Insync August 2020 Fund Commentary

Two factors driving our out-performance are our Megatrends and our unique process of disciplined analytical stock selection. This is much more than just investing in companies currently ‘disrupting’ if one is to obtain a longer term result. It’s also easy to forget non-tech stocks in the present market - we don’t.

Fund Performance - as at 31/8/2020

The Insync Difference

Insync’s investment approach is a strong diversifier to almost all competing investment styles once you delve into the detail of what we do. For example, our proprietary Megatrends transcends typical market boundaries, research labels and categorizations. Their multiyear return profiles usurp traditional country, industry and style factors. Disruption acceleration in industries makes Megatrends essential in avoiding the short-comings of traditional ‘style boxes’ that are otherwise leading to wide dispersions of performance both across and within styles (e.g. ‘value box’ managers and Value vs Growth styles).


Not just Tech Stocks.....

Whilst many managers focused on growth and disruption end up with a concentrated portfolio of technology companies, Insync’s overarching focus on 16 global megatrends provides significantly greater diversity. Examples include; immuno-oncology drugs, robotic assisted surgery, food away from home, universal basic income, athletic leisure and pet medication. Key elements of technology such as cloud computing, 5G, cloud computing and the internet of things (IoT) are present as well.


How we allocate across stocks makes a big difference.....

Constructing the portfolio weightings is critical and we place strong emphasis on risk. We continuously monitor the interplay of various risk factors and concentration between these Megatrends to create a well-balanced and diversified portfolio - some 30 highly profitable companies across 16 megatrends.


Valuations are important... so why don't we focus on P/E ratios?

A persistent factor of Insync’s stock selection success is in identifying which companies with one or more Megatrend ‘tailwinds’ have a strong ability to increase their performance. Our approach can confound traditional investment expectations by not only delivering significant returns compared to stocks that optically look much ‘cheaper’ (focusing on P/E multiples), but also possess lower downside volatility.


Price to Earnings ratios are often unsuitable and over-used when evaluating a company or assessing the attractiveness of an equity market. This is due to an inherent human bias known as the availability bias where investors take shortcuts and rely on simple readily available metrics. However, a P/E multiple is not a ‘valuation’.

As business models evolve, companies are increasing expenditure on innovation to drive sustainable growth.Yet, traditional valuation tools such as P/E ratios and price/book ratios often send false indications as a result of how they account for this. Insync prefers the ‘windshield’ view than the ‘rear-view mirror’ of accounting. We have a proprietary valuation framework that is future-focused utilising an analytical framework to assess the likely path of a company’s future earnings growth and to determine the intrinsic value of a business.


The accounting world has not kept up with the developments in the real world. This won’t change anytime soon, providing us additional opportunities to invest in profitable and sustainable growth companies that PE and Price to Book ratios would conclude otherwise


Megatrend: Universal Basic Income - Secular shift towards value for money based consumption

Described by Martin Luther King Jr as the solution to poverty, universal basic income (UBI) may become an inevitability in this era of advanced technology. By 2040, technology will be ubiquitous; automation, AI and robots will be in operation in businesses across all industries, improving efficiencies and creating profit, while ultimately displacing many jobs, forecasted to impact as much as 20% of the global workforce by 2030. They will do far more than they do today.


Until now, technology replaced only the physical work of people. Once displaced, with some assistance and re-training a worker could move to a new employment vocation. Now, AI is rapidly taking on that other human ability- cognitive ability. This is a historical first. Whilst a worker could go from building car-doors to operating a machine that builds the doors, it is a massive leap of huge cognitive capability to move from that role to advance AI software programming as a vocation. Massive upheavals in a short time frame can create mass unemployment and under employment.

Weak employment growth has been a key feature of previous economic recoveries – a phenomenon economists call “jobless recovery”.In the US, following the 2008 GFC, it took 6+ years for employment to return to its pre-recession peak. The recessions of 1991 (post-Gulf War) and 2001 (the dot-com bubble), also saw long-lasting high levels of unemployment, with immense economic and social consequences.


Weak employment growth has been a key feature of previous economic recoveries – a phenomenon economists call “jobless recovery”.In the US, following the 2008 GFC, it took 6+ years for employment to return to its pre-recession peak. The recessions of 1991 (post-Gulf War) and 2001 (the dot-com bubble), also saw long-lasting high levels of unemployment, with immense economic and social consequences.


In Europe, the effect on employment after 2008 was even more dramatic. It took the EU 11 years to return to its pre-crisis unemployment rate of 6.7%. In addition, real wages have stagnated and there hasn’t been a rise in income levels over the past decade. In fact numbers from PEW show that despite healthy employment numbers prior to Covid-19, when taking into account inflation, the average wage “has about the same purchasing power it did 40 years ago.” This has forced many consumers to become more value-savvy once home mortgages and credit cards become tapped out.


Regardless of the pros and cons of UBI, or whether it will in fact be introduced, Covid-19’s devastation upon the labour force, and continued downward pressure on wages, will all lead to a more frugal way of life and a secular shift towards value for money based consumption.


Beneficiaries of this Megatrend are discount stores. Data from e-commerce analytics firm Edge by Ascential show that discount retail stores, such as Dollar Stores, have been growing at a much faster clip than other retailers. These value-based stores are experiencing acceleration in sales at a time when many businesses are struggling. Year-on-year traffic for one leading discounter increased by the mid-teens in both April and May, and crossed 20% in June.

As other retailers struggle to stay afloat due to Covid-19, dollar stores in the United States are continuing to increase their physical presence as well as their profits. Dollar stores cluster in either rural areas where access to traditional grocery and retail is limited or are in underserved urban communities. They are also more prevalent in lower income communities especially as Covid-19 unemployment numbers have skyrocketed. Many Americans are becoming more budget-conscious.


Insync’s stock investment benefitting from the UBI Megatrend generates a very high return on invested capital. It is expected to increase the number of stores by 50% over the next 8 years. In a period of ‘retail apocalypse’ how many bricks and mortar retailers can provide such a high level of visible profitable growth?


The UBI megatrend is one of the 16 global megatrends in the portfolio and exemplifies the diversity of investments that exist within the Insync funds.

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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©2018 by Insync Funds Management Pty Ltd.

Disclaimer

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