Insync July 2020 Fund Commentary

July witnessed a continuation of outperformance for both funds. This has been derived not only from strong returns on the ‘upside’ but also from attaining superior ‘downside’ performance. Our concentrated portfolio of 30 highly profitable companies diversified across 16 megatrends with sustainable growth rates is performing significantly ahead of global GDP and the concerns leading from the pandemic.

Fund Performance - as at 31/7/2020

Market performance is logical not euphoric

A clear bifurcation in markets between winners and losers exists, especially during this pandemic. Interestingly after the first quarter results in the USA, despite earnings being negative, there was a strong contrast between companies with strong secular tailwinds and those that are more dependent on the economy. JPMorgan reported that 24% of S&P 500 companies attained higher revenue growth than their pre-COVID estimates. Further, results show a major separation between Nasdaq 100 companies, which posted an earnings surprise of +2% and revenue growth of +9%, with cyclically sensitive small-caps posting a -29% earnings surprise and -42% revenue growth. The gap between winners and losers is widening as we predicted.


The outperformance of the Tech sector is correlated to it out-investing almost every other market sector (circa 16% of revenue invested into R&D + CAPEX). The rest of the market stands at 8% of revenue; this having been flat for the past decade. Companies intensely focused on innovation are a key feature across all our Megatrends and thus in the Insync portfolio. We are not reliant on a single sector such as Technology for performance.


Success requires discipline AND adaption

A strong fund manager evolves its investment strategy to adapt to structural environmental shifts. Insync does this whilst maintaining strict discipline in executing its investment process. As humans continue to evolve so do businesses and their operating models. This is accelerating faster than ever before in modern history. Blink and you will probably miss the change and future winning investment opportunities. Many stocks and sectors that we held 3-5 years ago are no longer there. They failed to adapt and hence failed to meet our high hurdles rates for selection. Discipline in action.


Which is why Insync’s Megatrends are crucial for success

In a highly uncertain global environment, it provides a beacon to the future. We collate and corroborate industry data and use quantitative tools to measure the quality, valuation, and riskiness of businesses. Overlaid with the team’s long-term experience in interpreting the information, we invest in the best 30 stocks across 16 global megatrends. It is a future-focused approach.


Insync differs from others that seem similar at first glance

Every person has their own DNA and so do fund managers. Our industry likes to pigeonhole fund managers into ‘styles’. It is done to assist researchers in the main but a danger results from doing so; it often fails to highlight significant differences between funds from this oversimplification.


An important measure of identifying differences between managers is the correlation of excess returns with a peer group (e.g. quality and growth managers). Insync’s at 0.2 is very low. This demonstrates Insync’s alpha stream (outperformance over the MSCI benchmark) is unique. This is further supported by measuring how Insync’s stock positions differ from its peers measured by the active share versus the peer group which sits at 85%. The higher the number the more differences there are between Insync and its peers (score between 80 & 100 is very significant).


It’s akin to stating that as IBM and Microsoft are both technology stocks it does not matter which one you own if you want technology exposure. Let’s see;

Microsoft 5 year Performance


IBM 5 year Performance


The Medical Robots Are Coming!

They don’t get emotional. They don’t tire. They don’t get distracted. And they’re already helping surgeons perform minimally invasive surgery.


2019 saw a boom in the use of cutting-edge robotic technology and there is much more to come. It can be less invasive and improves recovery times. Good news with ever growing demand and costs in health services. Robots are increasingly used in surgery aiding physicians with better precision. Procedures requiring fine movements beyond the scope of the human hand can now be performed. Robots also enable improved accuracy and reproducibility, delivering better outcomes.


The Global Medical Robotics market is expected to surpass US$16 Billion by 2025, growing at a double-digit rate. Major drivers of this growth are a growing geriatric population, preference for minimally invasive surgeries by patients and surgeons, increasing acceptance of advanced medical technologies, and the growth in funding for medical robot research producing big capability advances.


Robots are really actuators attached and controlled by computers. An Actuator acts on its environment (a mechanical arm, a set of wheels, a soldering gun, a laser. Thus, they are very good at doing repetitive tasks with exacting accuracy. Ultimately, robotics are an extension of the surgeon’s hands and arms, a replacement of them, or acting as an assistive tool, producing more accurate and repeatable surgical outcomes. Some examples:


Removing brain tumours - The placement and size of brain tumors can have life-changing consequences. A tumor left untreated may cause facial paralysis and deafness. It can also lead to the loss of the ability to swallow and balance. Since the brain is such a delicate and vital area, precision is crucial.


Procedures on the retina - Surgical procedures to correct vision are exceptionally delicate with precision being essential.


Knee replacements - When orthopaedic specialists use robots, they typically use a robotic arm to shape the surrounding bone. Video then enables surgeons to confidently manipulate the robot through areas that are hard to see.


Surgical procedures on the spine - In 2019, a patient received spinal surgery involving a robot to correct scoliosis (spinal curvature). 3D surgical planning helped with the pre-operative stage. Robotic guidance and navigation technology then made operating more accurate and reduced the risk of complications.

Heart operations - Robots can fix valves in the heart, take out cardiac tumors, and treat defects. Because of robots, some procedures are now less invasive, speeding recovery times and reducing complications.


How are robots used in orthopaedic surgery? - Our analysis indicates that as the penetration of assisted robotic surgery is increasing in the hips and knees market it will reach a tipping point where surgeons will demand that hospitals offer robotic surgical capability because the outcomes are more predictable, better and lessen risk. Should a hospital not offer robots, surgeons will locate to ones that do.

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

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.