A Message from Mike: No "Dry July"

No sign of a drought

While some of you may be supporting “Dry July”, at Pie there is no sign of ‘drought’. In fact, July has proven to be our most fruitful month each year. Over the past decade, July is the only month that our funds have never been down. This is quite a strange phenomenon and after 10 years is probably providing us with enough data to suggest there is a pattern forming. 

I believe the main reason for positive July is that during the months of May and June in Australia it is tax-loss selling season. Therefore, in July the market usually bounces once the selling has finished. Strangely though, this year the
ASX had its worst July in six years! So perhaps this is just a Pie phenomenon. None of this of course explains the positive performance for our international funds every July, but with only four years of data I’ll put it down to luck at this stage! 

Unsurprisingly, the Australasian funds led the charge this month and it’s great to see Growth 2 back to its highs at $1.37, and +7% in the last three months. As discussed previously, Growth 2 is near capacity and we expect it to soft-close in the coming weeks.

Howard Marks 

Also in July, investment guru Howard Marks put out a memo entitled, There they go again…again. In summary, Marks states that we have the seeds in place for a boom, which ultimately could and, in his view will lead to a bust. 

These are similar seeds to previous cycles. For example, history repeats or rhymes. He cites;

• high valuations for stocks;
• low volatility;
• popularity of the FAANG group (Facebook, Amazon, Apple, Netflix and Google);
• US$1 trillion moving into passive ETFs;
• lowest yields in history on bonds;
• EM debt yields low;
• most funds raised in history for private equity;
• biggest fund of all time raised for leveraged tech investing and billions in digital currencies whose value has multiplied dramatically. 

He’s not saying that the stock market is too high or that it can’t go higher, but rather that investors are not taking in to account risk because things have been so good for so long now. What worries me the most is all the passive money being poured into ETFs. Nobody is doing any analysis of the stocks – literally. In some ETFs 40% of the portfolio is invested in the FAANGs. The more they go up, the more the ETFs buy. This may end in tears.

American investment travel journal

During July, I briefly escaped this years’ appalling New Zealand winter travelling through Wyoming, Montana and California. Other than the fact that it was over 30 degrees Celsius every day, there were a couple of notable things I observed that are worth sharing: 

Firstly, the opinions of Trump remain polarised. Americans are either terribly embarrassed he is their president or they are quietly in favour. Depending on which state you are in determines the majority view. 

Secondly, while the green-tech revolution is at the forefront in places like Los Angeles and San Francisco, with an abundance of Tesla vehicles, through the mid-west and mountain states, fossil fuels still dominate. In Montana, I drove past several coal trains that stretched for miles. And with petrol so cheap – with prices ranging from US$30 to fill-up an average car to US$60 to fill my rental “truck” with its 100L tank – there was no reason for electric cars! While California is leading the green way, the rest of America is in favour of the good ol’ pick-up truck (dominating vehicle sales and taking out the number 1-3 spots).

Finally, the US economy is performing very well, with areas like construction and housing strong. Retail apparel is weak, but overall small business and consumer confidence is high.

Risk aware 

Here at Pie, we are very much focused on risk management and I’m mindful that the equity market has delivered good returns for many years now. This won’t continue ad infinitum. However, as I like to remind investors, equity markets don’t die of old age, but eventually they do die. 

Each week, as part of my CIO report to the team, I monitor several factors that have in the past been warning signs for investors, such as the yield curve (interest rates), jobs data, car sales, investor optimism, trailing returns, market multiples and even our own investment team sentiment. I don’t have a crystal ball but I am focused on what’s going on around us always. 

As part of our risk management strategy, we’ve recently converted some of our cash in each of the funds to USD.

New product brewing 

Finally, because we know that markets don’t always go up, behind the scenes Pie is looking at a new fund that will be designed to take advantage of rising and falling markets, which I can hopefully discuss with you later in the year.

As always, thank you for your support. If you have any questions please don’t hesitate to call me on (09) 486 1701, or email me, mike@piefunds.co.nz.

This article is for information purposes only. It is not intended to be financial advice and has been prepared without taking into account any particular persons financial situation or investment objectives.  Past performance is not a guarantee of future returns. Material or views expressed on specific companies are not recommendations to buy, sell or hold financial products.