Australian Financial Review

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Hope you’ve had an excellent start to 2021

How Frazis doubled investors’ money in 2020

Tom Richardson

Markets reporter and commentator Jan 4, 2021 – 12.01am

Everyone has a favourite Sydney beach. For Michael Frazis, it’s trendy Tamarama, where he spent Christmas. It should have been a good one. After all, his long-only international equities fund advanced 110 per cent after fees to December 30, 2020.

“Looking back, the key driver was staying invested in March,” says Frazis. “We didn’t do anything great – we just kept our exposures, held our nerve. We didn’t do some crazy pick-the-bottom stuff or go all-in at the bottom. Actually, we were kind of long at the top.”

Michael Frazis, who lives and surfs at Tamarama beach in Sydney’s east. Dominic Lorrimer

After a brutal March sell-off, those long positions staged a V-shaped recovery as investors piled into just the kind of businesses he loves: ones with fanatical customers, growing fast.

“The actual returns this year [2020] were driven by how much we invested in tech and innovation,” he says. “All crises tend to trigger changes in behaviour, this was like that times 10.”

You could say Frazis is an unconventional investor, or at least removed from the traditional world of professional asset managers climbing the career ladder and beholden to performance reviews, consultants, institutional clients and pressure to justify valuation.

He’s his own boss and follows his own rule book. The investors in Frazis Capital Partners, including his father, Bank of Queensland chief executive George Frazis, and the John Wylie-led Tanarra Capital, must be prepared to back a style many would label high risk.

He barely pays attention to traditional valuation metrics such as price-to-earnings ratios, in part because the companies he likes to buy normally don’t have any earnings.

Our sweet spot is companies growing 100 per cent under five times sales. That is our bread and butter.
— Michael Frazis

“We’ll tend to be gone by the time the profits come through,” he says. “We want our companies spending and growing – hiring staff, opening new locations, putting money back into the community, spending on R&D.”

“That’s the perfect profile for me. As the companies mature, that’s when they become profitable and the growth slows down, that’s when we exit.

“We want companies investing heavily in doing really great things. That’s how I look at profitability, which is different, right? It’s different to most people.”

The swaggering style of favouring growth over profits has paid off in spades. Frazis says for every dollar the S&P/ASX 200 total return benchmark generated over the year to 2020, his fund made more than $5 net.

Moreover, the spectacular returns have been achieved without too much concentration risk and Frazis isn’t punting on volatile small-caps.

In fact, the fund held 40 different stocks largely valued between $US10 to $US100 billion, and none of which made up more than a 7 per cent weighting.

“It’s one thing to generate returns like this with four positions, quite another with 40,” Frazis says.

The overarching philosophy is to screen for companies that customers love, with explosive growth. This style has helped unearth more than 20 companies up between twofold and 22 times for the fund since establishing a position.

These include Afterpay (up 22-fold) and the likes of Moderna, Carvana, Tesla, Plug Power, Pinduoduo, Xero, Appen and The Trade Desk, which are all up more than sixfold since an initial investment.

Frazis says Moderna’s vaccine is probably the best among those currently available. Dominic Lorrimer

“Our sweet spot is companies growing 100 per cent under five times sales. That is our bread and butter, it’s the kind of opportunity we get excited about,” Frazis says.

“These companies aren’t growing in a vacuum. In a world of relatively flat GDP, they’re taking those revenues and market value from elsewhere.

“We expect traditional indices to dramatically lag the next generation of technology leaders, as the new guard overtakes the old.

“Investment returns for everyone – institutions and individuals alike – will likely depend on how much they allocate to this phenomenon.”

Biology becomes cool

The fund manager also understands life sciences better than most, after gaining a chemistry degree from the University of Oxford.

Nasdaq-listed Moderna, maker of a leading COVID-19 vaccine, is not just a biotech in his eyes. It’s a platform whose grasp of messenger RNA technology can be swiftly deployed to defeat other viruses or diseases.

It was added to the market-thumping fund at about $US19. This Christmas, its shares changed hands for $US126, and Frazis says Moderna’s inherent value is built on much more than just a coronavirus vaccine.

“You know, Moderna is a platform company,” he says.

“It comes back to this idea medical science is now data science. So all they have to do is change the code on their computers, which is now specific to the spike protein on coronavirus. They can change that to anything else and there’s a good chance they’ll be able to develop a vaccine for that. This is a process that can be used in many different indications.”

In his view the value uplift for Moderna investors is now part of history, but a stronger life sciences sector will be among the coronavirus’ lasting legacies.

“There’s been unprecedented government investment in the life sciences, and biology has never been cooler. I suspect more and more top students will end up in medical research. This combination of capital and talent is extraordinarily promising for long-term investors in the space.”

Alongside Moderna, Frazis highly rates Nasdaq-listed oncology specialist Guardant Health and ultra-rare disease treatment developer Ultragenyx, both of which the fund currently owns.

Facing 2021

Frazis seems agnostic on whether a post-vaccine world will drive a rotation from the growth stocks he favours into value stocks maimed by the consequences of physical lockdowns.

Either way, he’s bullish on equities in 2021, saying the confluence of ultra-low rates, fiscal stimulus and cashed-up consumers bodes well for banking, travel and entertainment companies.

“But these recoveries will be relatively short-lived,” he thinks. “The best year for travel on record will probably start some time in 2021. But most of these companies simply can’t compound like the leading next generation of technology companies.”

What he’s really focused on is whether e-commerce valuations will retreat in 2021 as lockdowns become part of the history books or soar again as the shift in consumers’ shopping habits solidifies or even accelerate.

True to style, the fund doesn’t own behemoth Amazon, as Frazis prefers to buy its smaller, riskier and faster-growing doppelgängers.

Sea is the like of Amazon of south-east Asia, MercadoLibre is like the Amazon of South America,” says Frazis. “In those two places e-commerce penetration is 4 to 5 per cent. In China it’s 40 per cent.

“They’re market leaders and they’ve got three things; bigger range, lower prices and better delivery. They can grow irrespective of coronavirus over the next decade and in e-commerce the winners generally win.”

The value investor making a fortune where others fear to tread

The fundie also tips Jack Dorsey’s payments giant Square and entertainment group Disney as two stocks to outperform. “Perhaps the strongest performers in 2021 will be companies that are already doing well, but will accelerate further in a recovery,” he speculates.

“Disney has a thriving consumer business, Disney+ [its streaming business], as well as the world’s best theme parks, which will come back online as the vaccine is rolled out.”

He’s willing to move in or out of recovery leveraged or e-commerce stocks as the data and macro-environment shift, while sticking to his belief in buying companies that will be on the right side of history in helping the world recover from the pandemic.

“It’s scary. We’re up 110 per cent now,” he says. “When you have these advances usually the next step is down, but at the moment it doesn’t look like that.”

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