Outperformance across every time period.
Investing has always been about generating outperformance through the full investment cycle, through both up and down markets. The year ending 31st March witnessed very strong rising markets in the first 10 months followed by one of the sharpest corrections in history. Our Insync Global Capital Aware Fund returned +19.6%. A large +16.24%, outperformance of the MSCI benchmark. The Global Quality Equity Fund outperformed by +11.25%. Clearly, the benefits of investing in very profitable companies (ROIC) tied to global megatrends through the cycle works. For those seeking downside protection via our Capital Aware Fund, the important contribution from the index put options acted as intended cushioning the downside. In March this cushion near halved the market loss impact (-4.38% versus the benchmark return of -8.64%). Calendar year to date management by Insync was also impressive. Global Capital Aware Fund stood at -0.10% and the Global Quality equity Fund at -5.92% (benchmark -9.41%). Quality future-focused stock selection contributed +3.49% of the outperformance for both the funds. Global Capital Aware Fund Put options contributing significantly to the additional +5.50% of quarterly outperformance.
In accordance with our rules-based process, we sold down all the remaining index put positions as volatility measured by the VIX index approached all-time highs in the middle of March, reflecting extreme fear and panic by investors. Likewise, as the Australian dollar fell significantly versus the US dollar, we hedged back into Australian dollars a portion of the USD exposure. Rules remove the emotional cloudiness surrounding extreme and fast-moving periods of market gyrations. Insync held firm to its game plan. Controlling our emotions helps to navigate what are challenging market conditions to avoid knee jerk reactions.
Future focus – Insync is positive
The on-going COVID-19 tragedy and the uncertainty around when the virus will no longer greatly hamper society, means the negative economic data will keep market volatility elevated in the short term. Insync is positive on equity markets despite the near-term carnage. Opportunities for very profitable businesses (based on return on invested capital), tied to global megatrends that have strong balance sheets exist. Our three major reasons for being positive are:
History is on our side
The size of the central bank and fiscal stimulus
Coronavirus - flattening of the curve and medical response
1. History supports our positive stance
The average bear market has seen a fall of 27% during a recession. The average recovery from the bottom has been between 27-39% within a year of the low point. Timing the bottom is difficult. Pessimism is peaking and uncertainty reigns supreme at the bottom. Human beings are genetically prone to being risk averse. Loss aversion plays a dominant role right now in the human psyche. Investors and commentators continue their focus on the downside, even after such a substantial fall. Fear and flight permanently destroys long-term returns by permanently depriving investors (having traded or cashed-in) of compounding much larger gains into the future no matter what they do next. Insync’s senior investment team started their careers in the late 1980s and early 1990s, thus have experienced at least 5 crises so far. In each it always felt the markets could go substantially lower. Each crisis was always heralded as being different. After each fall however markets went onto to reach new highs. It’s called capitalism. The maths demand that this occurs. Certainly, the GFC in 2008/9 is still clearly etched in our memory. How many investors back then were slow to get on board when the recovery started and missed the +400% returns in the following 10 years- with a big slice of this happening at the beginning in the midst of the doom and gloom? Buying the S&P 500 on October 6th, 2008, the day the market was first down by 30% after the Lehman crisis, or approximately the amount the market was down from the peak over the last month, you would have had a sickening ride lower. Courage was and is required but the recovery was so violent that you would have had positive returns after just one year. Within two years, you would have been up 15% for a solid but not great 7% annual return. After four years a +51% lift for an excellent 11% return per year. The 8 Perfect Decisions Alternative: A rare few get out of the market just ahead of a big decline. But it is the rarest of investors, amateur or professional, who have ever managed to jump out well and then back into markets just as well. To win this way you must get both directions and the timing right. It’s a game of two halves. Playing the game by trading to avoid big declines then catching the recovery in time requires 8 perfect decisions. When? To where? For how long? And how much? Then repeat the same questions to get back into markets near perfect. Now repeat for decades to come. Fail and you have done immense damage. Insync reduces investor risk by not trading, instead remaining focused on future-focused megatrends, with quality companies holding strong balance sheets. It is important to appreciate that the huge market recovery and rebound of less than a year’s average was not true for every stock. We call this ‘calculated patience’. In order to generate strong long-term returns, one must own financially very strong and profitable businesses, led by outstanding management teams that are excellent capital allocators, that have major secular trends in place to drive growth in excess of global GDP. A few will take longer than others to shine above the rest, whilst others will surprise at just how quick they will power on. Below outlines the cost of getting timing wrong, something managers holding high cash are now faced with.
