With many countries slowly making progress in suppressing COVID-19, lockdowns have started to become less restrictive. As a result, economic activity has begun to rebound from the extremely depressed levels seen in April and May.
It remains an open question as to what level economic activity will recover to. From our point of view, the answer will be determined by three competing variables: public health risks, economic growth, and the political response to both. Given that these three variables are not independent of each other, we believe they are essentially impossible to predict with a high degree of confidence at present.
Our response has been to refocus on the businesses we own: to make sure they can survive the immediate disruption from a liquidity and solvency point of view, and to understand what events need to play out that would make us change our mind regarding our long-term investment thesis.
We are happy to report that the Fund delivered a positive absolute return of +10.3% over the 2020 financial year. We believe the Fund also served its purpose as a source of portfolio diversification relative to the local equity market for many of our investors.
Nevertheless, in investing, the job is never done. Our efforts are focused on the uncertain markets we must navigate over the balance of the year. We will do so by adhering to the process that has served us well over what has proven to be the most volatile period in markets since the Global Financial Crisis of 2008/2009.
Three of the businesses we own in the Fund reported results this month. We discuss these in our quarterly note, which you can find at the link below. We also take a closer look at Prosus, one of the businesses introduced into the Fund late last year.
Heading into an unusual reporting season
From our point of view, markets are currently being driven by narrative to an unusual degree. Stocks set to benefit from the so-called ‘re-opening trade’ are being pitted against ‘lockdown-for-longer’ businesses. To be clear, we do not plan to engage in this type of speculation. We happen to own businesses – purchased well before COVID-19 entered the equation – that are being categorised along both sides of this divide. Our intent is to be long-term investors in these businesses, and not trade them over the near-term to realise a quick profit.
Mathematically, the vast majority of listed businesses around the world are likely to report extremely weak results in the upcoming reporting season, given how swiftly economic activity ground to a halt in March and April.
While much will depend on the scope and pace of the global recovery over the next several months, we fully expect July to have a high degree of volatility as markets attempt to re-price assets as they exceed or disappoint relative to short-term expectations.
We would caution against panicking at the sight of businesses reporting poor numbers, given the context in which they are currently operating. The June quarter will likely mark the low point of activity for many businesses and most economies. Markets are ultimately forward-looking discounting mechanisms, and business conditions should start improving during the second half of the calendar year.
With that in mind, we still hold roughly 10.1% of the Fund in cash, having selectively invested about 2.8% of the fund into several existing holdings and one new business during June.
Provided there is no information indicating that the long-term prospects of our businesses have materially worsened, we will likely deploy some of this cash should any of our businesses trade down on worse-than-expected quarterly results. We also have a reserve bench of several high-quality businesses we would consider introducing at attractive prices. (For context, the Fund currently has 21 holdings, with a median position weight of 4.9%).
As always, we are looking for a margin of safety before allocating capital, and we will remain disciplined in this regard.
On behalf of the entire team, I wish to extend my thanks for your ongoing support over the past year.
With warm regards and wishing you good health
Charlie & the AIM team