Insync November 2020 Fund Commentary

Updated: Jan 5


Markets knee-jerk response to vaccines…

Insync’s positive returns underperformed the benchmark due to the very strong “risk-on rally”. This rally has impacted our relative short-term results.


This can be observed in the chart below. It shows the performance of different segments of investment markets across October and November. The highest risk stocks (High beta), small caps and value stocks (e.g. financials and energy) have strongly outperformed dragging the overall index higher.


Companies that are the most cyclically sensitive, highly leveraged, or unprofitable tend to be in the high beta and value categories. Quality stocks, where Insync focuses, underperformed. This is normal in the early part of an economic recovery.


When did this type of market rally last appear? 2016 when Trump won. Markets thought all his words and actions would bear fast and amazing fruit, just as Covid vaccines today are fueling immediate and total recoveries across all sectors in sales, employment, activity and earnings; and with debt being of no consequence either.



Insync’s performance profile in 2016 was like that of today. Maintaining a rifle-like focus on the most profitable businesses then, ensured that the fund after a brief period of underperformance (<six months), outperformed strongly for the next three and half years.


As you would expect, we are not deviating from our stated path and approach to investing. It should be remembered that many of the stocks surging ahead today had fallen far behind for many years prior. This is not reflected in today’s return tables. It would take many more years of out-performance for them to break even with our quality stocks.


Those trying to ‘time’ when to move in and out of sectors or manager styles based on shorter-term events such as this invariably do it too early or too late. Notably there is no strategic or structural shift to suggest that quality stocks will not perform well into the future. We see strong indicators that their rise will continue.

“Periods like today, where many in the market are rotating into cyclical and higher risk stocks, provide investors with a more attractive opportunity than normally available to invest in the Quality sector at more reasonable prices.”

Amping up your compound returns

At Insync we do not get distracted by month to month (let alone week by week) market gyrations, with all their non-stop excitement that brokers and the media blast us with. To grow and compound investors wealth requires our team to tune out from the short-term noise.


At Insync we do not get distracted by month to month (let alone week by week) market gyrations, with all their non-stop excitement that brokers and the media blast us with. To grow and compound investors wealth requires our team to tune out from the short-term noise.


The importance of owning the highest quality businesses over several years cannot be overstated. Their share prices are proven to follow their compounding growth in earnings and shareholder value creation these businesses generate, even if in the short term, they do not do so due to passing external factors like we are experiencing today.


This leads to long holding periods. Our funds turn over only 20% of the portfolio annually, which equates to an average holding period of 5 years. This is low in industry terms. Patience is key.


Covid-19 and behavioural changes

According to The British Journal of General Practice, it takes on average 66 days for a new behaviour to become automatic. Simpler changes become permanent more quickly than complex ones.

According to McKinsey consumers across the globe have responded to the crisis and its associated disruption by trying different ways of shopping. 65 percent or more intend to incorporate these behaviors permanently. Insync incorporate these insights into our megatrend analysis to identify winning companies of the future.

A major way this is occurring is via the accelerating adoption in the use of contactless payments. The world is one large unlimited shelf of goods that you can buy from anywhere. PayPal is a major beneficiary of this powerful Megatrend and a second one; the continued move to online shopping (e-commerce).


The question is whether consumers will continue making contactless payments after the pandemic retreats? A 451 Research survey (part of S&P Global Market Intelligence), says that overwhelmingly, cardholders that tried contactless for the first time continue that behaviour moving forward. In fact, 86% of first-time contactless users plan to do so. A big, fast behavioural nudge from Covid in action.


451 Research forecasts that the value of global e‑commerce transactions will increase more than 23% year-over-year in 2020. It will then compound at 17% per year over 5 years to 2024 according to Verdict data, a specialist consultancy in the digital payments space.


By 2024, Verdict estimates that we’ll be making more than 1.1 trillion transactions globally, via smartphones and other gadgets.


The beauty of investing in Megatrends is that many managers underestimate the duration of profitable growth in their valuation models. Our proprietary valuation models consider this to be the case for PayPal.

PayPal’s main attraction is removing the need to find your credit or debit card when making an online purchase. People casually browsing are more likely to buy something if they know it only involves a few 'clicks' without the hassle of finding their physical wallet.


PayPal has been in our portfolio since May 2015 when Insync purchased eBay. When eBay spun out PayPal in July 2015, Insync sold its eBay stock and increased the funds exposure to PayPal, which we assessed to be a superior business model. PayPal has delivered a 400%+ return over the four and half years. Had we sold this stock during the rotation into cyclicals in 2016, as many are doing today, our investors would have lost out in a BIG way. Patience and discipline pays.







#Performance #Megatrends #Disruption #FutureFocused#ContactlessPayments

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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