WRITTEN VERSION

Sam De Court: Hi everyone, my name’s Sam De Court, and thank you very much for tuning in. With me today I have Mike Taylor, along with Guy Thornewill and Toby Woods. Both Guy and Toby join us from London, where they work on our Global Growth and UK & Europe funds. Hi Mike, hi Guy and hi Toby. Mike let’s start with you this week. So what are we seeing in the markets at the moment?

Mike Taylor: Markets peaked at the beginning of September, I think on the second of September, and we’ve seen it pull back, led by tech. In particular, some of the high flyers were making names for themselves in late August early September, have really come under pressure in the first couple of weeks of September. Now, I’m not sure if there’s too much that we can read into that, because when markets go really well and get a bit excited, it’s quite common for corrections to come into place, and for a little bit of heat to come out of the market so that’s sort of generally our view is that what’s happened is that things had a really good run for a long period of time. I think the NASDAQ went to correction territory and sort of, as we’re recording this, the market sort of was back up again today so we’re not really reading too much into that. The conditions that set the sort of tech market alight still remain in place which are low interest rates, fiscal stimulus, and a general shift to online caused by Covid-19.

SDC: Thanks Mike. Guy, in the past few newsletters, you and Toby have been talking about how the UK and Europe and the Global Growth Funds have been taking some profits on the technology stocks and reallocating some of this money into the recovery stocks. Firstly, what is a recovery stock? And secondly, why would you be taking profit and moving from technology, which has been doing so well, into recovery right now?

Guy Thornewill: Yeah, thanks Sam. So when we say recovery stocks, what we broadly mean is stocks that should benefit when news around the virus improves. So whether that’s from better treatments, lower numbers of infections or hospitalizations, or hopefully a vaccine being approved probably at the end of this year or more likely next year. So we’re then thinking about these kind of stocks in two broad categories.

The first one is cyclical companies like an auto parts supplier for example, that were impacted by the lockdowns and the recession. The second category is those companies who’ve unfortunately really suffered the most, for example in the travel and the leisure sector. So we’ve been starting to buy companies in the first category in recent months. For example we bought shares in a company called Norma. This is a global autoparts supplier, with much better margins compared to its peers. It’s got a really low valuation and the shares are still off 40% from their pre pandemic levels. We have been much more careful though when looking at stocks in the second category, the travel and leisure sectors, as these companies have and still are, as we know, really at the epicenter of the crisis. The recent increase in cases and additional restrictions in Europe and in fact even more restrictions announced by UK Prime Minister Boris Johnson tonight show that it’s been right to be cautious on this area, and share prices in these stocks have taken another leg down quite recently.

However, even here we do think there are some stocks to buy. So one example is a company called OMA. This is a Mexican airport operator that we purchased for the Global Fund a couple of months ago. So this is a company where, obviously passenger levels are much lower than they were last year, they’re currently down 60%, but it has no debt, which is rare for an airport operator. It’s got very little exposure to international travel or tourism. And so the passengers are mainly from domestic Mexican economy, and we think that’s going to start picking up in the next few months, and we want to be early on that kind of trade.

So turning to your second part of your question, why have we been recycling some of the profits from tech and also other high growth companies into these types of recovery stocks? Well, I think part of the answer lies in the fact that at Pie Funds we’re active managers. We are actively moving the portfolio over time, to overweigh the sectors or stocks which we feel will do the best in the future. So for example, soon after lockdowns were put in place, earlier in the year, we increased our weighting and the funds towards COVID beneficiaries including of course, a lot of the technology stocks. These did perform well for us but in recent weeks we have felt that valuations are becoming pretty high. And there’s some areas of tech very high indeed.

So, while the companies are fantastic, a lot of them we’re gonna hold for the long term, investors are pricing in a lot of that growth already. We think it’s really important to retain discipline around valuation. We know that stocks don’t always go up in a straight line. And we’ve seen that recently. So, that’s where we’ve been taking some profits. And we’ve been rotating that money into some of the recovery stocks, as I mentioned before, So the news around Covid-19 and the virus is still pretty mixed. But we do get closer to a vaccine every day, at some point we think the market is going to rotate pretty sharply into these recovery stocks and out of some of the growth companies at least temporarily. We might have seen a bit of that recently, and we don’t want to miss out on that trade. So, how I described the portfolios now is having more of a kind of a barbell strategy. We still have good exposure to the growth companies including technology, healthcare, and some other themes on the one side. But on the other side, we have these recovery names. So as Mike just mentioned, the market has struggled a little bit in the last couple of weeks. But looking at the Global Growth and the UK & Europe Funds, they’ve only lost a couple of percent off their all time highs which they reached at the end of August. So, you know, we feel that our strategy is working for now. And that’s what we’re going to continue with for the time being.

