September Investment Update

Dear investors and well-wishers, The fund advanced 15.5% net in August, taking us to 54% net for the calendar year-to-date (60% ahead of the ASX200 Total Return), and 52% net for the last 12 months. Strikingly, this was achieved with over 35 positions. Since inception, for every dollar the local index has advanced, we have advanced over $5. Our systematic approach to finding winners early has yielded some fairly astonishing returns across a number of stocks:


Updated to 12 September 2020 We also identified a number of other >4x opportunities over the past few years (eg Appen and Pointsbet), but sold out after they doubled. It seems we are slow learners on this - but are endeavouring to improve. While we could have certainly done better, the good news is that we are looking in the right places, and that our systematic framework based around customer love and explosive growth is identifying these companies long before they become household names (or at least, well known amongst professional investing circles) We are currently working on a number of new undisclosed opportunities that, in addition to a devoted consumer fanbase and explosive growth, are trading at the low multiples that marked the stocks above as such good buys. It seems that every time there's a split between investors and customers, the customers win. Perhaps that shouldn't be so surprising. Earlier in the year it seemed a portfolio of widely loved, fast-growing tech companies would be the worst thing to own during the sharpest sell-off since the days of Sir Isaac Newton, (certainly relative to say, cash). Perhaps to the surprise of all of us, it turned out to be one of the best, though the outperformance of tech in the aftermath of market panics is very much in line with market history. We wrote in March that you could rely on us not to panic then, so you could rely on us never to panic. We can only wonder how much was lost in those panicked March moves to cash that were so proudly broadcast by leading fund managers globally. Tech sell-off Of course, even at the very best of times, markets are two steps forward and one step back. There has been a recent sell-off in US tech. Fortunately the work we did to diversify against an incoming rotation bore some early fruit: on one recent day the Nasdaq was down ~4%, but about a quarter of our portfolio was in the green, led by companies like Disney. After such a strong run there is the temptation to hedge or move to cash. But we're not playing for good months, we're playing for good decades. So will stay consistent. Our portfolio companies are currently growing more than twice as fast as we need to hit our (fairly ambitious) return targets, at over 4% a month. So rest assured, we make every dollar invested with us count. Masa is at it again It was amusing last week to discover Masayoshi Son was at least partly responsible for the tech runup, buying $4 billion on call premium (accompanied by retail investors in much larger size). These positions add to volatility, as dealers have to buy as prices rise, and sell when prices fall. If buying during a panic is the sort of courage the market rewards, then buying option upside after strong market rallies is precisely the sort of move that markets tend to punish. We suspect we'll have to wait until all those calls have expired worthless before tech rises again (by some measures it appears we are halfway there). There's plenty of headlines poking fun at Masa. Masa apparently lost 99% of his wealth in the first tech bubble, some $70 billion. He was the only serious investor on the planet willing to pump money into WeWork, almost to the day the firm collapsed. Masa raised his Vision Fund in 2017, one of the best times to be a tech investor in history, yet has managed to find many of the few flagship tech firms that lost money. Yet this is a man personally worth >$30 billion. What did he get right? If we had to guess, it's a mix between being truly long term - and stubborn. Masa invested $20 million in Alibaba in 1999 and still owns over 29% of the company. That is some serious wealth creation, the likes of which can only happen by those who know how to sit on their investments. The true lesson of Masayoshi Son is how much you can really make if you think long term and stick to your guns. One wonders what could be achieved if you combined Masa's courage and stubbornness with a little more skill at selecting companies. E-commerce We have been debating internally over how much of the current runup in e-commerce will reverse as economies open up. One of the more exciting statistics we've come across is that online retail penetration across many countries in South America and South East Asia is below 5%.


E-commerce tends to be winner takes all, as the largest companies can offer a broader range, lower prices, and faster delivery. Sea and MercadoLibre both find themselves in this happy situation, and we expect them to perform for many years to come. Cars We own three car companies, Carvana, Tesla, and one we haven't yet disclosed. All have managed to grow through one of the sharpest auto recessions on record, which bodes well for the recovery. As I write, Tesla is off around 25% from its recent high. Nevertheless, the stock remains up 4x from our initial purchase price, and over 20x from where we bought many years ago. Always worth remembering who the real winners are in tech investing: the long term holders. We still find it surprising that so many thought this production profile was a sell rather than a buy:


We often get asked when is a good time to invest. Sadly the only thing we can really promise is that the stocks we invest in will fluctuate. We do think we're somewhat unique in the listed space for identifying so many high quality companies growing at over 100% per annum organically, which provides the basis for outperformance and also alleviates the relevance of timing. It doesn't really matter when you bought Shopify in March or April two years ago, simply whether or not you did. The same applies to Afterpay, Carvana, Pinduoduo, Livongo, Tesla... I could go on. What we can promise is that we will stay invested in the highest quality and fastest growing companies we can find - with quality measured, of course, in our own particular way. It's amazing how much you can make by following the love.


Michael

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Tanarra

Dear investors and well-wishers, We were delighted to welcome Tanarra as an investor and partner on 1 July. Tanarra is a ~$1.7 billion institutional asset management firm, with investments across

 

 Contact: michael@fraziscapitalpartners.com

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