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July 2023 Monthly Update

Updated: Jan 16


Our Global Quality Equity fund outperformed the benchmark for the year ending July, whilst our Global Capital Aware fund was just below the benchmark after including the cost of downside protection. Both funds ended just shy of the benchmark for the month of July. This was largely a result of having no exposure to Asian-domiciled companies and other emerging markets (that make up a large part of the MSCI). These were the strongest performing equity markets for July; however, this region’s mega cap stocks tend not to meet our strict selection criteria.


Focus more on global revenue, not domicile: Insync’s focus on the most profitable companies benefitting from global megatrends results in businesses domiciled in the largest markets for capital- the US, UK and Europe. As global leaders however, they generate cash flows globally including Asia. For example, LVMH generates 37% of sales from the US, 24% from Europe, 6% from Japan and the balance from Asia and developing markets. This form of geographic spread is far more important to us as it aligns with how megatrends develop geographically as well as providing a diversified source of earnings. The benefits of this diversity can be seen in LVMH’s results where the relative weakness in demand out of Asia over the past two years has been offset by strength in the US and European markets. This enabled the company to still deliver double digit sales and earnings growth in a volatile economic environment.


Ongoing debate continues over the speed with which inflation will decline. Historically inflation tends to fall quickly if the rise was also quick, and so there is the prospect that the rate of inflation may surprise investors on the downside. A lot has changed however in a post Covid world, particularly with the structure of the labour market. This may result in core inflation remaining stickier and interest rates remaining higher than in the past.


This would be negative for traditional value-based sectors as they tend to be more capital intensive, have higher capital expenditure requirements and more debt. It’s also a very negative headwind for high-growth sectors that have low, or patchy profitability, or have low ROIC (return on invested capital). Stock valuations here are very sensitive to interest rates as the prospects for high levels of profitability is much further out into the distant future.


The most attractive market sector is in our prime ‘hunting ground’: Highly profitable companies delivering sustained growth in earnings today and trading on reasonable valuations. Our portfolio trades on a price to cash flow discount to market with a weighted average profitability, based on ROIC, of greater than 3x the benchmark average.



The Experiences Megatrend

Despite Covid’s interruption it has continued to gain momentum. Its recovery is proving remarkable, as experiences remain a potent megatrend with substantial growth potential ahead, even amidst short-term economic woes.


Despite the headlines throughout the pandemic and general market commentator’s gloomy predictions, our research at Insync told us otherwise. For players that had strong capital bases, tight reins on expenses, and prudent investment allocation strategies, they could endure the worst the pandemic could throw at them.


These businesses emerged stronger, such as the prime stock in our portfolio did. Many of its peers however weren’t as strong, with some folding or forcibly downsized. Additionally, entire sectors of travel/experiences almost collapsed (e.g. cruise lines). For those left standing, their hold on the market and thus their margins became bigger and stronger. An increase in interest rates and inflation had minimal impact on their performance in the post pandemic recovery.


These businesses emerged stronger, such as the prime stock in our portfolio did. Many of its peers however weren’t as strong, with some folding or forcibly downsized. Additionally, entire sectors of travel/experiences almost collapsed (e.g. cruise lines). For those left standing, their hold on the market and thus their margins became bigger and stronger. An increase in interest rates and inflation had minimal impact on their performance in the post pandemic recovery.


What and who is driving this megatrend?

Over the past decade, the desire of consumers has shifted towards experience-based offerings and is influencing people's spending priorities. This shift spearheaded initially by millennials has spread across all age groups. Ironically it gained further traction from covid’s travel restrictions. A proof point can be found in air travel; that whilst business trips are relatively flat compared to pre-covid, overall commercial flights hit a global record in June this year.


A significant majority of 74% of Americans, as a further example, now prioritize experiences over material possessions according to a third-party research study. This is no different to us here in Australia and New Zealand or in Europe.


Notably, millennials and Gen Zers are leading this trend as travel becomes an increasingly regular and a vital priority for these age groups . With 44% of travellers aged 18 to 34 asserting that travel is more important post-pandemic, it's evident that this generational shift is taking hold.


The fast approaching impact of AI on this megatrend.


With AI developing quickly it is vital to understand its impact on business models of all companies that we invest in. Our research shows that online travel agencies(OTAs) are extremely well placed, contrary to many investors placing them in the AI loser’s basket.


This is because the OTAs operate far downstream of where AI will have its heaviest and nearest impacts. Consider this single aspect; OTAs employ tens of thousands of staff in local markets around the world to source then continue to manage the fragmented accommodation supply to make it homogenously, digitally bookable globally. Importantly, our prime holding is already investing heavily in utilising AI.


This is a critical piece of OTA infrastructure that the likes of Google or ChatGPT will both struggle to execute and match the capabilities of dominant OTAs. Indeed Google recently tried and failed to gain a foothold in this sector after significant investment and effort.


Insync has been investing in the most profitable companies that are benefitting from the Experiences megatrend since 2017. An enduring example in the portfolio meeting our high hurdles and criteria is Booking Holdings (Booking.com).


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