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Wash your hands, it's time to start picking through the long term opportunities

In a recent communication, we talked about the value of not panicking and sticking to your long term plan during a situation like the current Covid-19 virus. However, human emotion tends to have us looking forward with trepidation as we start to wonder whether this may just be the start of something bigger.

Governments globally are now taking strong action to arrest the growth rate in the spread of the virus. Central banks and policy makers are aggressively working together to provide significant monetary and fiscal support to limit the downside risks to the global economy. Typically the average “bear market” correction is 26% (with a recession) and 23% (without a recession) going back to the 1950s. Whilst we don’t know what’s going to happen in the short term, history over the same period shows that the recovery in the S&P 500 is on average between 27% and 39% within 250 days of the bottom of the market fall. We do believe that our future focused philosophy and process is strongly positioned for the inevitable stock market recovery.

The Return on Invested Capital (ROIC) in our portfolio is greater than 50% compared to the market ROIC of just over 12%. This means that the current volatility in markets is pricing companies that make more than 50 cents return for every dollar they invest in their business, in the same way it is pricing companies that make just a few cents return on every dollar they invest. We firmly believe that these high-quality companies will float to the top again as investors start to make more rational judgements. By requiring companies that we invest in to have high ROIC also means that we have no investment in the Real Estate, Utilities, Energy and Materials sectors with low exposure to the Financials (no banks) and Industrials sectors. We have no emerging market exposure.

All of the companies in our portfolio are beneficiaries of long runways of growth from Global Megatrends. Every company we own has to have at least one megatrend driving its growth although many companies are benefiting from more than one. Clearly there are a couple of megatrends that we are invested in that will be augmented by the Covid-19 pandemic. This includes the Gig Economy, Cashless Society, Video Gaming Explosion, Cloud Computing and Corporate Digitisation. The companies in our portfolio that are beneficiaries from these megatrends, such as Accenture, Nvidia, Visa, Intuit and Adobe are well-positioned; in fact, 46% of our megatrend exposure is invested in these 5 megatrends.

In addition to our future-focus on highly profitable companies that benefit from megatrends, we also offer downside protection via our Insync Global Capital Aware Fund which uses Put Options to offer some insurance against catastrophic market downturns. From the 1st of February to the 17th of March the Puts have added 5% of extra value against the falling market.

A stock example in action: How ROIC and megatrends can work together is found in our Adobe investment. Insync identified Adobe as a facilitator of the Corporate Digitisation megatrend. Corporations are in a multi-year plan to enhance the ROI, efficacy, efficiency and competitiveness of their organisations by introducing cloud-based platforms linking front end sales teams/e-commerce platforms to accounts and customer data. Adobe was early in transitioning its world-leading creative tools into a cloud-based application and has become a one-stop-shop for corporations looking to complete their multi-channel sales strategy. Adobe is a subscription-based business with 91% of its revenue last quarter coming from subscriptions and it has a high ROIC too. Since the start of March until today, Adobe has outperformed the market by 10% and we believe Adobe and many other high-quality companies in our portfolio will weather this storm well and is poised for above-market growth beyond.

Disclaimer Equity Trustees Limited (“EQT”) (ABN 46 004 031 298), AFSL 240975, is the Responsible Entity for the Insync Global Quality Fund and the Insync Global Capital Aware Fund. EQT is a subsidiary of EQT Holdings Limited (ABN 22 607 797 615), a publicly listed company on the Australian Securities Exchange (ASX: EQT). This information has been prepared by Insync Funds Management Pty Ltd (ABN 29 125 092 677, AFSL 322891) (“Insync”), to provide you with general information only. In preparing this information, we did not take into account the investment objectives, financial situation or particular needs of any particular person. It is not intended to take the place of professional advice and you should not take action on specific issues in reliance on this information. Neither Insync, EQT nor any of its related parties, their employees or directors, provide and warranty of accuracy or reliability in relation to such information or accepts any liability to any person who relies on it. Past performance should not be taken as an indicator of future performance. You should obtain a copy of the Product Disclosure Statement before making a decision about whether to invest in this product.

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