March 2016 : Issue 91
K e eping you up to dat e wit h Pie Fu n ds an d t he mark et s
T h i s I ss u e:
The Debate
Passive vs. Active
The I nt er n
Au st r a l a si a n F u nd
Globa l R ev iew
Mat Moore, 2016
Scholarship Recipient
Best and worst performers
of the month
The state of small caps and a
breakdown of Paragon AG
“Investing is a funny thing. It is as much about sentiment
and confidence as it is about fundamentals and value.”
Message From Mike Taylor
HOW THINGS ARE
STACKING UP
The ratio of Bulls to Bears
February was another volatile month. Investor nerves are beginning to fray, as
demonstrated by the ratio of Bulls to Bears (measured by the Individual Investor
sentiment survey). During the month of February, this ratio reached its lowest level
since the GFC in 2008. This does not mean the market can’t go lower, but it does
demonstrate that we are in a period where irrational pricing will appear. Typically,
you should be greedy when others are fearful and vice versa, as the saying goes –
thanks Mr. Buffett.
This was particularly evident for us this month as there were a number of cases of
irrational behaviour, with SurfStitch being the most obvious (more on this in the
portfolio review). In addition, Vita Group, one of our largest positions, came out with
a ripper of a result which I don’t believe is reflected in its current share price.
Whilst events weren’t crazy enough for me to add to my personal portfolio in
January, this month’s moves prompted action. I added to my investment in order
to take advantage of some weakness in Pie unit prices – albeit the falls have been
minimal. The Funds also did some buying.
The other big news for Pie this month was the limited release of new units in the
Emerging Fund for the first time since inception. As you would expect for a fund
annualising at over 40% p.a., demand has been extremely strong.
I look forward to seeing many of you at the Investor Day and our Small Cap
Conference later this March. Please note Juno is also running an event which has
a few spaces left on 17 March. Click here to register. This will be another awesome
event so I encourage you to check it out.
Mike Taylor, Founder / CEO / CIO
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BULLS TO BEARS
RATIO
DEFINITION
Survey data gathered from
investors to determine who is bullish
(optimistic) and who is bearish
(pessimistic) about the market
climate. The bull/bear ratio is
calculated by dividing the number of
bullish respondents by the number
of bearish respondents. It serves as
a good contrarian indicator.
FIVE MINUTE Q&A
Mat will complete an internship and
mentorship program with the team.
What made you apply for the Pie
Funds scholarship?
I was particularly excited about the
internship and mentorship. Learning
from the investment team at Pie will be
an invaluable opportunity.
Mat Moore
PIE FUNDS
What are you hoping to learn while
interning at Pie Funds?
I want to gain a fundamental
understanding of investment analysis
and how to identify companies with
large growth potential.
SCHOLARSHIP
WINNER
What will you be studying?
I will be working towards a Bachelor
of Business Studies degree at Massey
University, majoring in Finance and
Marketing.
What inspired you to study Business?
My biggest inspiration has always
been my dad, a seasoned CFO. Years
of listening to in-depth conversations
between him and my mum made me
want to learn more about the world of
economics.
What do you like to do for fun?
I love being active and out in nature. I
enjoy surfing, spearfishing and running
in the bush and off-road…and gym
training whenever I can fit it in!
FUND SUMMARY FOR THIS MONTH
All data as at 29 February 2016
Investment Performance of Funds Net of fees, before tax
38.8% p.a.
40%
30%
20%
Relevant Index
Pie Funds
50%
19.6% p.a.
19.6% p.a.
5.6% p.a.
10%
9.7%
3.0%
2.8%
2.6%
0%
-10%
-0.4% p.a.
-7.6% p.a.
-2.9% p.a.
0.8% p.a.
-20%
Pie Growth Fund
(Inception: December 2007)
Pie Dividend Fund
(Inception: September 2011)
Pie Emerging Fund
(Inception: April 2013)
Pie Global Fund
(Inception: September 2013)
Pie Cash Plus Fund
(Inception: April 2015)
Annualised Since Inception
Pie Growth 2
(Inception: August 2015)
Total Since Inception
CashPlus
Global
Dividend
Growth 2
Growth
Emerging
1.02
1.15
1.95
1.10
4.38
2.59
unit price
0.3
performance 1 month
3
unit price
-1.7
performance 1 month
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unit price
2.4
performance 1 month
unit price
-1.6
performance 1 month
unit price
-2.3
performance 1 month
unit price
-0.3
performance 1 month
The
INVESTMENT DEBATE
OF THE CENTURY
Passive vs. Active
The debate amongst investment professionals as to whether investors should use an “active” fund
manager or a “passive” index-tracking fund manager has been raging since the early 1970s. While the
controversy might not invigorate the public, uttering the phrase “passive versus active” will get any fund
manager’s blood boiling. In the world of investing, it is a rivalry up there with the All Blacks versus the
Wallabies’. Each team staunchly supports their own view and rubbishes their opponent’s side whenever
possible. Sounds like most sporting codes, really.
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WHERE I STAND
Unsurprisingly, commentary from each side is appallingly biased, as most authors tend to be in strong favour of the particular
product that they are peddling. Therefore, I need to be upfront with you and confess that Pie Funds is an active fund manager.
