March 2021: Rising Rates, SPACs and Growth Stocks

Dear investors and well-wishers,

The fund returned 2.5% net in February, taking us to 15% net for calendar 2021.

For the financial year-to-date (since 1 July 2020) we are up 91% net, comfortably ahead of all major indices (the Nasdaq100 did ~30%, the ASX200 Total Return did ~15%). This brought our total net annualized return since inception to over 35%.

I joined Equity Mates on their podcast, available here. I will do another video update next week so please send through any questions.


February saw a sharp rally into the middle of the month, followed by a steep sell-off in growth, which continued into March.

We were affected by this and gave back some of our gains since 1 January, though as I write are still comfortably positive for the year. We would prefer to be back at the highs, but it’s encouraging that we’ve generated strong returns over a period where the US 10 year interest rate increased >100 basis points.

This fund has now weathered two bear markets, a global epidemic, and our second rising rate environment. We could have picked a better time to launch a fund!

Higher rates have obvious consequences for growth assets, but if we had to guess, the recent retracement has as much to do with overextended valuations and sentiment as macro factors.

The table below is worth studying, showing the EV/Sales on 31 December 2020, and the EV/Sales for 30 December 2021, using current forecasts for revenues (which for our stocks generally prove conservative) and yesterday’s prices.

Disclaimer – we hold over 50 stocks, this is a selection of companies we’ve discussed in these letters before.

Despite large multiple contractions across our portfolio, the fund is actually up over this period. The ability to weather sharp multiple contractions is one of the reasons we focus on such fast growing companies.

You can also compare the change in multiple to the change in price:

Change in price and multiple. For 2021 numbers we used current market prices for prices and enterprise values, and analyst averages for CY2021 revenues.

As you can see, the sell-off has resulted in a large change in multiple since 1 January 2021, but only modest falls in price and indeed some gains. The change in price, ofcourse, is what we actually care about.

It turns out a fast-growing portfolio can weather quite extreme reductions in multiple, and still generate strong returns:


I’d be remiss not to comment on SPACs which are a defining feature of today’s market.

Companies merging into SPAC cash shells skip the arduous process of listing, which can take well over six months, requires a certain number of years of audited financial accounts, and has all kinds of restrictions over, say, long term revenue forecasts.

The appeal to founders is clear: negotiating a simple merger agreement with full control over terms and timing, rather than dealing with investment banks and all the associated well-documented issues.

But there are real benefits to the traditional process, not least convincing a somewhat respectable institution to lend their support and passing their due diligence process.

There are now several listed battery companies with no batteries for sale. Multiple flying car companies with no flying cars. And many marketing 2025 revenues – but nothing until then.

And all these seem to be valued at billions of dollars, while no doubt requiring vast additional amounts of capital to have a small shot at winning what might be a large market.

Here is one example of how a flying car company is marketing 2025 estimates:

While we wish for flying cars as much as (and probably more) than most, there is likely a bumpy few years ahead for shareholders of such companies.

It’s easy to mock these companies (they may have the last laugh) but the sector demands attention, as the best companies of today are not doing IPOs, they are merging into SPACs.

This is a good thing: lower barriers means companies are coming to market sooner. There was an entire vintage of startups like Airbnb and Uber that stayed private until well into maturity, benefiting a very small group of ultra-wealthy investors, locking out access to those who loved their products but couldn’t invest in the companies during their most exciting growth years.

We are spending a lot of time sifting through these, and some of our most promising new investments have come to market via SPAC.


We used the recent sell-off to add to CuriosityStream, set up by the Discovery Channel founder John Hendricks, who grew his previous company to more than 2.5 billion cumulative subscribers across channels, generating $5.5 billion in annual revenue. CuriosityStream is growing at >80%, trades at ~10x CY21 EV/Sales and has built its subscriber base from 1mn in 2019 to over 13mn in 2020.

We were careful to be net buyers on the big down days, and bought two companies growing at well over 100%, with exceptionally high profit margins.

Over the past six months or so we had reduced renewables to ~3% of the portfolio, and software to even less. Renewables have been particularly hard hit over the last few weeks, perhaps as so much capital has been sucked up by all the shiny new green SPACs.

So we have started building that position back up. If the sell-off continues we will add to our favourite software names like Twilio and Shopify, but they still look a little rich for now.

What next?

My guess is as good as the next, but as rates continue to rise we expect multiples to continue to compress. Far more importantly, however, we expect our portfolio companies to continue to grow and create value.

The recent reporting season suggests our companies remain on track, though we did close a small number that didn’t prove up to scratch.

It’s helpful to remember that multiple contraction only happens once, while compound growth can go on indefinitely, at least over any relevant human timeframe.

Our main job now is to make sure every company we own continues to post rockstar fundamental performance.

It’s also worth noting that big growth selloffs tend to prove excellent buying opportunities. You could have done worse than to add at these kinds of extremes:

If you were waiting for a dip in tech, well, this is a dip in tech.

A sincere thank you for your support


Please note: We are now taking applications weekly, so if applications, funds and supporting documents are received by 2pm on a Friday, the investment will be priced for Friday COB / Monday morning start. We are also available on Netwealth and Hub24.

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