Insync February 2021 Fund Commentary

Insync funds marginally underperformed after fees in the month of February. The exuberant rotation to cyclicals in anticipation of their, yet to be earned, future prospects along with some sector frothiness, continued to dominate the investors’ imagination. This impacted the very near-term numbers. Given the objectives of both funds, the important 5, 10, and Since Inception results continue to outperform. Pleasingly so do the nearer term 1, 2, and 3 year numbers, and by a large margin.

As we have observed before, a quality defensive growth approach to investing, like Insync’s, produces a tendency to temporarily underperform when coming out of a recession (today) or when overly enthusiastic optimism takes hold (Trump’s election 2016). Nothing has changed however to warrant a deviation from our proven path. Patience is key.

Why we say this?

Our approach invests in proven companies doing very well financially AND with long runways of growth. Markets end up valuing these businesses better than the market average over the longer run. It seems simple to live with, yet most investors try to beat markets in the short run too. This leads to long-run disappointment as those approaches require superb timing and switching between regions, sectors, industries and companies, and an amazing crystal ball!

We don’t have the prescient crystal ball that many other managers assure their investors that they are in possession of. Happily, we do not need one as our approach does NOT rely on the state of the economy, nor on the direction of markets. We also do not focus on our own short term result up or down. This reduces many risks for our investors.

Case in Point: IDEXX (+400%)

To illustrate how our focus works so well in practice lets study our investment in IDEXX Laboratories. A global leader in diagnostics to the animal health industry. It is one of two stocks that form the majority of our investment with our Pet Humanisation Megatrend.

IDEXX reported a 45% increase in profits over six-months to 31st December 2020 compared to the prior corresponding period, and in the middle of a pandemic. Insync has held IDEXX for 4 years. Its price is up by 400% over this time. Patience rewarded.

This Megatrend is also supported by demographic forces where the Gen Z’ers are the first generation to treat pets like humans. Surveys show they spend a greater amount on pets than others, providing a high degree of confidence in the sustainability of the Megatrend.

Last month we spoke of how disruption events can boost the acceleration of a Megatrend. IDEXX is also a beneficiary of this phenomenon. By example, UK pet ownership during the pandemic has jumped by +3.2Mn extra pets (not including the swimming variety). 59% of these new owners were, Gen-Zers!

Low Emission Energy: The Megatrend

A Megatrend is not a wistful thematic or visionary view of the future. It is about corroborating and studying masses of data over time to assess if a Megatrend is both sustainable and likely to generate economic value, for the right participants.

Invest in a trend too early and you can end up with an unprofitable business. Albeit one that may have the hype and story to light up the imagination; but to only end up severely disappointing its investors.

A good example is the Hydrogen Economy. After decades of false starts, it is now arrived at the point at which hydrogen based fuel cells will increasingly play a significant role in the “Low Emission Energy” Megatrend. This trend is about to accelerate. Hydrogen fuel cells are already on the rise especially in transport and heavy industry.

Technology improvements have vastly exceeded predictions across most alternate power generation sources far faster than predicted. Production costs, especially when the cost of building power generation facilities is included, has seen non-carbon energy move ahead in leaps and bounds. Hydrogen is no longer a dream energy source. Technology and economic factors have conspired to carve out a realistic, expanding, and viable place in energy production.

A Megatrend is useless however without the right company to monetise the reward to investors. We have identified a highly profitable business that will be a major player in the new energy economy as it rapidly transforms energy globally.

Air Products: The Investment

Hydrogen fuel cells offer solutions for primary (baseload) power that can augment a power grid, operating 24/7 in ways that improves efficiency, reliability, and environmental impact. Fuel cells offer the unique advantage of compactness, competitive operating costs, and low emissions (when made with non-carbon energy inputs). Excess Solar and Wind generation can be used to create hydrogen. This, in turn can be stored for the purpose of generating fuel cell sourced electricity at night or when other non-carbon generation cannot.

Air Products (APD) is a global profitable industrial gas company listed in the USA. It is a leading supplier of hydrogen fuel production, logistics and carbon capture. APD is the global leader in the supply of liquified natural gas process technology and equipment. This is the current primary raw material used in hydrogen production.

There are very high barriers to entry for competitors (even for petroleum companies) due to the highly specialised nature of this industry. Intellectual property is garnered over many years and the US$100m’s of capital required to build a plant poses a formidable barrier to entry. Barriers to entry, is something that Insync likes in its stock selection process.

Consolidation of industrial gas companies over the years has further reduced the number of participants. This reinforces the barriers to entry.

We anticipate the global uptake and subsequent demand to generate both profitable and sustainable revenue growth for Air (APD) for a minimum of 15 years.

Note: This illustrates why we do not try to manage for 1-12 month returns of our Funds when viewing this long a runway to prosperity.

Air Products is also building the world’s largest Green hydrogen-based ammonia plant. More to come.

APD is a main provider of hydrogen fuelling infrastructure and technology. It offers both liquid and compressed hydrogen gas in a variety of purities and in various modes of supply around the world

They maintain an extensive network of pipelines, hydrogen manufacturing plants and filling facilities with global reach. Thus, it profits from distribution and transportation of hydrogen products as well as its creation.

Carbon Capture too! APD is also a major player in process technology designed to capture CO2 by-product resulting from fossil fuel conversion before it reaches the atmosphere. The CO2 sequestration technology effectively stores this gas where it is unlikely to escape once captured.

Companies are rapidly emerging like APD, that bring what was once a fringe and ‘brownfields’ investment sector into the mainstream. Invest with Insync.

Total Carbon Emissions: Insync Global Portfolio (green) vs MSCI ACWI nr (red) <31/12/2020 – tCO2e>

Source: Foresight Analytics

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