The ASX 200 Accumulated Index was up 1.7% for the month of July, and Luke's Fund achieved a return of -1.3% over the same period. As we start a new financial year, we thought it an opportune time to review the historical performance of Luke’s Fund, which is outlined below:
We have achieved great results year over year, despite extended periods of underperformance, and it is of note July’s underperformance is a continuation of the fund’s underperformance since March 2021. We have discussed some of the lessons learned from Luke's Fund underperformance in our Lessons Learned section of our update. The breakdown of our holding’s and their contribution to performance over the past month is outlined below:
The top contributors over the month were:
1. Sequoia Financial Group, as the share price continued to rally following its second guidance upgrade in the past 6 months.
2. Novonix Limited, which announced the expansion of their anode materials business. The expansion will result in an increase in production capacity to at least 10 k Tonnes of anode material per annum by the end of 2023, on its pathway to an anode production capacity of 150 k Tonnes per annum by 2030, and the development of a similar single crystal cathode business over the same period.
The top two detractors over the month were:
1. Selfwealth, following a weak fourth quarter update, on the back of low trading volumes on the Australian Stock Exchange (ASX) over the fourth quarter, and a surprise capital raise. ASX trading volumes fell to their lowest levels since 2019, resulting in the lowest trades per active trader for Selfwealth since 2018. Immediately after the fourth quarter results announcement, a capital raising was initiated, with funds to be used to improve the platform, service offering, and on customer acquisition. The timing of the capital raise was rather poor, considering this is likely the low point in terms of quarterly revenue.
2. Pointerra Limited, with the share price falling following their fourth quarter enterprise sales and cashflow report. Reported receipts continued to lag reported Annualised Contract Value (ACV), and management failed to break out reported ACV for their recent acquisition, Airovant. On a positive note, Pointerra reported its first customer for the 3Dinsight.ai platform. We have reached out to management requesting clarification.
Our gold hedge portfolio returned 2.4% for the month (vs a gold price increase of 3.9%). As at the end of July, the precious metals portfolio is 17.9% of the fund portfolio.
Notable changes to the portfolio over July were:
1. We sold out of our position in Pushpay Holdings Ltd in July. We decided to sell following the resignation of the CFO, and sell down from former Managing Director Bruce Gordon. This follows on from the recent appointment of the CEO, the 50% sell down from CCB founder Christopher Fowler in December 2020, and the exit of the Huljich family. We considered the changes in management and recent share sales as a red flag. Time will tell if our decision to sell was the correct one, however, we have held Pushpay since June 2017, with our holdings achieving a 44% annualised return over that holding period.
2. We reduced our holding in Selfwealth. Selfwealth, although gaining market share from the big four banks, will face ongoing competitive pressures, and will need to continue to innovate (i.e. expend capital to keep ahead of its smaller rivals). Part of our thesis for holding such a high portfolio weighting in Selfwealth was our expectation that negative real interest rates will drive long term demand (above historical trend trade volumes) into the medium term. We were wrong. The demand surge was a direct reflection of the COVID-19 government stimulus packages, and market volatility, which have both unwound. We note, further stimulus measures are inevitable, as the economy’s recovery slows over the coming 6-12 months, although it is uncertain as to what form this stimulus will take.
3. We added to our position in Novonix Limited, as they seek to accelerate and increase the scope of their expansion plans in order to meet the escalating demands driven by the electrification of transport.
4. We opened a new position, which we will discuss the October newsletter, following their Q1 2022 results.
We held 3.4% cash at the end of July.
KEY LEARNINGS FROM THIS MONTH
The key learnings we take away from this month are:
1. One shoul only add to positions as management execute. Examples of this strategy are the additions we have made to our Sequoia and Novonix positions in our portfolio over time. However, there is one notable exception to this strategy, and that is the approach we took in acquiring Cleanspace Holdings. We were guilty of following the reverse strategy, adding to the position as a way to exploit tax loss selling in June, in anticipation of a turnaround in performance.
2. The importance of forward looking business metrics, and applying them. In relation to Selfwealth, web analytics data pointed towards a slowdown. But, we did not act on this data, as we were uncertain of the correlation between web traffic and trades. Had we tracked ASX trading volumes in conjunction with web traffic, we would have been in a better position to make an informed decision and to fail fast. We were guilty of inaction.
3. Our long term strategy is to invest in fast growing businesses, with a strong competitive position, high barriers to market entry, a small market share in a large addressable market, and leadership with a track record of execution. Selfwealth was one of our largest positions, but it does not benefit from high barriers to entry, and does not have a strong competitive position (weak competition does not necessarily equal a strong competitive position). Our portfolio positions should reflect the quality of the business, and we allowed Selfwealth to become a position well out of proportion with the quality of the business.
4. Fail fast. It is inevitable we will get it wrong. In fact, we will be wrong almost half the time. To succeed in investing, one must come to terms with making mistakes and minimising the damage they make. We do this by adding to our positions as they execute, and cutting / reducing positions that fail to do so.
If you have any opinions on the companies we hold, or what like to know more, we would love to hear your feedback.
Regards,
Sean