What drives poor returns?

Insync Fund Managers

October 2022

Most investors do not reap the benefits of compounding wealth that come from equities. Equities grow wealth very well. $100 in the S&P 500 at the start of 1926, three years prior to the great crash, would have boosted your wealth to over $1 Million today.

That's 10.05% p.a. Tumultuous macro world events have rained down upon us since then, and so it's not adverse macro events that derail wealth accumulation; it is investors' reactions to them. In short, investor behaviour derails compounding wealth.

We've experienced difficult months recently for our quality-based strategy including recessionary concerns. We've also delivered positive annual above market returns recently as well - 2017, 2018, 2019, 2020, & 2021 (December Ending).

First to fall: When a recession looms, a Quality company's stock price often falls more than the market initially.

Quickest to rise: They are also the first to recover and outperform the other major investment styles during a market recovery.

All roads lead to technology - Accenture

Some of our 16 global megatrends are technology based. Despite all the negative noise shouting for our attention today, the reality is that we are in the middle of an unstoppable wave of technological advances impacting every business. From old style utilities and industrials to online payments, construction and retail. Companies must digitise their business to remain competitive, grow their customer base, revenues and earnings. Accenture is a key player assisting in this digital transformation.

Accenture posted revenues of $62 billion, a record 22% growth adding $11 billion for the year, and importantly EPS growth of 18%. New bookings were $18.4 billion for the quarter, their second highest ever.

A case study on how they do it- EDF

French multinational utility company EDF digitizes the construction of nuclear power stations that provide low-carbon energy for more than 6 million UK homes alone. Accenture transformed EDF's digital construction processes by creating a digital factory model on a secure cloud infrastructure. This drives cost efficiencies. Construction methods that relied on thousands of uncoordinated, disjointed paper plans and text are now digitized with contractors accessing and sharing the same view and information. AI then scans and assesses this for problems and opportunities.

Digital dashboards provide real-time data visibility across a myriad of systems. 'Digital twins' identify areas for automation across power plants, all of which drive safety, efficiency and quality. A 'digital twin' virtually duplicates physical objects, processes & systems, and are used to predict how those elements will respond to different variables.

Premiumisation powerhouse - LVMH                                                                     

LVMH is the world's largest luxury conglomerate.  Brands include Christian Dior, Givenchy, Louis Vuitton, Tag Heuer, Bulgari, Fendi, and Moët & Chandon - even Cape Mentell wines in WA and Cloudy Bay in NZ. LVMH's products are an expression of creativity and timelessness.

The previous LVMH picture highlights an important facet of their brand strength. They are 6 of LVMH's oldest brands (houses) in the leather goods division with the Loewe brand first established in 1846. History shows heritage brands with a strong leather goods offer, fare best during economic downturns.

In today's difficult macroeconomic climate LVMH delivered standout growth. LVMH recorded revenue around €56.5 billion in the first nine months alone. Up 28% compared to the same period last year. Luxury shoppers have not lost their appetite for high-end designer goods, even in tumultuous times. We have often cited the benefits of companies with pricing power and high gross margins in a rising inflationary environment. LVMH is a stand out example.

Whilst the luxury sector is not immune to recessionary shocks, the negative impacts do not last very long. The strongest brands tend come out bigger and better on the other side. LVMH offers a proven defensive track record.

The GFC period highlights this. Overall sales at LVMH declined by 4% yet Fashion & Leather Goods (F&LG)   posted sales growth of +2% in the worst recessionary period we have had in decades. Back then F&LG made up 55% of their total. Today it represents 75% of group profits. 

Conventional wisdom pointed to people trying to hide their wealth during an economic downturn. During the GFC, anecdotes spread of shoppers coming out of Bergdorf Goodman in NY with their purchases wrapped in brown paper bags.  But a 2010 joint study by the Marshall School of Business and UCLA put paid to this.

The study focused on luxury leather goods and how they changed during the GFC. Leading brands substantially trimmed their offering, whilst simultaneously increasing price points. They also featured a higher proportion of items with logos or other brand identifiers.

Louis Vuitton and Gucci were charging consumers more to flaunt their brands during a recession.

The study explained this by segmenting luxury consumers into "Patricians" and "Parvenus", or "insiders" and "outsiders" to the world of luxury. Parvenus needed to confirm they were still wealthy during a recession by buying more items from the latest collections of lux brands. This created an opportunity for ostentatious luxury designs.

The GFC sent the world into a tailspin, mainly because it was the most significant contraction in the global economy since WWII and the last global recession was 18 long years ago. Luxury stocks saw a mass sell-off. From the peak of their performance in May 2007 to trough in March 2009, an index of the top 13 luxury goods companies lost 62 percent of its value.

Over the same period, the financial performance of the 13 companies making up the index was the reverse!  Sales continued growing; +5.7% in 07', +6.5% in 08' and +2.2% in 2009. Their share prices recovered sharply immediately after the bad news ebbed. Investors rightly appreciated the resilience and strength of their business models. LVMH have delivered a compound annual earnings per stock growth rate of 14% p.a.  since the start of the GFC. A compound annual rate of return of 17% p.a. over the same period.

Summing things up

The global economy is impossibly complex, with billions of moving parts driving demand, consumption and activity. Commentators, most fund managers, consultants and the media earn money trying to predict what all of these billions of consumers and companies are doing, or are planning to do over the next few weeks, months or even years. It's not only foolish but impossible.

