Written by Doug Jopling, Senior Investment Analyst and Portfolio Manager
Australasian Growth Fund
The Australasian Growth Fund was down 1.1% for the month versus the ASX Small Ordinaries Index which was up 1.7%.
Commodity/chemical companies (excluding gold) continued to perform well in February. Two of the main contributors for the portfolio this month were from these categories – Alpha HPA was up 32% for the month and Galena Mining up 29%. Galena benefited from a commodities tail wind and further drill results, while Alpha HPA benefited from the Electric Vehicle (EV) thematic. I have taken profits on a nickel position and reinvested the funds into a copper mine developer, to continue to have exposure to metals that will benefit from growth in the EV and renewable energy sectors.
A few months ago I substantially reduced the fund’s exposure to gold as I believed the gold price was showing signs of weakness. Gold price fell another 6% in the month (down 16% since its peak in August), and gold miners, as reflected by their share prices, have been out of favour for the last few months. I believe a lot of the profits made in the gold sector last year have been rotated into copper, nickel and other metals which tend do well when the economy improves. The fund now only has ~3% of exposure to gold.
In terms of new additions, I have added a telecommunications/IT service provider to the fund and increased the holdings in a couple of other existing software companies. I have also used the liquidity created by reporting season to reduce some holdings, either trimming to take some profits or exiting a couple of minor positions.
In terms of other major share price moves, software company Life360 was up 13% for the month after posting half-year results slightly better than guidance. E-commerce provider Zebit fell 10% after being up 18% the previous month and Probiotec, a pharmaceutical contract manufacturer, fell 5% in the month after posting results in line with my expectations.
Written by Mike Ross, Portfolio Manager
Australasian Dividend Fund
The Dividend Fund returned 4.3% in February, outperforming the index return of 1.7%.
Uniti was the top contributor to performance during the month after reporting a strong half-year result and outlook. The company has only been listed two years but in that time has grown from a forecast EBITDA of $2m at IPO to be run-rating at $116m as at December 2020. This growth has been achieved primarily through acquisition, however the company is also generating strong organic growth. The most common issue with “roll-ups” is a sacrifice in earnings quality as management teams (and investors) become fixated on earnings per share accretion with little regard for the quality, health or strategic fit of the businesses being acquired. In the case of Uniti, business and earnings quality today is vastly superior to what it was at the IPO two years ago. It will take time and continued execution for the share price to fully reflect this.
Redbubble was the largest detractor to performance during February, having previously been a key performer for the fund. Fortunately, I had reduced the position size ahead of the result primarily due to elevated investor expectations (an army of fund managers and brokers were pitching it) and a mixed track record of delivery in the key Christmas quarter. Redbubble shares finished the month almost 25% lower after the company produced a very strong result at the revenue line, but operating leverage was muted by margin pressure primarily due to a consumer preference for express shipping amidst shipping delays in the US (less profitable for RBL). While the company is off to a strong start in 2021, it remains to be seen whether it will maintain momentum as the world opens up and consumer behaviour evolves.
Overall the reporting period delivered strong performance for the fund, but more importantly it reaffirmed my conviction in the fund’s key positions. I have not made substantial changes to the portfolio, although there are a number of new ideas under consideration.
Written by Chris Bainbridge, Head of Australasian Equities and Portfolio Manager
Australasian Emerging Fund
The volatile market conditions experienced in January continued into February, with ECF finishing the month down 0.7% versus the Emerging Companies Index which was up 2.2%. While market conditions were challenging, ECF performed below our standards. The reasons for our sub-par performance were twofold:
First, our batting performance was average and our slugging percentage was worse. We had a number of positive contributors during the month such as Aussie Broadband, Atomos, Calix and Pacific Smiles. However, our win/loss ratio was below prior reporting periods with Bigtincan, City Chic and Damstra detracting from performance. More importantly, it was our slugging percentage which let us down, with the weight of our losers exceeding that of our winners.
Secondly, large positions such as Frontier Digital, Kip McGrath and Probiotec were flat. The performance of our companies doesn’t neatly coincide with half yearly reporting periods and we remain enthusiastic about the outlook for each of these companies. However, their lack of performance weighed on our overall result.
What are we doing about it? We’re sticking to the process which has consistently delivered results. We’re confident in our core positions and have added selectively to quality names caught up in the recent sell off. At the same time, we’ve cut the weeds and recycled capital into those opportunities with the best long-term potential.
Looking ahead, small caps have borne the brunt of the recent sell off. While long duration assets (growth/tech) have been most impacted by the rise in yields, somewhat counter-intuitively, the numbers show growth is the place to be. A study by EFG in Portland, Oregon demonstrated that technology was the third best performing sector (behind healthcare and materials) during the seven periods of rising yields since 1990. The story here is growth. These sectors grew earnings fast enough to outpace any PE contraction caused by a higher discount rate. In summary, while the short term maybe bumpy, the strategy is sound, the process tight and we’re confident we can return the fund to its previous high levels of performance.
Written by Chris Bainbridge, Head of Australasian Equities and Portfolio Manager
Australasian Growth 2 Fund
After a strong start to the month, global markets corrected. The correction occurred as yields rose to reflect investor concerns that a faster than expected global recovery will result in inflation, causing the Fed to raise interest rates ahead of plan. Companies are worth the sum of their future cashflows, discounted back to today. Accordingly, higher rates are kryptonite to equity valuations as the discount applied to future cashflows increases. Simply speaking, as interest rates go up, future earnings are worth less. The impact of higher interest rates is greatest on long duration assets (growth/tech), which is where Growth 2 invests. There’s good news on this front though, which we cover below.
Capacity: The most important event for Growth 2 during the month was the decision to close the fund to further investment. When investing in small caps, size is the enemy of performance. As the size of the fund increases, we’re forced to either sacrifice liquidity or move up the curve into larger and more efficiently priced companies. Both options inhibit performance and performance is why Growth 2 exists. Accordingly, we’re pleased to say that Growth 2 will close at the end of this month with the aim of preserving future performance.
Half Year Reporting: Growth 2 ended the month up 6.3% versus the Australian Small Ordinaries Index which was up 1.7%. Positive performance came from structural growth companies benefiting from reopening. Detracting from performance were small positions in Covid beneficiaries and my failure to follow process. We run a high conviction fund with the aim of knowing a handful of companies better than most market participants. When new information is introduced to the market, the market can take time to reprice the company to reflect that new information. In a limited number of circumstances, an investor may know a company well enough to take advantage of the temporary mispricing. I identified three such opportunities in reporting season. However, instead of executing on my pre-market plan, I allowed price to alter my decisions. As Druckenmiller says, "it takes courage to be a pig" and I lacked the courage and conviction to stick to my plan and maximise the opportunities presented. There are two lessons here: (1) follow Druck and (2) don’t hope away your edge.We’re excited about the improvements we can deliver by following both.
At the time of writing, the correction which began at the end of Feb had continued into March. The good news here is that the indiscriminate sell-off across growth names has presented us with an excellent opportunity to zig whilst the market is zagging by adding to quality structural growth names. Performance doesn’t come in a straight line, but we’re confident that Growth 2’s in great shape to keep delivering.
Information is current as at 28 February 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.