- Sean Rapley
July 2021 - Luke's Global Fund Performance Update
Luke's Global Fund achieved a return of -0.9% (in constant currency) return over the month of July, while the S & P 500 returned 4.5% for the month of July. As we start a new financial year, we thought it was an opportune time to review the historical performance of Luke’s Global Fund, which is outlined in Table 1 below:
We are quite pleased with the above results, and we anticipate our portfolio will outperform this year, as the global economic recovery stalls, as economic recoveries typically do as they exit a recession, following the withdrawal of fiscal stimulus, and secular deflationary trends re-emerge late 2021 / early 2022, requiring governments attempt to re-energise their economies with further stimulus. We believe low long term bond yields, combined with our businesses continuing their exponential growth, will be a recipe for high returns in 2021/22.
Our portfolio breakdown as at July 31, 2021 is outlined in Chart 1 below:
Chart 1 - Portfolio Pie Chart
In July the portfolio experienced extraordinary volatility, and was down approximately 15% on July 15 from July 1. However, the transition away from the high growth tech sector to value / cyclical companies appeared to run out of steam around mid-July. Over the next few months, we expect there to be some significant volatility, as Mr Market swings between cyclical and growth themes as economic data and policy decisions unfold over time. A popular macro thesis is that we are living in an era similar to the 1940's where heavily indebted governments flatten the yield curve (through bond purchases) and allow inflation to run unabated, thereby inflating away the enormous government & public debt in the system. Clearly, this is what the Federal Reserve is attempting, however, today, we live in world where technology and demographics are applying tremendous deflationary pressures, which will make it very difficult for governments to sustain inflation, in our opinion. This is why the comparison to the 1940's is a dangerous assumption for investors to make, and the expectations we will experience strongly negative real interest rates may not play out quite as expected.
The contribution analysis of our holdings is outlined below, with strong contributions from Snowflake, Datadog, and Crowdstrike.
Chart 2 - Contribution Analysis Bar Chart
COMPANY REPORTS & ANNOUNCEMENTS
Over the month, many of our holdings reported, including:
Teladoc Health Ltd
Teladoc Health reported their 2nd quarter, 2021 results. Key takeaways:
· Revenue growth of 109% year-on-year, including growth via acquisitions.
· Launched myStrength Complete, a mental health service to their platform.
· Announced largest deal, signing an agreement with HCSC to provide hole-person chronic care solutions.
· Net loss of $133.5 million, with losses accrued for amortisation of intangibles associated with acquisitions, and stock based compensation associated with the Livongo merger.
The lack of transparency regarding organic growth leaves me somewhat suspicious of management, given that organic growth is running at 51%, behind the share count growth in recent years, and the headline growth number management report each quarter.
The valuation of the business has fallen to a level that, on the surface looks attractive, however, we will not be buying until we can see the sustainability of organic growth, and better management of stock based compensation, which has seriously diluted shareholders in recent years.
On July 28, Upstart announced Associated Bank launched personal loans powered by Upstart. Associated Bank has more than 220 branches in the mid-West states of the United States, significantly increasing the reach of the Upstart platform.
Upstart report 2nd quarter results on August 10. Website traffic metrics and deal flow indicates Q2 and Q3 will be very strong quarters.
PORTFOLIO CHANGES FOR THE MONTH
During the month of July, we were relatively inactive, however, we did reduce our position in Crowdstrike, as its valuation stretched to a forward EV/S multiple in excess of 45, whilst holding a +25% position size in the portfolio.
KEY LEARNINGS THIS MONTH:
Re-balancing one’s portfolio, and increasing positions sizes of businesses with strong momentum in terms of business execution and share price appreciation can make a significant difference to performance. Psychologically, we find it easier to sell out of a loser, if we are moving the capital into a business where we have confidence in their execution and future prospects, rather than just converting the asset to cash. We have done little weed trimming in July, but have resolved to do so in August.
If you have any opinions on the companies we hold, or would like to know more about our investments, we would love to hear your feedback.