Insync January 2021 Fund Commentary

The euphoria of investors continued this month, similar to when Trump was elected but this time ousted. As in late 2016 and similar times before this, the ‘promise’ that all will be immediately better, took hold. This had investors hunting for stocks long neglected with the belief that these companies’ numbers, fortunes and prospects must surely instantaneously rise to the highest of levels. Covid vaccine announcements have undoubtedly provided additional optimism. The resultant share prices surge in cyclical stocks continues in the near-term.


The fact that most of these companies’ financials and prospects will not rise as high or anywhere near as fast to support the current price surge, is yet to be reconciled. That day will come and with it, more realistic prices. A relative reappreciation of companies supported by superior financials and situations will ensue. We have witnessed this phenomenon before with over-hyped tech stocks rising too far beyond what the financial position justifies.

Monthly Round Up

Given the above, investors and some fund managers are tempted to chase the return, doubting their original decisions and to swap investments. This is human nature. When markets reconcile these events into their proper standing however, it does so without notice. The current situation may last 3, 4 or 7 months; perhaps longer, or shorter. In early 2017 it reconciled. After 4 months Insync’s fund went on to rise significantly, outrunning the previous cyclical surge and without the timing risk.


In January 2021, the year-long plus roll out of vaccines commenced, as surging hospitalisation and death rates for 95% of the globe intensified. A disruptive presidential exit led many to question the sanctity of democracy. China continued its march to authoritarianism without suffering economic consequences from a weakened West. The USA posted a mix of both good and poor economic results. China and a few small countries aside, most nations economic progress was thwarted again.


It is however a folly to take too much notice of markets as a whole. Within ‘markets’ there are sectors thriving, those in structural decline and those yet to be determined in between. Markets also contain the full spectrum of quality companies too; from the very poorest in ability and results, to those displaying the very best outcomes.


Insync experienced a dream run of high monthly returns for almost a year, then a few months of flat returns, and posting a small negative result this month.

Insync’s Defensive Growth process of investing means we are selecting companies that we believe will produce outsized gains over time, for those investors with at least a 5-year time frame (not 5 months). To achieve this without increasing risk means, at times, experiencing short-lived lows.


The dramatic rise and falls of 2020 are fine examples. Insync did not sell out, move to cash or deviate off our path when markets swung wildly. The path of quality companies with high ROIC positioned in one or more Megatrends that deliver great returns over long runs, remained. That resulted in almost +20% for the calendar year, almost 3x the ‘market’ and over 14% and 15% over 5 and 10 years respectively after fees. We retained our discipline and our focus.


Two overall drivers produced the net negative January result. Investors were jittery over the upcoming earnings results to the end of December because of Covid; and the switch by many institutional investors from growth stocks to cyclicals (the leveraged trade play). This selling down of previous holdings in bulk depresses prices for a short while, whilst boosting the latter’s prices.


Several holdings declined as a result. Visa, Nintendo, Disney, Estee Lauder, Facebook, Adobe, and Dollar General, whilst the index remained flat.

Most holdings remained about flat. This does not correlate to the current and prospective financial and sales situation that these companies are producing.

Three stocks rose: Microsoft, Home Depot and Qualcomm. The net month’s fund result was circa -3%.


Structural headwinds preventing a continued cyclical upsurge, outpacing a quality defensive growth approach, have not magically disappeared simply because investors are throwing money into the cyclical play.


Reinflation prospects remain dim (despite latest US Bond rate moves) as the low Velocity of Money remains a serious blocker. Factors causing this include negative industry lending flows and investment. Importantly, conditions supporting defensive growth beyond the near-term remain strong.

They are not mutually exclusive but are inexorably entwined. Disruption plays a ‘stimulant’ role to what has been going on for many years in global Megatrends. Disruption accelerates change especially where it supplants human intervention or makes redundant far‑reaching processes.

By example, the most successful retailers have moved their distribution channels significantly to online. This reduces costs and increases access, all from the comfort of one’s home. The stocks involved with online distribution such as PayPal, Amazon, Apple and Walmart have ballooned. Importantly this is supported by ballooning profits and revenues.


The magnitude of change (disruption) we are undergoing is both rising and accelerating. Investors must therefore understand both; identify the role of disruption and where it will move the needle, and the impact on global Megatrends.


Disruption is not enough on its own. To what extent does it subvert or support other factors in identifying winners and losers? By example, companies in advanced industries studied by McKinsey & Co showed that firms embedding digital sales into their GTM (go-to-market) model see five-times-faster revenue growth, compared with previous levels, 30% higher acquisition efficiency and sales cost reductions of 40%-60%.

