that, it was a pretty volatile reporting season. There were a number of cases where bad results would get rewarded by the market. And to me, this just shows how oversold small caps are and how oversold conditions are for a number of stocks and how much negativity is baked into share prices. So as an investor, who, let's say, has a three-year investment horizon, I think some of the prices that are offered today sets you up for some really attractive returns in the future.
SAM DE COURT: Thank you, Goltsy. And one more question for you. Can you share a couple of examples of companies that you feeling pretty optimistic and excited about?
MICHAEL GOLTSMAN: It's pretty easy to be bearish. The consumer sector, for example, today, you see rising interest rates, household budget pressures. So there's two ideas in this space that we found that we're pretty excited about that I thought I'd share with you. The first one is the Reject Shop. This is a discount variety retail in Australia. It's going through a product-led turnaround that's really in its very early stages.
Our analysis shows that the stores are trading significantly under their potential at the moment. And we think the company can drive some really strong sales growth through some fresh new product, particularly at a time when consumers want to trade down. The second stock is Embark Education. This is an early childcare centre operator. Occupancy levels and childcare at the moment are very high after several years of lack of new supply entering the market, which in our view is going to drive really strong earnings growth, not just for Embark but the whole sector. And to Mike's point earlier, immigration's at high levels, this is all supportive of the sector right now. Embark also has a very experienced CEO, it's got cash on balance sheet, and we think it can amplify returns back to shareholders through some disciplined M&A as well.
SAM DE COURT: Thank you very much, Goltsy. Mike, back to you for the final question. There's obviously still a lot of noise in financial media and financial markets all about inflation and interest rates. Putting aside the noise for a minute, what are some positives you can share with the audience?
MIKE TAYLOR: It's pretty easy to get negative if you want to. There's enough things to look at, which would suggest investors should be concerned. Valuations of mega-cap tech are high, interest rates are high, consumer spending is slowing down in areas. All of those could point to a negative picture, and you can get yourself pretty pessimistic if you want to.
But actually, you don't necessarily need to, because we could look and say, 12 months ago, we were concerned the world was going to be deep in recession now. It's not. So that means that the pent-up savings from COVID have lasted and people have continued to spend. You could also say we've had high inflation. And we've still got some inflation, yes, but a year ago, inflation was 9%. Now, it's three, maybe three and a half. So it's fairly benign.
Then you can look at oil and say, well, I'm worried about oil. Oil is back at $90 a barrel. But I did some work on that, actually, and typically, oil prices have to increase by 100%, and a relatively short period of time to actually induce the recession. So we've come from $65-$70 a barrel, now we're $90, so nothing to get too worried about, really, you'd only be concerned if oil was trading $120-130 US a barrel.
So I just don't think we need to be so chicken little about a number of things that are out there. We invest in companies that we think are going to grow their earnings, we're not investing in a company because we think their earnings are going down. We find businesses that are growing earnings. We can't control what the market does from period to period.
But, as we've just seen, with the example with [The Australasian Growth Fund], is that people were throwing the baby out with the bathwater 12 months ago. And now look at the performance of that fund. So I could say the UK, for example, at the moment the economy hasn't been doing that well. Small caps over there had been really trashed, but actually, if you look 12 months forward, it's probably a good opportunity to be actually looking at UK stocks. I mean, they've got government stability there. Now they've got migration, inflation is probably going to be back under control. So you do have to be a contrarian as an investor, if you want to outperform otherwise, you just get same as the guy next to you. So I would say, yes, there are some things to worry about. But also there's plenty to be optimistic about.
SAM DE COURT: Thank you, Mike. And thanks a lot, Goltsy for joining from Sydney. Thank you to the audience for watching, and a quick reminder that we have our investor roadshow around the country early November. You should have seen an email come out a couple of days ago. If not, contact the team. Thanks, everyone.
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