2. Central Bank and Fiscal Stimulus
Global central banks have significantly reduced interest rates and are providing important sources of liquidity to the financial system at a time of stress. This is now being augmented with unprecedented fiscal stimulus by government Treasuries in a highly coordinated manner. In the United States almost $6 trillion has come through relative to a roughly $20 trillion GDP. The stimulus is already larger than the negative impact from the economic shutdown that we're hearing from many members of Wall Street. This provides a significant buffer to the downside in the global economy and helps build confidence.
3. Flattening the curve and the medical response
We are cautiously optimistic that the measures governments and the science now being applied have over the past few weeks are having their desired effect, sharply reducing the coronavirus’ replication rate as can be observed in the charts below. This may well lead to a faster re-opening of the economy than many of the gloomy forecasts. We expect surprises good and bad along this journey. We do however fully believe in science and the mathematics of pandemics. We also know that time to identify test and distribute medicine has shortened considerably due to technology in the last 5 years. The death rate tracks this case rate in a similar series of curves.
Insync’s portfolio is well positioned for the recovery in markets
Large-scale operations with the strongest balance sheets, a long runway of growth because of global megatrends and effective capital allocators are going to be the most successful beneficiaries as global economies start to recover from the forced shut down of businesses. We're moving to a model of rapid consolidation of industries with the strongest players dominating. Think Bookings.com versus Airbnb as just one example. Trust as well as financial means will be important. We don’t hold high cash as we know what to do with it and have the right time-frame perspective. Pizza! Across the world large franchisors have become more dominant versus small businesses. When the local pizza shop or coffee shop closes, which it is going to, what is going to replace it? It's going to be a Domino's or Starbucks franchise. Disney is not only well positioned for a recovery but is likely to consolidate its position as a dominant media business. Its new streaming service, Disney+ recently passed 50m subscribers worldwide years ahead of schedule. Two pan Asian competitors failed during this crisis. Disney’s result is significantly ahead of the company’s target of 60-90m by 2024 and positions them in an even stronger position. Their unmatched brands and scale as theme parks and cinemas start to reopen their doors are big drivers. Insync’s global megatrends are mostly less sensitive to the economic cycle or crisis. We have not had to make significant changes as a result. Areas of the portfolio which are more likely to be impacted short term, and where the impacted trajectory of the megatrend will result in a longer time to recover are Travel and the Rise in the Gig Economy megatrends (due to many SMEs closing from the crisis before new ones appear) compared to megatrends that offer more abundant opportunity. This does not mean however we have exited from these megatrends. Accordingly, adjustments saw the sale of Amadeus, and a reduction to portfolio exposure to the Global Travel megatrend overall. Intuit which is exposed to the gig economy was reduced. Major focus areas for new buys included selective pharmaceutical companies, where the stocks are ranking strongly in our quality focused algorithms, and global franchised quick service restaurants, where takeaways and/or home delivery make up a significant part of their businesses. Its half-time. The second half requires focus on the positive as quality companies have gone on sale at great prices not seen in years. Recent examples of current portfolio holdings include Adobe, Domino’s Pizza Inc and Booking Holdings: Click these links to see why and how your Insync investment takes advantage of what others do not see.
After a significant market correction and economic hit as well, it is important to be focused on the winners as we come out of the current crisis and take advantage of the opportunities the markets have presented to generate strong returns for our investors. As we enter the second half of this game its important to be Future-Focused. Patience, clarity, confidence, discipline will reward the canny investor.
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.
Comments