Dear investors and well-wishers

The fund returned -4.6% in February. We’ve had a positive month in March so far.

I spent a couple of weeks in the United States in March for Morgan Stanley’s tech conference, which included the weekend when Silicon Valley Bank collapsed – a nerve-wracking period for many.

There were a few observations I believe worth sharing.

Firstly, big tech companies are increasingly attractive due to ongoing job cuts. These seem to have the full support of employees (the ones I spoke to anyway), who are frustrated with bureaucracy and the decreasing efficiency of these companies as headcount exploded over the last two years. This has significant consequences for small and mid-cap tech companies that often sell to larger ones, and every job lost means a number of SAAS subscriptions are churned.

The good news is that the pathway out of this cyclical downturn is also clear – at some point these layoffs will stop, and there are fast-growing areas that are hiring fast.

Secondly, small and mid cap growth companies paid lip service to cost-cutting but rarely gave a sense of urgency.

To give one example, the CEO of Twilio spoke in front of hundreds of buy-side professionals managing perhaps hundreds of billions of dollars, if not trillions, in aggregate.

But instead of laying out the investment case in detail, he chose to lecture on the importance of putting the customer first.

This may well be true, but it was a strange moment to make the point.

Every day there’s an increasing divergence between companies acting with urgency around profitability and those that aren’t.

Some companies guided to significantly slower growth, like Datadog, which is forecasting flat quarterly growth.

Datadog guided to basically flat sequential quarterly revenues – not great for a $21 billion company annualizing $1.8b of revenues. 

There may be a time when these cyclical factors flip into reverse and these companies will once again post the growth rates that made these companies such favourites in the first place, but it will likely come when companies on aggregate are spending and hiring, not cutting and firing.

There’s a bit difference between say Microsoft, which sells to all industries, and many tech firms, which sell to other tech firms.

RingCentral is a good example of what may happen to companies that lose too much money and print too much stock:

A company very few have heard of prints nearly $395 million of stock a year on GAAP losses of over $800 million – there is basically no market for this kind of thing so the stock has melted away

Sea Limited

Some companies have taken the opposite approach. In the quarter Sea returned to GAAP profitability well ahead of schedule, posting $423 million net profit for the most recent quarter.

In Sea’s prior earnings calls, CEO Forrest Li struck a strikingly forceful position on costs – and pleasingly followed through and delivered. 

Sea Ltd Diluted EPS Revisions

This is one of the companies that was emblematic of our experience the last few years. It was one of our best performers as the companies multiplied gross profits by an order of magnitude and the stock reacted proportionally.

Sea Ltd – one of our positions which drove strong returns for us in 2020-2021 but was a major detractor from late 2021 to Dec 2022

But a number of things went wrong at the same time. E-commerce growth collapsed around the world, billions of dollars of gaming profit vanished as the game was banned in India and gamers switched off their screens after lockdowns ended. And this growth and profit crunch happened when Sea was most overstretched, with new, expensive operations in multiple continents far from their original South East Asia base.

However instead of dramatically increasing stock comp to insiders, Sea made tough decisions and ripped away many of the sales incentives that were boosting sales. Fortunately their key competitors were doing the same thing at the same time, so growth stayed strong, with e-commerce coming in at 50.5% year-on-year.

Note gross profits increased by 29.5%, despite a dramatic fall in digital entertainment (what they call gaming). Sales and marketing expenses fell by 61%, leading to over $1 billion turnaround in net income, from a $616 million loss to a $422 million profit.

Finally, every single person in tech is thinking about AI and the consequences of being able to talk to computers so directly, and having them talk back.

People with no coding experience are launching iPhone games on the Apple store they built that day. PAlmost every company in tech now has an existential threat – and an opportunity.

Software developers will become an order of magnitude more productive, though the consequences of dramatically lowering the barriers to building software are not clear right now.

Our highest conviction idea is to invest in those companies supplying the immense amount of computing power required to train and run these models.

OpenAI could well become a pillar of US technology on the magnitude of Facebook and Google etc, which is enough to move the needle even for a company as large as Microsoft – another plus for big tech.

While companies like Apple and Amazon are investing heavily on their own chip designs, others (notably Microsoft) have a strategy of using commodity suppliers wherever possible. NVDA is a clear winner, and this has been swiftly recognised by the market. But the industry does not want a single supplier, so AMD is also sitting very comfortably (and trades at a substantially lower valuation). We own both.


The US banking system is still struggling with the consequences of lending against real estate for 30 years at 2% while short term interest rates reached a high of 5%. No deposit guarantee changes the maths of yield curve inversion – money kept in treasuries is both safer and higher returning than bank deposits. For every American who locked in a 2% mortgage – there’s someone on the other side who has taken a substantial hit, and banks were encouraged to hold these kinds of long duration mortgage securities.

The striking yield curve conversion is perhaps why sectors like biotech have struggled so much lately – there are immense yield incentives on offer for thinking short term.

Inflation continued to both post high year-on-year numbers while collapsing by most other measures.

Over the last eight months, for example, the Fed’s own preferred measure of PPI has annualized at 0.8%.

The Fed set up new facilities allowing banks to swap deeply underwater treasuries for liquidity at par. There’s some debate over the extent to which this counts as quantitative easing, but as it’s liquifying frozen banking assets and being handed out to depositors, it must be stimulative on some level. Which perhaps explains the strength in markets recently, though it has been concentrated almost entirely in big tech.

Source: Federal Reserve

It’s encouraging for the first time in a while to see central bank liquidity return to the markets.

Best regards


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