March 2021 Investment Update

Dear investors and well-wishers,

The fund contracted -9.1% in March taking us to +4% net for calendar 2021, +74% net for the financial year-to-date and +188% net over the last 12 months.

Returns to 31 March 2021

While writing this I came across our note from last year. It’s hard to tell if this feels recent, or a very long time ago indeed:

Excerpt from our investment update this time last year:

March in 2021 was far less dramatic than 2020, but about a third has been knocked off multiples across some of our key holdings:

Summary statistics for a selection of fund holdings. Price movements and EV/Sales for 2020 and 2021 are taken from Sentieo. We have made adjustments to account for organic growth.

There are a few points of note in the table above.

Firstly, the ‘Change in multiple’ over those dates is much larger than the ‘YTD price change’, mostly due to the exceptional growth rates of the stocks themselves. A company growing at 100% can weather a multiple contraction far easier than one growing at 10%.

Secondly, the fund itself performed better than the stocks above, which was partly due to some fortunately timed exits of richly valued companies, but mostly due to new positions which shielded the blow.

Perhaps more interestingly, growth stocks are well off recent highs: the examples above are 28% down. From here, the relevant number is actually the inverse of this, the distance to the recent 52 week high, which is 39%.

We track this number across our portfolio and this number is as high as it’s been since this time last year.

Fundamentals first

Since 30 June 2020, US 10 year interest rates have risen around 100 basis points. Over this period the fund has netted 74%, including this steep sell-off in growth. This is largely because their fundamental performance trumped macro concerns.

There is something relieving about seeing valuations return to a more normal state. We appreciate that many investors joined us in February (we were also investing throughout February), this bodes well for future returns.

In the past, investors have joined us on the eve of the COVID crash, and right before the steep interest-induced sell-off in 2018. In both cases, subsequent performance was strong irrespective of timing.

Particularly in companies that are growing as fast as ours, the most important thing is generally to get the company analysis correct, not the timing.

We wish we could go back to 2016 and pay the 52 week high for Shopify, Afterpay, Tesla, or any of a number of stocks displaying explosive growth and true customer love at the time.


The sell-off was particularly sharp in software, which has had a charmed run over the past five years.

We were fortunate to have reduced our exposure to the sector significantly, from one of our larger weightings down to <3%.

Summary statistics for a selection of fund holdings. Price movements and EV/Sales for 2020 and 2021 are taken from Sentieo. We have made adjustments to account for organic growth.

We think it unlikely anyone will get rich buying Snowflake at 133x sales.

Best-in-class, long-term category winners in the software space are still quite expensive on absolute terms, but are at least now back to levels that will likely reward >5 year holders. If multiples contract another 30% from here, forward returns will start to become very interesting, so we are watching closely.

Fortunately, there are still companies growing at over 100% organically, trading at single-digit EV/Sales multiples, two orders of magnitude less than Snowflake. This is where we are spending our time and capital.

We didn’t reduce our software holdings because we thought the stocks would crash, rather that they would move sideways for an extended period of time, with volatility, while the fundamentals caught up with the multiples. So far that seems to be holding out.


I was recently asked what we think of Chinese regulatory risk, specifically the difficulty of pinning down what you actually own when you buy a US-listed American Depositary Receipt (ADR) of a Chinese company. It turns out you own a Variable Interest Entity, or VIE, that the Chinese Government has never explicitly approved.

This scares people and there are countless essays on the internet on the creatively opaque ownership structure of these companies, whose authors presumably were smart enough to untangle the legals, but missed the exceptional returns on offer.

If push-came-to-shove, China could indeed cut the ownership link between the domestic company and the foreign shares, but we think that extraordinarily unlikely.

The reason is simple: these structures are incredibly lucrative. Chinese companies raise US dollars and rarely pay dividends. Money flows in one direction – to China – and the Chinese retain full control.

It’s strange looking back now, but about a decade ago the BRICs were the cool thing in markets. Western managers flocked to China and most were quickly humbled. (Second acts don’t seem to work so well with funds. The managers who string together historic track records tend to do it in a single vehicle.)

As it turned out, there were in fact phenomenal returns on offer, just not in the ‘cheap’ industrials and conglomerates that were fashionable at the time. Instead, as it turned out elsewhere, the real money was made in fast-growing, widely- loved tech companies that grew bigger and stronger every year.

There’s increasing risk on the US side that these structures come under legal scrutiny, perhaps justifiably so. But the VIEs could relist or dual-list in Hong Kong quite easily. And the Americans care about money too.


There is a lot going on under the surface. The regime shift that began in April 2020 may have come to an end in February. The sharp change in spending patterns triggered last year when travel and dining budgets were cut to zero and consumer spending exploded will at least partly reverse.

It will soon be cooler to be seen in Japan or Mykonos than Byron Bay.

When it comes to technology, however, we are not going back to 2019. Many of the positive developments are here to stay.

Inflation has also arrived, as seen in official statistics, inflation markets, and certainly by anecdote. Looking at real estate sales in Sydney (and this is by no means local) it’s clear that one million dollars today is not the same as one million dollars five years ago.

The Mannheim US used vehicle index – another indication of inflation
This will have unpredictable consequences.

The traditional play in inflationary environments is to borrow and buy real assets. Real estate works particularly well, as adult humans will work twenty years to buy a house, irrespective of what’s happening to the currency.

The traditional cautionary counter-argument is that high inflation is generally accompanied by higher rates, making this strategy expensive and risky. Which is why today is so very strange.

Inflation statistics are flattered by a healthy year-on-year comparison with last March (as was, we have to admit, our own 12 month number), but if we had to guess we would say the circa forty year trend of lower interest rates and lower inflation has now reversed. Then again, people have been making that call for nearly forty years!

We find this kind of macro speculation interesting, but having spent the last few years watching companies grow users, revenues and gross profit dollars by 10x, 20x or more, we are more convinced than ever that the smart play in the equity market is to focus on fundamentals and weather the volatility. Our best current investment idea is to hold a portfolio of ~50 brilliantly loved companies growing at over 100%.

Thank you for all your support,


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