Why you can be cautious on markets and 100% invested Aoris Investment Management 14 January 2022 2022 began with global stock markets around record levels, leaving many investors primed to sell equities. However, timing the market is more likely to reduce your returns than enhance them. Importantly, you can be cautious on the market and 100% invested provided you're in the right stocks. Here's why. A December 2021 Livewire reader survey found that 'overvalued stock bubbles' are the #1 concern of readers, by a factor of two!  Many investors have an opinion, often strongly held, on whether the stock market in aggregate is cheap or expensive. If the market is viewed as being too pricey, they may increase the cash weight in their portfolio with a view to buying back into equities at lower prices. While conceptually appealing, history shows that attempting to profit from the market's zigs and zags along its upwards journey is far more likely to detract from investment returns than add to them. Aswath Damodaran, a highly esteemed Professor of Finance at New York University's Stern School of Business, has studied market timing strategies. He looked at asset allocation mutual funds in the US, so called because rather than being 100% in equities they can time the market by moving between stocks, bonds and cash. As such, they should do better than the equity market.   Over the 10 years to 1998 these market timing funds on average underperformed the S&P500 by 5.0% p.a. I recall telling clients in January of 2013 that markets are fully priced and to expect a zero return from the index in the coming year (the S&P500 put on 30% that year!). I've learnt a few things since then. Today, I have no view, positive or negative, on the value or the direction of the equity market in totality. Nor do I believe it's necessary to have one as an equity manager. Timing the market is an example of what is known as the fallacy of composition, meaning the belief that what is true of the whole is also true of all the component parts. It's common for investors who've formed a view on the equity market in totality to then project this view onto all equities - all stocks and all funds. However, the returns from any individual security will look nothing like the average.  Thinking about equity market indices in aggregate misses the vast dispersion of stock returns within an index. To illustrate this dispersion, in 2021 the returns of the best 20% of the global equity market exceeded those of the worst 20% by almost 90%.  What matters is what you own, which in the case of Aoris is just 15 exceptional businesses. The index is mostly made up of businesses you don't own. I've seen many poor investment decisions made as a result of confusing these two constructs. What matters is what you do own. The index is mostly made up of businesses you don't own. If you own the right type of business, and you own them at or below their fair value, then time is on your side and being fully invested makes sense. By the right type of business, I mean those that have been around a long time, are understandable, have leadership positions in growing markets, and grow earnings per share at an attractive rate on a sustainable basis. I believe the intrinsic value of the 15 companies we own at Aoris is rising at a rate of around 10% a year and I believe we own them at or below their intrinsic worth. Therefore, cash represents a considerable opportunity cost. To hold $1 of portfolio capital in cash rather than in one of our companies, in the expectation that its share price may fall 10% or more from an already attractive level, would not be judicious. I believe it is far better to invest all of one's portfolio capital in these types of businesses and participate fully in that 10% p.a. growth in value. To maximise your long-term returns, recognise the futility of trying to optimise short-term returns. Invest to win the main game, the long-term game. Recognise that your equity portfolio is not the equity index. Rather, it's a discrete set of businesses whose returns will look nothing like the market average. If the businesses you own are profitable, durable, competitively strong and growing in intrinsic value at around 10% p.a., and you own them at or below today's fair value, then it makes sense to be fully invested.  Written By Stephen Arnold, Managing Director & Chief Investment Officer Funds operated by this manager: Aoris International Fund

