International Review: Insight into our train of thought

Tuesday 6 March, 2018

International Review: Insight into our train of thought

Written by Mike Taylor, Founder, CEO and CIO

Multi-Strategy 

The fund had a strong month in February up 2% as volatility spiked and a large profit was banked from closing out S&P 500 put options. I am now in the process of re-building the put option book. 

Equity gains were recorded predominantly in Aurelia Metals, which was up over 20%. The main detractor was EML Payments, which disappointed the market with its outlook statement. 

They make more money when markets are volatile.

Staying on track 

During the sell-off the fund added a number of small long positions including Amazon, Nikkei ETF, Indian small cap ETF and Tencent. Shorts added include Sky TV, Domino’s Australia and NZ King Salmon. In addition, the foreign currency holdings were increased (majority unhedged). I wish I’d bought Netflix at the same time - up 60% YTD.

Bianca, one of our analysts, also uncovered a Dutch investment company whose profitability is inversely correlated with the market. They make more money when markets are volatile. FLOW, a company that provides liquidity on ETF’s, sees revenue rise as ETF trading and volatility increases. The fund has taken a position here, for a hedge as much as anything else. 

The challenge for investors is that whilst volatility might be on the rise, I still think that equity prices can go higher in this environment. 

 


Written by Chris Wright, Senior Investment Analyst and Co-Portfolio Manager

Growth UK & Europe 

February has been eventful for the Growth UK & Europe Fund, with our performance holding the line at -0.3%.International share markets started poorly this year and our benchmark is down ~5.4% to date. Our fund is up about 1.6% however, delivering outperformance of about 7% and accomplishing our primary aim of protecting and growing investors’ capital. Risk management is a large part of that. As the managers in charge of the fund, risk management starts with ensuring we find outstanding businesses – ideally at outstanding prices. 

Risk management starts with ensuring we find outstanding businesses – ideally at outstanding prices. 

Full steam ahead

It is pleasing to get good news from portfolio companies, as we did from train software company Tracsis, which reported a strong start to their financial year. Tracsis’ business is helping their customers to improve notoriously inefficient operations. Overall, we view Tracsis’ management team as extremely shareholder friendly. Their tried-and-true strategy of accretive buy and build growth continues to shine. The business has options to grow the profitability of its existing businesses and grow into new segments. As Amazons’ Jeff Bezos has proved, delighting your customers and making their life easier, can be an extremely profitable exercise. We believe John McArthur at Tracsis has been drinking the same Kool Aid. 

“We’ve had three big ideas at Amazon that we’ve stuck with for 18 years, and they’re the reason we’re successful: Put the customer first. Invent. And be patient.” - Jeff Bezos, Amazon CEO

Mar18 International Amazon

 

Green light for sharp ideas

During the month we’ve started to put a reasonable amount of money to work in two new holdings. With our mantra of investing alongside management teams, we’re comforted to see the two founder and management teams have NZ$54 million and $50 million invested alongside us, great alignment with our interests. With the remaining cash we’re focussed on staying patient and investing only in the best new ideas. 

As results season heats up, Daniel and I will go to the UK, Norway and Sweden during April. We’ll spend considerable time with our portfolio companies and look forward to updating you in time.

No tunnel vision

With a fair amount of market volatility currently, I think it’s important to remember that each investment we’ve made has been on the basis we’re happy to be long-term investors. Their prices may move around, but we’re confident patience will be rewarded. 

  


Written by Victoria Harris, Senior Investment Analyst and Co-Portfolio Manager

Global 

February proved to be a very volatile month for global markets as the expectation of rising inflation and the accompanying jump in bond yields, led to a sharp correction. The S&P 500 fell approximately 4% during the month, the first negative month since 2016 and breaking a 15 month long positive streak. 

Growth is all go 

Relative to the January peak, all equity markets are off their highs. The US is currently approximately 6% below its peak, UK and European shares are 9% and 7% below their peaks, while Japan is down over 12%. Amongst this volatility, we also had the global reporting season for financial results for the quarter (or year) ending December 2017. It has been a very impressive set of results, despite current market conditions, with nearly 80% of companies beating revenue and profit estimates. All sectors experienced earnings growth, apart from telecommunications which saw profits slip marginally. The strongest growth came from Energy, Materials and Technology. 

Tech roars into action

It was also a busy month for the Global Fund with nearly half of our holdings reporting financial results for the year (or quarter) ending December 2017. Overall, the quality of the results was fairly positive, with Chegg Education and LivePerson being the stand-outs in the US, and Aurelia Metals and Temple & Webster being the stand-outs in Australia. These positions all rose greater than 20% during the month, despite the market correction.

LivePerson (LPSN) is a founder-led provider of online B2C messaging solutions. At a high level, LPSN is a thematic play on the shift from desktop to mobile computing. We were attracted to the company for two main reasons. Firstly, the large opportunity of consumers increasingly opting for mobile messaging as their primary means of communication. Millennials send on average 60 messages per day and prefer to message rather than talk to someone over the phone. This plays right into LPSN’s hands. Secondly, LPSN began migrating its legacy customers en masse in 2016 to its new platform. This led to depressed revenues and bookings amidst the transition but also created an attractive buying opportunity. With the migration now largely complete, we are starting to see signs of a re-acceleration of revenue growth and margin expansion. We also hold LPSN indirectly through an external manager, Granahan US Focused Growth Fund. 

Eyes wide open 

We expect to have more months like February, as volatility returns to global markets. Being active investors we welcome volatility, as it provides opportunities to buy companies at more attractive prices.

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.

Mar18 International Chat Bot

 

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.