SDC: Thanks a lot Guy. Toby, now a question for you. What regions, sectors, or specific companies are getting you excited at the moment?

Toby Woods: Well, firstly, it’s been a fantastic year to get excited about certain sectors and companies. There’s so much change when all of this has been going on so that’s great for stock pickers like us. However, as Guy says, we’ve been slightly pivoting our strategy. And one way to do this is to focus on some investment themes that carry across different regions and sectors. So a simple example is, I took some time to focus on 5G and its implications, and looking at it from the viewpoint of the equipment makers, the telecom providers, the handset makers and all the related services. 5G is currently being rolled out across much of the globe. And it’s something we will hear a lot about in the coming years. So one of the subsectors that I worked out was going to really benefit was data centres. So this is an example where we ended up investing into a Korean data centre business, it’s done very well since.

However, aside from tech, which has been discussed a lot on this forum, I think perhaps our favorite theme from this year has been focusing on pets, and the increased demand for predominantly dogs. We’ve seen data showing demand for puppies up 15 to 20% across all the regions, since the Covid crisis began. The best thing about this is that a dog is not just for lockdown, it’s for life. So, the recurring demand for products and food will last for many years to come. We’re in a business in Europe called Musti, which is an omni channel retailer of all pet products, which has appreciated by roughly 50% since we bought it in early June. However, one of my favorite stocks that we own in both the Global Growth and the UK & Europe funds is called Swedencare. Now this company has developed and patented a product that is made from a certain algae that only grows on seaweed in the North Atlantic. This algae has certain properties that are very good for oral health. So, when it’s processed into a powder, it can be sprinkled into a dog’s food and it kills any plaque that’s on his teeth and makes the dog’s breath much better. This is ideal for the humanization of pets as owners tend to mollycoddle them closer. Swedencare then made a great move to buy another pet health related business in the US, called Stratford, which opens up a large market for their core product, and also adds some further healthy products to their portfolio. The stock market is rewarding the story and the shares are roughly 100% higher than our initial purchase level. By the way, Swedencare’s core product is called Plaque Off. So if you have a dog, you should definitely try it. We have done so and it works well.

SDC: That’s really interesting, thanks Toby. Actually, my wife just paid a deposit for a dog two weeks ago. The ETA’s six months away, so we will look into it. Mike, we all know the saying buy low, sell high. But of course, and we’ve talked about this before, when markets drop human nature is to feel worried or scared and to not invest. And over the past couple of weeks, as you mentioned, markets have let off a bit of steam. What do you think is a good strategy for taking advantage of market pullbacks?

Mike Taylor: It’s a really good question Sam, because at the moment, as you know we’re getting a lot of interest in the Conservative Fund and we’ve had a considerable amount of money that’s come into that fund in the last couple of weeks so I guess I’ve got that very dilemma myself is that I’ve got money in cash in that fund and I need to do something with it. So the strategy that I’m employing essentially is twofold is that when there’s a good opportunity, I take advantage of that. When an idea gets generated, whether that’s in a fixed interest market or an equity market. That’s kind of regardless of what’s going on around me, trying to block out the noise. If I find a good idea, I invest in that good idea. And the second strategy that I’m employing is essentially to buy in the red. Because for that particular fund, you know, you’re not trying to make 50% a year, you’re actually only trying to make in many cases, 5%. So, if you can buy stock that you really want to own that might be Microsoft or Amazon, you can buy it on a day when it’s down five, then you’re doing well, I feel, because it’s better to buy on a day when it’s down five, rather than up five. Though that sounds kind of counterintuitive, these types of names, particularly when you’re running a fund that is trying to replicate the equity market globally as a whole, you’re actually better to put money in on the red days so that’s the strategy, is buy things you like when you like them, and also put money into the market or sort of average in when it’s actually on its way down.

SDC: Thank you Mike, and thank you very much Guy and Toby for joining us as well. Obviously you guys are dialing in pretty late at night over in the UK so you can go to bed now. And thank you very much everyone for watching and we’ll see you in a month’s time. Thank you very much.