Written by Doug Jopling, Senior Investment Analyst and Portfolio Manager
Australasian Growth Fund
The Australasian Growth Fund was up 5.6% during the month versus the ASX Small Ordinaries Index which was up 8.6%.
The positive announcement of Covid-19 vaccines during the month caused a rotation into cyclicals, banks and recovery stocks, and out of technology and gold. This rotation was reflected in the fund with some of my recent additions (which were more recovery focused) performing well, and gold detracting.
The largest contributors in the month came from property, pharmaceutical, and IT consultancy sectors. The entry into a couple of property companies over the last two months has proved profitable, with Elanor Investors Group up a further 30% after rising 20% the previous month. Elanor Retail Fund rose 31% after announcing the sale of one of their shopping centres at a price higher than book value and announced the reinstatement of dividends and a potential share buyback. Empired Ltd, an IT service provider, rose 27% after increasing profit guidance and announcing the resumption of dividends next year. While Probiotec, one of the largest positions in the fund, was up 25% after announcing an earnings accretive acquisition.
In terms of negative contributors, the main culprits were gold stocks. Gold price has risen from US$1,517/oz at the start of January to a peak of $2,063/oz in August and finished the month at $1,777/oz (a fall of 5.4% for the month).I started to believe the gold price was breaking down in the middle of the month so I cut my remaining larger gold mining positions in half which proved advantageous as the gold mining sector then sold off by ~10%. It also helped that I sold out of Ramelius Resources last month when it hit my price target. This allowed me to bank an ~80% gain on that position. Its share price is now about 27% below what I sold it for. When dealing with resource stocks it pays not to get too greedy as commodity prices can change quickly.
The gold sector has been a large contributor in terms of the fund performance this year. I will keep an eye on it but for now it only represents ~5% of the fund.
Written by Mike Ross, Senior Investment Analyst
Australasian Dividend Fund
The Dividend Fund returned 8.3% versus the benchmark return of 8.6% during November.
During the month vaccine news caused a rotation from tech, growth and Covid winners, into cyclicals and Covid losers. This benefited some of our holdings including Karoon, as the oil price rallied. Another possible beneficiary was Eclipx, which also reported a strong result during November.
Strong contributions also came from Redbubble, Uniti Group and Macquarie Telecom. These are not reopening trades as most of these businesses appear to have benefited from lockdown measures.
A quick recap on the Dividend Fund strategy. Most of the fund’s core positions are businesses we believe can grow independent of GDP. These are either exposed to structural growth trends such as ecommerce, the shift to cloud computing, or businesses with competitive advantages, strong balance sheets and industry structures that allow them to grow independent of the broader economy.
The fund has a mandate to invest a portion of the portfolio into stocks that pay out profits in the form of dividends (as opposed to reinvesting for growth). This means the fund will generally have more exposure to the domestic economy than a growth fund.
So what will drive the direction of markets from here and should we tilt the portfolio in any particular direction? Will low interest rates and anaemic growth continue to see growth stocks outperform, or will the current rotation into cyclicals sustain? We do not know or invest much time trying to answer these questions. The balanced approach described above should lead to a good outcome for investors either way. Our time is best spent finding great businesses, run by great management, mispriced by the market.
Written by Chris Bainbridge, Head of Australasian Equities and Portfolio Manager
Australasian Emerging Fund
Positive vaccine news triggered a sharp rotation from growth to value during the month. Despite the fund’s growth bias, ECF performed relatively well, ending the month up 5.4% versus the Emerging Companies Index which was up 11.2%.
Positive contributors to performance included Atomos, Probiotec and Kip McGrath. Atomos is a founder-led video technology company which designs, develops and commercialises video monitor recorders, a device which, when used in conjunction with a video camera, significantly enhances quality and recording/monitoring capabilities. Atomos re-rated strongly during the month as investors realised Atomos’ product leadership has placed it in a unique position to capitalise on the increased demand for streaming and gaming, on top of already strong demand for its core products.
Also contributing to performance was Probiotec. Probiotec, a developer and manufacturer of pharmaceutical and consumer health products globally, re-rated following its highly accretive acquisition of Multipack-LJM. Kip McGrath also continued to re-rate on the back of a positive AGM update and valuation read-through from IPO aspirant Cluey.
Detracting from performance were Marley Spoon and Damstra.
The rotation from growth to value provided a headwind to performance in November. While the fund has a growth bias, you should take comfort that we’re pragmatists, not purists. We continually challenge both our approach and the companies in the portfolio. In the current case, while cyclicals have moved, long term rates remain low. This suggests to us that the headwind from the current rotation will pass as investors realise we live in a low growth world where stock market returns are driven by a small number of structural growth companies. We’re positioned for this, but caution that investors may need to be patient to see the results.
Written by Chris Bainbridge, Head of Australasian Equities and Portfolio Manager
Australasian Growth 2 Fund
Over the long run, stock market returns are driven by a small number of exceptional growth companies. The progress of such companies is rarely smooth or linear. Sentiment in the market can turn quickly, driving price volatility that is commonly mistaken for risk. However, over the long term, the picture of compounding is clear. Finding exceptional growth companies is difficult. When we do, we take large positions. This is the approach that has driven Growth 2’s long term performance.
Unfortunately, Growth 2’s approach fell out of favour this month. Positive vaccine news triggered a sharp rotation from growth to value as technology, industrial and consumer facing stocks were sold to fund the rotation into cyclicals, specifically resources, travel and banking stocks. We have a lot of exposure in the former and none in the later. As a result, Growth 2 severely underperformed, ending the month up 3.4% versus the Australian Small Ordinaries Index which was up 8.6%.
Should we have rotated? Making a dash for trash might work for some fund managers, but it’s not for us. Why? Aside from nailing the timing (difficult with a concentrated portfolio), cyclicals have their pricing set by external forces which we can’t forecast and many have a terminal value of zero. While we haven’t rotated into cyclicals, we haven’t been idle. We’ve repositioned the portfolio in three ways:
1. We’ve added significantly to two structural growth companies temporarily impacted by Covid. What distinguishes these companies from the aforementioned cyclicals is that structural tailwinds mean their revenue will continue to grow beyond the mean reversion, which is about the best one can hope for when buying cyclicals.
2. We’ve taken a contrarian approach and added to quality technology stocks which are growing strongly, have high returns on invested capital and aligned management teams.
3. We’ve cut vaccine victims. While some of our companies have married Covid with strong execution and greater clarity on the long term investment case, some haven’t. Accordingly, we have divested, or are in the case of divesting, positions which we believe will suffer as economies reopen.
In summary, while it’s seductive to believe we can capture every move in the market, we approach markets more like the Tour de France. We’re focused on winning the race, not every stage, and winning the race means focusing on structural growth companies. While the fund has a growth bias, you should take comfort that we’re pragmatists, not purists. We continually challenge both our approach and the companies in the portfolio. In the current case, while cyclicals have moved, long term rates remain low. This suggests to us that the headwind from the current rotation will pass as investors realise we live in a low growth world where stock market returns are driven by a small number of structural growth companies. We’re positioned for this, but caution that investors may need to be patient to see the results.
Past performance is not an indicator for future performance. This is not intended to be financial advice and does not take into account any particular person’s circumstances. Before relying on this information, please speak to an independent financial adviser. Pie Funds is the issuer of the Pie Funds Management Scheme. For access to the PDSs, please click here.