We are our own worst enemy Ty Archibald, Aoris Investment Management 29 October 2021 Most of us read about behavioural biases and acknowledge they exist, yet there is no evidence the financial community is any better at dealing with them. Understanding the impact of biases improves our ability to apply guardrails and combat them, leading to better decisions and investment outcomes. With that in mind, let's look at three of the most common biases, where we come across them in everyday life and investing, and how we can minimise their impact. Optimism bias It is natural to take the view that good things will happen more often than they do. While positive thinking makes life more pleasant, the evidence suggests excessive optimism can be to our detriment. Optimism bias regularly appears in investment thinking. For example, the graph below shows the change in analyst earnings per share estimates for the S&P 500 across each calendar year from 2006-2020. Of the 14 years included, 10 showed meaningful downgrades. On average, analysts overestimated EPS growth by about two times. The high proportion of downgrades illustrates analysts repeatedly overestimating business prospects at the beginning of each period, demonstrating optimism bias in practice. Source: Aoris research, FactSet Optimism bias can be exaggerated when investing in companies with a wide range of outcomes, where little past information is relied on for the basis of bold future assumptions. By focusing attention on the large potential gains, it can be difficult for investors to visualise potential losses. For example, the electric vehicle market is in its early stages, and it is difficult to gauge how stable the market will be and which manufacturers will ultimately succeed. How can we combat our natural optimism bias without turning ourselves into killjoys? Paying attention to history will help keep our expectations grounded. Social proof bias Social proof is a phenomenon that involves people copying the actions of others in situations of uncertainty. Humans naturally believe there is safety in numbers and want to fit in with the crowd. We also avoid confrontation, so going along with what others think provides the path of least resistance. Humans feel there is safety in numbers. Investors can panic amid a sell-off and follow the crowd, even if selling is contrary to the information they have on hand. In contrast, at the peak of an economic cycle investors can flock to well-performing stocks in an attempt to ride the momentum wave and avoid the dreaded feeling of FOMO (fear of missing out). FOMO and the impact of herding behaviour can have very real consequences. For example, in Singapore in the 1980s an unexpected bus strike had created an abnormally large crowd at a bus stop outside a bank. Local customers mistook the gathering as people waiting to make a withdrawal, so they too lined up thinking the bank must be in financial trouble if there were so many customers waiting. The bank was forced to shut its doors to prevent an actual bank run. How do we counter social proof? A simple (but not easy) way to combat this behaviour involves developing independent thoughts and conclusions, with reference to objective reasoning and facts and not the "sway" of the herd. Anchoring bias Anchoring bias causes us to rely too heavily on the first piece of information we are given about a topic. We then typically adjust slightly away from the original anchor point when making decisions, even if it has little relevance to the problem we are trying to solve. Anchors are used in negotiations every day. Take the used car salesperson for example, who will always give you their best price upfront. They have now dropped an anchor, and any price you can get below that will seem like a better deal to you when it could still be a price well above the car's value. This will now play a larger role in your decision, rather than more relevant indicators of value such as the age of the car and its current condition. Source: The Decision Lab Similar behaviour regularly occurs in equity markets. Investors have a tendency to anchor on the current stock price and use that as a gauge on where the stock will go in the future, or use current multiples compared to historical values. Like the car salesperson example above, this single indicator has little relevance and offers no insight into the value of the underlying business. How do we deal with anchoring? Dropping your own anchor is an effective way to combat this. Thinking about the value of a business independent of the current price or purchase price can keep the focus on business fundamentals. Key takeaways In conclusion, let's reinforce the key considerations for investors when dealing with the three behavioural biases mentioned above. Optimism bias: If we participate in parts of the market characterised by narrower ranges of outcomes, it mitigates the chances of excessive optimism. Exciting themes, emergent markets and unproven technologies are fertile grounds for optimism bias. Social proof bias: Maintain independent thoughts and conclusions. Be wary of herd following behaviour and think carefully about the reasons for a purchase or sale. Anchoring bias: Delay decisions and drop your own anchor. Slowing down our decisions allows us to develop a more holistic view of the problem we are facing and can avoid anchoring off that first piece of information we receive. We can make more informed transaction decisions if we focus on the value of the underlying business, without reference to the current price or our original purchase price. Funds operated by this manager: Aoris International Fund

