2020 Financial Year Investment Update

Dear investors and well-wishers,

The fund advanced 13.9% net in June, which took us to 39% net for the financial year (ASX200 total return was minus 8%) and 25% net for the calendar year (ASX 200 Total Return was minus11%). So we outperformed the ASX 200 including dividends by over 45%.

We have now outperformed the MSCI World Index by over 10% net since inception.

Of the top 10 ASX stocks, we had 3, including the top performer Afterpay (#1), Mesoblast and Polynovo.

We had similar fortune a couple of years ago, when we held three of the top five: Xero, Afterpay and Appen, which will all be familiar to readers of previous notes.

It was rewarding to see the performance of some of our high conviction investments:

Companies with brilliant products and broad customer support are faring significantly better than mature incumbents – which is no surprise given the incumbents are more or less the same size as they were last year.

Which just shows that all you need to do is follow the love.

When I look back over the last seven years, each time we’ve backed a fast-growing game-changing innovator, with widespread customer support, the stock has turned out to not just be safe… but one of the top performers. These companies are often scrambling to meet the intense demand for their products, so have to spend big to meet it, so they tend to attract a lot of short interest too.

There is a rich history of this kind of investing: Warren Buffett’s own successes in companies like Coca-cola could be seen in a similar light: fast-growing companies with widely loved products. As could those of Peter Lynch.

This fund has seen two global equity bear markets in two years, so it was nice to discover that, at least in those instances, we were both able to swim and significantly outperform.

Afterpay pushed to new highs, and is now up over 16x from when we bought it. Interestingly, the company itself has doubled in size every year, so the underlying business has kept pace.

If we had to guess, we would say APT’s multiple compresses 25-50% in the mid term. Fortunately, that’s less than a year’s growth, and we expect the true winners to be those who continue to hold this long term, as has proven the case so far

We think there’s a strong chance Afterpay enters the Chinese market with Tencent, or at the very least, Hong Kong, which would add years to their current growth runway.

Pinduoduo pushed to new highs. There are billions of dollars – perhaps hundreds of billions – on the table for anyone who figures out how to bring this model to the West. Get in touch if you want to hear my thoughts.

Even after a 4x increase from our purchase price, Pinduoduo trades at 1/7th the valuation of Alibaba, while the Chinese are spending half as much time on the platform:

These were the sorts of numbers that caught our eye a year ago when PDD was a wee $25 billion market cap.

With the benefit of hindsight, we did make some regrettable mistakes. We added to Shopify close to the lows in March at $330, but reduced our position significantly around $600-$700 at ~35x sales, only for the multiple to expand another 20% and the stock to trade to $1,000 shortly after. We have maintained a small position.

We are constantly striving to improve the quality of our work.

Looking back over the past few years, we have reduced our holdings in far too many good companies after strong runs, only to watch them dramatically outperform the market (and in some cases, this fund). We are endeavouring to minimize this in the future.

It is striking how well innovative online retail companies have gone:

Tesla too has resolved decisively on the side of the bulls, resulting in a tragic waste of capital from years of short bets amassed across the stock itself and the options market too.

Once again, those who backed a fast-growing widely-loved innovator were rewarded with not just solid returns, but one of the best performing stocks globally:

In many ways, Tesla’s fundamental performance is more impressive than its stock price.This was the fatal flaw in all those lengthy short theses flying around the past few years: Tesla was consistently multiplying the number of cars they were selling.

After Q4 2012, Tesla sold around 2,000 cars. In their latest quarter, they delivered over 90,000 deliveries – a 45x increase roughly over the period of the chart above. So perhaps the move in the stock should not be so surprising.

Until recently Tesla was trading at only 20x forward EBITDA:

We believe Tesla is likely to attain a similar position in the auto industry that Apple achieved in the smartphone industry, and generate significant margins while others compete destructively on price and features. And there is more to the story than cars.

Crisis purchases

In March, we certainly did not play a perfect game. But we did at least get one thing right: when markets were moving wildly, we held our nerve and stayed invested.

This is precisely what you can expect of us in the next market storm.

Our crisis purchases certainly helped:

A small positive aspect of the crisis is that it appears retail investors were net buyers from professional investors who were net sellers. We can’t help but cheer the underdog.


This is a topic we need to address directly.

It’s sadly clear that the multiples of many technology stocks need to compress by 25-50% to reenter normal valuation ranges. This might happen quickly tomorrow, but could also happen slowly with time.

We are alert to this, but we are selectively holding companies that we expect to have 300%-500% larger revenues in 3-5 years. The only way to guarantee we capture those returns is to stay invested, knowing that every day that passes these companies are bigger, stronger, and cheaper relative to our entry price.

Software is one of the hottest parts of the market right now, but there is a very real fundamental effect taking place.

I can speak for our own firm that the number of subscriptions we pay has become substantial indeed, and growing rapidly.

Every month, Google, Microsoft, Xero, Mailchimp, Slack, Zoom and many others all automatically deducted funds from our accounts.

We don’t begrudge this, as we get substantially more value out of these tools than we spend. But this is a global phenomenon.

A handful of mostly US tech firms will soon be billing almost every business on the planet. Best to be on the right side of this.

We have carefully ensured our median portfolio growth rate is over 50%, which gives us a decent buffer for the inevitable compression in multiples, while also giving confidence that the fundamentals of each business are rapidly improving: they are winning customers and increasing revenue.

The multiple compression I’ve flagged above can only happen once, but these firms will be compounding for many years.

It’s strange to be talking about high valuations over a period when so many market indices are down, but it’s the beginning and end of every discussion right now.

We do agree the market is paying up considerably, and perhaps excessively,for the handful of companies that are truly best-in-class, and often only-in-class. Fortunately, there are plenty of unappreciated fast-growing companies, and we are focusing our attention on these.

We expect that this time next year we will still be talking about Afterpay, Carvana, Pinduoduo, Twilio, Alteryx, Xero, Tesla, and many of the other names we hold today.


The fund will continue to be invested across our usual themes:

1. Software

2. Solar and renewables

3. Online retail

4. Life Sciences

5. Fintech

6. Digital health

7. Companies changing the way we live.

I am extraordinarily grateful to all of you invested in the fund for maintaining your support during March and trusting us to do our job. This is not something I will ever forget.

Best wishes


ps I’ll be hosting a strategy update with questions enabled next Wednesday. We are experimenting with format but will keep it short and sharp. You can register here.

If you register and miss it, we’ll send you a video recording.

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