We believe that through careful stock selection, it is possible to outperform an index. In other words, to beat the average.
As you’d expect, my review of this debate cannot be entirely neutral. But unlike many who have sparred before me, I promise to
present both sides of the argument. Of course, like any good barrister, I will then attempt to convert you to my side by picking
apart the thesis for the accused (Team Passive), and presenting you with unequivocal evidence for my case (Team Active). This
will leave you, in no uncertain terms, compellingly convinced to my argument.
You will no doubt walk away head-nodding to my verdict (in my humble
opinion). But first, we must lay out the theory behind the arguments.
Team Passive
Passive managers manage a portfolio designed to
match the performance of a specified benchmark.
VS.
Active managers attempt to add value to a
portfolio by selecting investments that are
expected, on the basis of analysis, to outperform a
specified benchmark.
OPENING STATEMENT
The case for passive investing focuses on the
premise that the stock market is efficient. The
efficient market hypothesis states that it is
impossible to “beat the market” because stock
market efficiency causes existing share prices
to always incorporate and reflect all relevant
information. In other words, passive investors
believe that whatever price you see quoted each
day reflects all the known information on that
company.
Every time the price fluctuates, it is because
the “market”, better known as the collection
of all investors, adjusts the price to reflect new
information.
ROUND ONE
Who won this round of the
debate? You decide. Here
is the score card as I see it.
...to be continued
Passive: 0 points
Active: 1 point
THE REBUTTAL
There is a logical contradiction to the efficient
market hypothesis, as quoted by London School of
Economics Professor John Kay:
“If all information were already in the price,
what incentive would there be to gather such
information in the first place?”
John Kay, ‘Other People’s Money’
There may well be an argument to suggest that the
stock market is efficient some of the time. After all,
we need investors to recognise fair value at some
point. However, anyone who has taken more than
a cursory glance at the business pages will know
that prices often fluctuate widely. Many times,
this occurs for no apparent reason. This is not the
mark of an efficient market, but a characteristic
of an investment that deviates considerably from
what could be termed fair value from time to time.
Humans are not robots; emotion often clouds our
better judgment. Thus, markets are not perfect.
They have inefficiencies, which passive investors
cannot exploit. From an active investor’s point of
view, it is rational to go out and find those stocks
that are selling too cheap.
To read the next rounds of the debate and Mike’s closing argument, be sure to read the Winter Issue of Juno, out June 2016. Subscribe to the
Juno Newsletter for regular updates and exclusive content.
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GLOBAL PORTFOLIO REVIEW
Invest ors R e main in “ Risk Off” mode
Volatility in global markets persisted in
February, as investors remain in a “risk
off” mode. This has led to a pullback
in the valuations of smaller growthoriented companies, which has in turn
weighed on the performance of the
Global Fund. While the Russell 2000 and
S&P 500 finished the month a touch
lower than where they started, the
Nikkei fell some 8.5% in February alone
and the Shanghai Composite has fallen
more than 20% year-to-date!
The S&P Global SmallCap Index, the
best benchmark for the Global Fund,
had dropped 7.77% year-to-date at
the end of February. While the Global
Fund is down 5.54% so far in 2016, I
am by no means beating the drum
about outperformance year-to-date.
Capital preservation is important, but
ultimately we aim to make money for
our investors.
Equity
market
Current
YTD %
Change
(local
currency)
DOW
16517
-5.21%
NASDAQ
4558
-8.98%
S&P500
19328
-5.47%
Japan
16027
-15.80%
Germany
9495
-11.61%
UK
6097
-2.33%
China
2688
-24.05%
Australia
4881
-7.84%
All data as at 29 February 2016
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WHAT’S NEXT FOR GLOBAL SMALL CAPS?
Looking forward, the outlook is promising. Global small caps are overdue for a
rally, having posted mediocre returns since 2013. Indeed, over the last five years
the S&P Global SmallCap Index has posted a compounded annual growth rate
of just 2.32%. The Pie Global Fund has maintained high levels of cash (around
35%), putting it in a strong position to capitalise on a shift in sentiment in global
small caps. We have identified a number of attractive opportunities, both in
terms of managers and direct stock picks. The focus now will be on deploying
our cash at the right time.
Going forward, we will be taking more direct stock positions in the Global Fund.
The strategy is to boost returns by complementing the diversified structure of
the fund with exposure to the best quality companies we can find around the
world.
PARAGON AG
One such stock is Paragon AG. Based in Germany, Paragon is a premium
part-supplier to high-end luxury car brands. It sells electrical components to
some of the most renowned automakers in Germany and abroad through five
divisions; sensors, acoustics, cockpit, electromobility and body kinematics.
We believe Paragon has a true competitive advantage through its
technological knowhow and track record as an innovative, premium supplier
to the industry. Two thirds of Paragon’s sales are through single sourcedsupplier contracts. As an exclusive supplier to many of the world’s top
automakers, Paragon has embedded itself into customer’s production
process, creating significant barriers to entry for any would-be competitors.
