We are pleased to report that both the Insync funds significantly outperformed the benchmark again in May. We continue holding companies exposed to Megatrends that our work shows will deliver sustainable profitable growth in a post pandemic environment. Insync is a broad-based global equity fund exposed to 16 such global Megatrends with each business delivering very high levels of profitability (ROIC), and are on the right side of disruption. Beneficiaries extend well beyond technology, the Amazon’s and the Alphabet’s of the world, and into areas like pet nutrition, animal diagnostics, medical devices businesses, beauty and athleisure.
The Global Capital Aware fund delivered in excess of +19% over the benchmark for the year, benefitting from the downside protection and strong focus on quality businesses. Our long-only Global Quality Equity fund was +14% over benchmark. Both consistently outperformed in both rising and falling markets over the past 5 months through some of the most volatile times in a century.
Fund Performance - as at 31/5/2020
Both funds continue to have a portion of the underlying US dollar exposure hedged back to the Australian dollar which we first implemented when the Australian dollar was trading towards the low end of its long-term trading range in March. We adopt a rules-based process in managing currencies, implemented from a risk management perspective.
Our view is positive for the companies we own over the mid to longer-term recognising that there will be ongoing price volatility in the near term.
Why Insync doesn’t care much about the ‘shape’ of the recovery…
Whilst many commentators focus on the shape of the recovery (with the whole alphabet seemingly used to describe their crystal ball forecasts), Insync has recognised that this is a thankless task and has a high degree of forecasting error.
Instead we resolutely focus on global Megatrends. They have a lot less sensitivity to the economic cycle, are durable and almost unstoppable in nature. This alternative approach provides long term visibility of what a good company operating in them can expect (even in recessionary times). This means we can confidently invest and take advantage of significant market opportunities as others continue to fret about the shape of the recovery, the recession and the present.
Insync is presently invested in 32 stocks across 16 megatrends. Thus our investors receive diversification benefits reducing the risk of potentially misjudging one or two Megatrends. The outperformance of the 14 remaining Megatrends will continue to drive strong performance.
This can be seen in our Batting Average of 75% over the past year- a very high score indeed. It means we don’t rely on just a few star stocks to provide outperformance. We have a significant portion of our stocks contributing to the ‘quality’ of our performance; one beyond most peers.
A big part of Insync’s edge is our innate understanding of disruption. Today the world of the GE type company is finished, whereas in the world of the Adobe company it’s accelerating. The physical economy has just taken the largest economic hit outside World War II, yet at the same time, the digital/virtual economy has accelerated as a result of the pandemic.
Covid-19 simply brought forward the demise of many businesses that were already in structural decline or on shaky financial ground. In contrast many of the businesses tied to our Megatrends have seen acceleration in their underlying sales, financials and future prospects.
Whilst most are bearish about the global economy there are positive trends taking place that Insync uses.
Cherry-picking companies within these Megatrends is what we do.
Adobe, Domino’s Pizza and Facebook as examples, are seeing strong growth in new customers and increased usage of their products because of their leadership in innovation.
Cloud infrastructure companies are an example in businesses that can scale rapidly with profits growing faster than revenues. This is why these companies already had some of the highest profitability metrics even before demand skyrocketed from Covid19.
Non-technology companies that rapidly pivoted to the digital world are also growing fast. Importantly, many of the winning companies have little to no debt and massive operating margins. They will not only endure this recession but will likely boom.
A tale of two giants…
Then there are those that failed to see it coming or to adapt fast enough. The poster child of the old-world is General Electric. 3 CEO’s in 3 years reflects the magnitude of the structural challenges GE is facing. They were all quality CEO’s with great track-records but the pace of disruption was too fast for them to handle.
GE is bricks and Mortar, factories and machinery, massive sales forces and all the things you don’t want in today’s fast changing environment with physical overcapacity and what we call demand destruction in their underlying businesses. And GE is saddled with massive amounts of debt.
They didn’t foresee renewable energy so quickly reducing (disrupting) demand for gas powered turbines. Following the collapse in earnings in their gas turbine business GE is now heavily reliant on the aviation industry for its earnings, with GE Aviation being its largest profit centre. With the airline industry being decimated, as a result of the crisis, this is not only going to hit GE's industrial cash flow generation hard but it's also going to hit GE Capital as well. GECAS, its aircraft leasing business, is the main profit generator at GE Capital and by far its most valuable business. It looks like a great business when aviation is soaring and airlines need planes, but when the market turns sour leasing companies are severely exposed. The severe shock of Covid-19 on airlines means the downside can only be worse (defaults and future sales).
The pandemic is not the cause of disruption, just a big nudge to its pace. The gap between winning and losing companies will widen dramatically.
Our stocks are in the slip stream of many Megatrends, are well managed and financially very strong. It’s why we are bullish. The pandemic and the recession are accelerating the growth rates of some megatrends. Outside of technology, the secular growth in the ‘Food prepared away from home’ market is a great example.
It’s driven by increased urbanisation, the increasing number of women in the workforce, and the demographic shift towards millennials. In the US, since 2012, the value of food consumed by households that was prepared away from home has exceeded that of food prepared at home. Major food chains are big beneficiaries. The pandemic has pushed these trends with some of the large food chains experiencing accelerated growth rates.
One leader rapidly shifting its business model from the physical world to the digital has been Domino’s Pizza Inc, listed on the NYSE. They pioneered fast home delivery.
Domino’s have built a two-story, 33,000-square-foot facility, next to its headquarters on the Domino’s Farm campus in Ann Arbor, Michigan. It houses multifunction teams working on new technologies (voice automation, autonomous delivery, GPS driver tracking) and other strategies the company hopes will quickly find their way into more locations. The pandemic increased growth rates in the business with comps for the U.S. business improving from +7.1% for the 4 weeks ended April 19, to +20.9% for the 4 weeks ended May 17. These impressive growth numbers are in the middle of the second worst decline in global GDP.
As we move into a more restrictive social environment with perhaps social distancing becoming the norm, Domino’s will disproportionately benefit. In contrast smaller local competitors will struggle even more to survive, thus handing Domino's even more sales.
Whilst many investors continue to position their portfolio depending on their view on the economy and second guessing where it will be in a years’ time, Insync instead focuses on investing in highly profitable businesses benefitting from global Megatrends, like Domino’s Pizza. In many instances they are experiencing accelerating growth independent of the economy. Invest with us.
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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