Staying relevant in a fast-changing world Aoris Investment Management October 2021 Consumers have never been more fickle, in a world of fast fashion and next-day delivery. Covid has further upended our purchasing behaviours and expectations. Against the odds, luxury goods giant LVMH has become more desirable over many centuries, and emerged from this disruptive period stronger than ever. What's their secret? LVMH (Louis Vuitton Moët Hennessy) is the largest global luxury goods company, owning 75 iconic brands such as those in its name as well as Christian Dior, Sephora, Bulgari and Tiffany. It has a long history of growth and profitability, even through difficult market environments - in fact it has not made a loss in a single year of its existence. Let me share with you five features of this business that have allowed it to prosper in the face of ever-changing consumer preferences. 1. Heritage The Clos des Lambrays vineyard dates back to 1365. Chaumet was founded in 1780 as a jeweller for the French Empress. Louis Vuitton was born 200 years ago and founded his business to make suitcases, featuring the classic monogrammed logo design, for the French royal family. LVMH's brands are steeped in history and tradition. There is a story behind their products, they stand for something. The depth and authenticity of their heritage cannot be replicated by younger luxury goods brands. This heritage and desirability only builds over time, making it even more difficult for new entrants to succeed. 2. Innovation But they aren't just old, tired brands. LVMH has done a great job of straddling tradition with innovation, remaining contemporary and relevant with consumers. It invests over €20 billion each year into creating new products (which represent about a quarter of its sales in a given year), advertising its brands through engaging campaigns, and refurbishing its stores with vibrant and constantly evolving displays. LVMH also has an ongoing annual intake of thousands of new apprentices and talented young designers that bring with them new ideas. Half of LVMH's employees are under the age of 34, which is remarkable for such a longstanding business. 3. Agility There are 75 brands owned by LVMH which operate as largely independent businesses, keeping them agile and entrepreneurial. The company's response to the Covid pandemic was a great validation of this strength. Consumer behaviour changed drastically, with retail stores shut and travel grinding to a halt (which is when a large portion of luxury sales are traditionally made). LVMH adapted more rapidly than its competitors, resulting in massive market share gains and a quick recovery in profits. Its brands continued to invest in new product launches, virtual fashion shows and marketing, unlike others which withdrew their investments. They also found novel ways to serve a local clientele, such as these incredible mobile stores which brought a caravan with a bespoke selection of products directly to the homes of their most valued clients. 4. Control LVMH makes most of its products in-house and sells most of its products through directly operated stores, giving it full reign over the quality of its products, how they're priced (Louis Vuitton is notoriously the only luxury brand that never discounts its products), and the customer experience. Contrast the look and feel of a Louis Vuitton store and the attentive customer service you'd receive in one, to the unorganised mess of a department store. The company is obsessed with product quality, taking the long-term view that if you can focus on satisfying your customers, the financial outcomes will naturally be favourable. It has a high degree of control over its supply chain and materials usage, e.g. recently acquiring a sustainable crocodile leather tannery in Singapore to ensure its supply of a scarce resource, which is proving valuable amid the current global disruptions. 5. Breadth LVMH sells a lot more than Fashion and Leather Goods; it also has businesses across Wines & Spirits (where it is the largest global producer of champagne and cognac), Perfumes & Cosmetics, Watches & Jewellery (where it recently acquired Tiffany) and Retailing (where it owns Sephora). Its breadth across these five divisions, 75 brands and many countries provides valuable balance and resiliency to the inevitable ups and downs in any one area of consumer spending. LVMH's breadth is important when considering the Chinese government's increasingly intrusive stance on the behaviour of its citizens. China has certainly been an important contributor to LVMH's growth, and today Chinese consumers represent a third of its sales across a very broad range of goods. However LVMH is a truly global business that is growing strongly in other geographies as well. The company reported exceptional results in the first half of 2021, where sales grew faster from its US and European customers than in China. LVMH shares have fallen by 10% over the last month, and some of its luxury peers have fared worse, but the market's focus on these events may be masking the business' finer qualities. In conclusion These five attributes have contributed to LVMH's growing desirability, long track record of growth, and enviable profitability. In the Aoris International Fund we own a portfolio of 15 durable, all-weather businesses like LVMH, which we expect to keep compounding in value for many years to come. Funds operated by this manager: Aoris International Fund