Funds operated by this manager:

Insync Global Capital Aware Fund, Insync Global Quality Equity Fund

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.

Is Google's LaMDA chatbot sentient?

Alphinity Investment Management

September 2022

Funds operated by this manager:

Alphinity Australian Share Fund, Alphinity Concentrated Australian Share Fund, Alphinity Global Equity Fund, Alphinity Sustainable Share Fund

Disclaimer
The information on this website is general in nature and does not take into account your personal circumstances, financial needs or objectives. Before acting on any information, you should consider the appropriateness of it and the relevant product having regard to your objectives, financial situation and needs. In particular, you should seek independent financial advice and read the relevant Product Disclosure Statement or other offer document and the relevant Target Market Determination (available on the Apply Now page on this website) before making a decision whether to buy or hold a financial product.

4D inflation podcast (part 2): The US Inflation Reduction Act

4D Infrastructure

November 2022

In part 2, Peter Aquilina (4D's Head of ESG and Senior Investment Analyst) speaks with Dave Whitby (Bennelong Account Director) about how the US' new Inflation Reduction Act is really about transitioning the US to a decarbonised, clean/renewable energy economy.

• 0:34 - Why the Inflation Reduction Act isn't actually inflation policy
• 3:56 - How the Act is supporting decarbonisation efforts
• 6:30 - What this means for infrastructure (and why 4D is excited)
• 9:32 - Some of the names in 4D's portfolio that could benefit.

Speakers: Peter Aquilina,  Head of ESG and Senior Investment Analyst
Dave Whitby, Bennelong Account Director

Funds operated by this manager:

^{The content contained in this audio represents the opinions of the speakers. The speakers may hold either long or short positions in securities of various companies discussed in the audio. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely as an avenue for the speakers to express their personal views on investing and for the entertainment of the listener.}

Australian Secure Capital Fund - Market Update October

Australian Secure Capital Fund

November 2022

National property prices have fallen for the sixth consecutive month, with values declining a further 1.2% in October. Whilst the price correction continues, there is some signs of easing within the capital cities, with the rate of decline slowing following falls of 1.6% (August) and 1.4% (September), reducing to a 1.1% decline in October. 

Queensland capital cities recorded the most significant monthly change with the Home Value Index recording a 2% reduction. New South Wales, Tasmania and Canberra experienced further declines of 1.3%, 1.1% and 1% respectively. Smaller falls of 0.8% for 

Victoria and the Northern Territory, with South Australia and Western Australia experiencing the smallest reductions of 0.3% and 0.2% respectively.

 

 

 

Despite the continued reduction in house prices, at the combined capital city level, housing values have fallen just 6.5% following a 25.5% increase through the upswing, with Sydney recording the largest falls of 10.2% since the January peak (after a 27.7% rise), and Melbourne down 6.4% since February (after a 17.3% rise). Interestingly, unit prices have held value better throughout the downturn (down 4.2%), likely driven by surges in rental returns, as well as experiencing smaller growth during the upswing. 

Supply remains lower than previous years, with the number of newly listed capital city dwellings in October down 25.2% from 2021, and almost 19% below that of the previous five-year average. This lack of supply is likely to contain the price falls to an extent, as there has not been any significant upswing in panicked selling or forced sales. The last weekend of October saw a total of 1,908 auctions take place across the capital cities, well below the 3,546 on the same weekend in 2021. 

Clearance rates also remain lower than last year, with the weighted average clearance rate across the capital cities at 59.8% (down from 76.8% in 2021) in the last weekend of October. Similar to last month, clearance rates in Adelaide were the highest of the weekend, with a clearance rate of 68.2%, followed by Sydney (62.3%), Melbourne (60.7%), Canberra (59.8%), Brisbane (45.7%) and Perth (38.5%). 

Whilst it is too early to determine if the worst of the decline phase is over, the RBA's decision to raise the cash rate by a further 0.25% instead of 0.5% for the second straight month, despite the high inflation reading for the September quarter, indicates they do expect inflation to start moderating.

Quick Insights
Housing Accords     The Federal Government's new policy of targeting 1  million new homes over 5 years could be a difficult  target to achieve based on current estimates however  the policy has merit in attempting to deal with the  ongoing structural under supply of housing across  the country with significant economic benefits.

Low Vacancies Co-living and build-to-rent operator UKO expects to  more than double its portfolio to over 2500 rental  units  over  the  next  two  years  after  leasing  up  its  newest building in inner Sydney in just four weeks.  Near  record  low  rental  vacancy  rates  in  Sydney  has  lifted  occupancy  across  UKO's  portfolio  of  18  buildings and more than 1000 apartments to 98 per  cent and allowed it to bump up asking rents.

An Opportunity Presents  Some seasoned landlords are now taking advantage  of the lull in the market to bulk up their portfolios.  Domain calculated that a 4.34 per cent gross rental  yields  will  cover  the  mortgage  repayments  on  an  average standard variable rate loan, taken on a 20  per cent deposit over 30 years. This means houses  in 11 per cent of all suburbs in NSW are earning high  enough  rents  to  cover  the  mortgage  repayments  and even putting some extra cash into the landlords'  pockets.

Funds operated by this manager:

ASCF High Yield Fund, ASCF Premium Capital Fund, ASCF Select Income Fund