Paragon also stands to benefit from some long-term structural trends facing
the auto industry. For instance, the company produces air quality sensors
for automakers in China. If you visited any of China’s major cities you will
understand the need for such a product and the size of the potential market.
Having invested a considerable sum over the last twelve months in new
products and production facilities, we believe Paragon is now set to reap the
rewards through increased operational leverage, by growing abroad and
increasing its “share of wallet” with the big three German auto producers. This
should also raise margins in the business.
Trading around 8.5x this year’s EV/EBITDA, we don’t think the market fully
appreciates the quality of Paragon’s business and its growth prospects.
The markets have adopted for a
Sell first. Ask
questions later.
approach
AUSTRALASIAN FUND HIGHLIGHTS
T h e Aust ra la si a n Fun ds encounter ed one of th e mor e
di f ficult reporting seasons in a long time.
SurfStitch had a tough month in what can be described as
‘throwing the baby out with the bath water’. The Australian
surf gear online retailer reported a better-than-expected
result, but was met with harsh stock price reaction as it
decided to embark on strategic growth projects. SurfStitch
abandoned its previous profit guidance range, as this would
hamstring its ability to invest in the growth projects.
We believe the business is performing extraordinarily well.
However, it is hard to forecast the level of profitability
the online retailer will generate, similar to the difficulties
surrounding Amazon. Importantly, SurfStitch is forecasting
to grow revenue from AU$300m to AU$1b by 2020. We are
still excited by the scale of the opportunity and have been
buying more.
Another stock that sold off significantly was iSentia.
We initially participated in the private equity sell-down
at AU$3.25 back in August 2015 and had reduced our
holding to negligible levels as it reached a high of AU$4.90
in December. However, we bought back in around the
AU$4.20’s level in February, expecting strong trading. The
result was slightly below analysts’ expectations and the
business also suffered from deciding to invest ahead for
growth in its recently purchased King Content business.
We purchased more stock around AU$3.40 and below as we
believe iSentia is one of the highest quality businesses
on the ASX and it is now trading at one of the lowest
multiples since listing.
We believe that the market reaction can be attributed to negative investor sentiment rather
than fundamental problems with the companies. We view these situations as opportunities
and have been buying companies like SurfStitch, iSentia and Vita Group aggressively.
On the positives, Vita Group continued to impress under
the leadership of Maxine Horne. The company smashed
its December profit guidance of only AU$25-5m-$27.5m
EBITDA, and reported underlying EBITDA of AU$30.4m. We
are particularly excited by the opportunity to replicate the
success of the retail channel in the small-medium business
channel and believe this will provide a long runway of
growth for future years.
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Other highlights of reporting season were IDP Education and
Costa Group, both which reported strong results which we
believe put them on track to exceed prospectus forecasts.
Adacel Technologies gave another profit upgrade to its
profit guidance given in February and reported an extremely
strong cash flow and gave a strong outlook for the rest
of the financial year. We believe there are further profit
upgrades to come for Adacel.
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As always, thank you for your
support. If you have any questions
please don’t hesitate to call
on 09 486 1701, or email me,
[email protected]
...you choose. We do the rest.
Mike Taylor
Founder / CEO / CIO
Pie Funds Management Limited
Level One 495 Lake Road
PO Box 331079
Takapuna 0740
Auckland, New Zealand
Telephone:
+64 9 486 1701
Facsimile:
+64 9 486 1702
Email:[email protected]
Growth 2 Fund
Global Fund
1.
1.
Access companies that are
under the radar
Gain worldwide diversification
2. Invest in high-growth small and
medium-sized companies
2. Invest directly in some of the
world’s top-performing small
cap managed funds
3. A similar investment strategy to
the Growth Fund, which boasts
one of the best long-term track
records in Australasia
3. Access investments in the
UK, Europe, USA, Japan,
Australasian and Emerging
Markets
Pie Funds Management Limited (“Pie Funds”) is not licensed to provide personalised
financial advice. Any information about financial products, securities or services
provided in this communication (or any attachment hereto) does not constitute
personalised financial advice. If you are unsure about investing in the Pie Growth
Fund, Pie Dividend Fund, Pie Emerging Fund, Pie Global Fund, Pie Cash Plus Fund or
Pie Growth 2 Fund you should seek independent financial advice. The information
contained in this newsletter is given in good faith and has been derived from sources
believed to be reliable and accurate. However, neither Pie Funds nor any of its
employees, Directors or shareholders, gives any warranty of reliability or accuracy
and shall not be liable (whether in contract, tort - including negligence, equity or
any other basis) for errors or omissions herein, or any loss or damage sustained by
any person relying on such information, whatever the cause of loss or damage. Past
performance is not a guarantee of future returns. No person, including the Directors
or shareholders of Pie Funds, guarantees the repayment of units in the funds or any
returns of units in the funds. Returns can be negative as well as positive and returns
over different periods may vary.
To download our investment statements visit www.piefunds.co.nz
Past performance is not a guarantee of future returns. No person, including the Directors of Pie Funds
Management Limited, guarantees the repayment of units in the funds or any return of units in the
funds. Returns can be negative as well as positive and returns over different periods may vary.
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