2/6/2020 11:00:00 PM

CIO Report: Carry On Regardless

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The funds for the month navigated some turbulent waters.

Carry on regardless

The funds for the month navigated some turbulent waters. We had a phase 1 trade deal between the US and China, an assassination and subsequent retaliatory missile attack on a US military base in Iraq and the first signs of the Wuhan flu coronavirus. The market reaction has shown stoic resilience to these macro-events as interest rates remain low and equities still look relatively attractive compared to other asset classes.

However, we are mindful 2019 was a stellar year for stock-markets around the world which was largely driven by multiple expansion or to put it bluntly stocks becoming more expensive with minimal return coming from earnings growth. This feat will be difficult to replicate in 2020 as stock prices cannot continue rising unless supported by earnings growth or falling interest rates. Interest rates already feel incessantly low and are unlikely to go much lower (famous last words). Valuation multiples tend to mean revert due to competition and business cycles. As Economics 101 teaches us high prices increases competition which competes away returns on capital and causes valuations to fall.

Australasian fund summaries

The Growth Fund was up 1.5% and Dividend up 2.1%. The Growth 2 Fund had a more difficult month being down -0.6%. The Emerging Companies Fund was up 7.2%.

Key contributors for the Growth Fund were EML Payments (EML.ASX) and Macquarie Telecom (MAQ.ASX). The main detractors were Atrum (ATU.ASX) and Geopacific (GPR.ASX).

The Emerging Companies Fund benefited from a flurry of positive announcements from portfolio constituents such as Bigtincan (BTH.ASX), RPM Global (RUL.ASX) and Kip McGrath (KME.ASX). Kip McGrath, a portfolio stalwart and long-held position at Pie Funds, indicated there was corporate interest in their business. We have long felt a business that possesses a wide global footprint of franchisees such as Kip McGrath had inherent corporate appeal to a larger education group or as a platform for a wider global K-12 education rollout. The main detractor was Citadel (CGL.ASX).

Key contributors to the Dividend Fund were Johns Lyng (JLG.ASX) which had an earnings upgrade and Macquarie Telecom (MAQ.ASX). The negative was an update from Mosaic Brands (MOZ.ASX) which has experienced a poor trading period due to the bush fires in Australia impacting retail traffic.

Growth 2 Fund benefited strongly from Afterpay (APT.ASX), which is a larger position in the fund, but suffered from a disappointing business update from Kogan (KGN.ASX) during the month.


International fund summaries

The International Funds performed well, the standout being both the Global and UK / Europe Funds up 5.5% and 4.7% respectively. We saw a continued rally post the UK general election in December. Recent strength in the GBP has also helped as we tactically lowered our currency hedging levels to only 25% to take advantage of a recovery in the UK economy post Brexit. Climate Friendly Fund was up 1.8%.

The key contributors for Global Small Companies were Cybozu (4776.JP) which continued its momentum from the month before, Kornit (KRNT.US) and DotDigital (DOTD.LN) with only mild detractors.

For Growth UK & Europe, key contributors were plenty DotDigital (DOTD.LN), AFH Financial (AFHP.LN) and IMI Mobile (IMO.LN). We continued to increase our exposure to Europe in the portfolio.

For Climate Friendly, key contributors were LPSN (LPSN.US) and Iberdrola (IBE.SM). Detractors were GB Group (GBG.LN) which experienced profit taking post its strong run and (WUBA.US) as concerns around the Chinese economy from the Coronavirus spread.

As Mike discussed, we have implemented some market hedging late in the month as the uncertainties surrounding the Coronavirus elevated. We are also buying companies that we believe have unfairly sold off more on sentiment rather than fundamental issues. These companies have limited exposure to China or industries that are affected by travel.

Thank you for entrusting your capital with us.