Top stock picks pay off

STRONG RETURNS ACROSS ALL FUNDS IN JULY

This month, we celebrate five years since we opened our Australasian Growth 2 Fund, back in August 2015.

I’d like to personally acknowledge Chris Bainbridge for the Growth 2 Fund’s success over this period. The fund is widely known within Pie as ‘Chris’ baby’ and Chris has worked incredibly hard to generate its performance. The Growth 2 Fund has generated an average return of 18.0% p.a (after fees and before tax) since the fund started. This makes the fund one of Australasia’s most successful equities funds over this period. An incredible achievement.

Asset bubble: Yay or nay?

July was a continuation of the market themes we have seen in place these past few months – strong for technology companies, Covid-19 beneficiaries, and gold. All three performed well during the month. Much has been made of economic fundamentals being disconnected from stock prices. But as I’ve said previously, investors have been very discerning; picking assets and companies which are beating expectations and selling those missing them. There is even talk now of bubbles and Covid-19-era mania for the winners. Let’s briefly explore the science behind the blowing of asset bubbles, that way we can have an informed view.

Three conditions needed

Three conditions are typically needed for financial mania or asset bubbles:

Easy money. Credit is the lifeblood of any economy – the easier it flows the faster the wheels can spin. We’ve met this condition – we have record-low rates and a surge in Central Bank liquidity.

Exciting growth stories which capture the imagination. Investors need something to dream about, they need an idea which can take over the world. We’ve met this condition – Netflix, Tesla and Amazon all tick this box.

Mass speculation and participation. The 1929, 1987 and 2000 stock bubbles and 2007 housing bubble, all had one thing in common. Everyone was doing it. We’ve met this condition, with low-cost platforms like Sharesies helping young investors enter the market – the stage is set.

How big will the bubble get?

Now we can confirm we have all the ingredients needed for an asset bubble. How big is it going to get and what will prick it?

Blow-off phase. Typically, bubbles get out of control in the final six-12 months when prices move higher exponentially. We haven’t met this condition – most markets are still down YTD and while tech has run, it’s not up 100% like it was at the end of 1999.

Rising interest rates. Previous share market bubbles have burst when liquidity is withdrawn and rates go up. We haven’t met this condition – rates are on hold until the end of 2021.

A catalyst. It’s said the Dutch tulip boom ended in the 1600s when a sailor ate a valuable tulip, mistaking it for an onion. We haven’t met this condition – Covid-19 has accelerated many of the trends and arguably set in place a runaway train of free money that eventually will come to an end.

I think there is the potential for the bubble to grow very large this time. Especially if we continue down the current path of stimulus and low rates.

In short though, don’t worry about bubbles just yet, but something to keep on the radar.

 

Active choices can deliver

Performance of our funds continues to be strong with some very good stock picking again delivering good returns for investors in July.

The graph (above) shows how our funds have performed YTD with a comparison against some relevant indices.

We have been banging the drum for 13 years about active management, and a situation like this demonstrates clearly how Pie adds value. The team continues to find new ideas each week despite the market rally, because the environment is so dynamic at present. However, I caution investors expecting 8-10% monthly returns, this is not sustainable – though I wish it were!

+ We have reduced the withdrawal periods across all our open Funds. If you have any questions about these changes please contact your Relationship Manager, Wealth Adviser, or refer to the Product Disclosure Statement available at
www.piefunds.co.nz/Investor-Documents or to our monthly fact sheet.

+ The Pie Funds Management Scheme Annual Report is now available. This document outlines important information about our funds for the year to 31 March 2020. The annual report is available on the Pie Funds Management Limited scheme register:
www.companiesoffice.govt.nz/disclose and at
www.piefunds.co.nz/Market-Insights. You can request a copy free of charge by emailing clients@piefunds.co.nz.

As always, thank you for your support. If you have any questions please don’t hesitate to call me on (09) 486 1701, or email me, mike@piefunds.co.nz.
Mike Taylor, Founder and CEO

Past performance is not an indicator for future performance. This is not intended to be financial advice and does not take into account any particular person’s circumstances. Before relying on this information, please speak to an independent financial adviser.