We are at a unique point in history, the digital revolution (The Fourth Industrial Revolution) is well underway; and in ways never imagined even 10 years ago.



Matching investor’s long-term needs.

Megatrend, (Duration) investing, is the opposite of near‑term investing of many growth and momentum managers. They seek to generate upside from timing markets and stock price movements, whereas duration investing looks to longer term trends and reasons why a stock will be a sustainable performer beating the sprinters over time. Timing and stock selection risks are reduced. Duration investors enjoy lower turnover and lower volatility in their returns. Stock turnover statistics of managers reveals the truth.






Lowering Disruption’s tendency to concentration.

One of the most successful traits of a long-run winning company is that they generally heavily invest into innovation (R&D); to ensure they are on the right side of disruption and benefit from the tailwinds of Megatrends.

Megatrends, whilst using disruption, are not concentrated on where disruption is occurring – i.e., mostly technology. Megatrends leverage disruption instead.

With Insync this is how Domino’s grows market share in the Food Away from Home Sector, Estee Lauder on well-being products, Nintendo dominating Video & Gaming, and PayPal’s dominance in the Cashless Society as examples. A drawback of a focus primarily upon disruption is that without the context of global Megatrends, investors end up with overly concentrated sector holdings and higher risk.

Improve portfolio blending, negative correlation and stock diversification.

Megatrends often defy and transcend typical market boundaries, research labels and categorizations. Their multiyear return profiles usurp traditional country, industry and style factors and old financial measures such as PE ratios.

One outcome is that it complements traditional Value versus Growth fund manager portfolio mixes. This does not exclude the benefits of disruption, rather it cleverly incorporates it.


Harness Disruption’s qualities and better align investor time frames.

Megatrends help make sense of disruption, harnessing its better impacts and reducing its risks. Disruption led investing requires additional and more frequent timing risk. When to get out is key but is often not apparent when riding a disruption story, often appearing and ending quickly and without notice. Megatrends ensure investors are taking a longer-term approach, controlling the risks, matching the timeframe and liabilities of most investors and without blocking the upside of disruption.

Provide greater resilience to sporadic shocks.

Megatrends over the last decade have proved very resilient to the Covid-19 type events. In these situations, it is about how low and for how long the stocks held respond. Insync’s Megatrend approach has a strong record on both counts. This has driven superb upside and downside capture results for the fund, participating in most of the ups and avoiding many of the downs.


Sort the hype of disruption from the reality.

Take for instance Tesla and benchmarked to GM and real numbers. Tesla gobbles up $1,500,000 of shareholder capital per unit produced, with GM just $9,000. Tesla is yet to make the leap to volume production from its tiny production rate. Its profits are not what they seem. They exist only due to the bringing forward of environmental credits of 5 years into the present.

Tesla’s massive price run up of +400% in little over a year means even if all its stated plans and numbers come to fruition (and on the high side) by 2030, shareholder returns between then and now will only be in the single digits. Megatrends sort hype from the real.


Future proof investor portfolios with both.

The pace of disruption is accelerating across all industries amplifying the importance of identifying Megatrends as a beacon to the future. In other words, investing in Megatrends provide a greater degree of certainty in an increasingly uncertain world without blocking the benefits that disruption triggers. Have both with Insync.


Conclusion

Preparing investors for the future means avoiding tactically responding to short term market developments and hoping one’s timing is right (whether it will be a V or K-shaped recovery, or event hype such as a vaccine).

It requires:

  1. being attuned to disruptive forces.

  2. possessing a cogent vision of how the longer-term future is likely to unfold.

Naturally, we side with quality businesses, with a clear future-focused vision, leveraged from but not led by disruption. These companies must also exhibit a high ROIC and participating in one or more Megatrends.







#Performance #Megatrends #Disruption #FutureFocused

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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The rating contained in this document is issued by SQM Research Pty Ltd ABN 93 122 592 036 AFSL 421913. SQM Research is an investment research firm that undertakes research on investment products exclusively for its wholesale clients, utilising a proprietary review and star rating system. The SQM Research star rating system is of a general nature and does not take into account the particular circumstances or needs of any specific person. The rating may be subject to change at any time. Only licensed financial advisers may use the SQM Research star rating system in determining whether an investment is appropriate to a person’s particular circumstances or needs. You should read the product disclosure statement and consult a licensed financial adviser before making an investment decision in relation to this investment product. SQM Research receives a fee from the Fund Manager for the research and rating of the managed investment scheme.

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