April Portfolio Update | 2020

Thoughts on the Market: April Edition 

 

V-Shaped Recovery? So far so good, but... 

The markets continued their recovery from March lows, with hopes pinned on the rapid response from governments around the world to backstop workers through aggressive unemployment benefits and their support of affected industries through favourable loan programs. Behind the scenes, massive liquidity was provided to financial markets to stabilize bond markets, which flowed through to equity markets. As well, epidemic modelling of COVID-19 cases and hospital data indicates that infection rates are peaking or declining in many hard-hit jurisdictions, allowing governments to start implementing plans to re-open shuttered sectors of the economy. 

There are two key unknowns moving forward: the path of the virus and the path of the economy. Naturally, these are interlinked, with a second wave potentially causing a retightening of social distancing measures. As well, the strength of the recovery will depend on consumer confidence in the ability to safely shop, dine and travel. 

This brings us back to the roles of governments, particularly public health authorities. Japan, South Korea and Hong Kong have been able to control the spread of the virus without drastic lockdown measures through contact tracing, testing and public masks. Whether Western governments can effectively implement such measures will go a long way in determining additional economic pressure.  

This crisis has created a unique recession, with many industries shutting down completely while traditional office jobs have largely been transferred to a work-from-home environment. This has several implications. First, the jobs lost (restaurant servers, flight attendants, etc…) can quickly be re-hired when lockdowns end. In other words, the labour force has not been structurally impaired. Second, the internet has entrenched itself as a basic necessity, following shelter, food, water and power. It is clearer than ever that companies leveraging the internet can fulfill the baseline economic and social requirements of society. 

April’s “V” recovery was driven by the big social media stocks and other companies such as Microsoft showing they can power through the pandemic. The improvement from here on will be slower as companies that have been materially impacted gradually recover. The investment world had been waiting for the end of the business cycle for some time. It will quickly move to anticipating a recovery and paying a higher multiple for consumer cyclicals, which normally lead in the first few years of an economic cycle.

GLOBAL EQUITY GROWTH FUND

The Global Equity Growth Fund rose 13.3% in April, bringing its year-to-date return to –9.7%. During the month, two of our portfolio holdings, Amazon and Netflix, reached all-time highs, benefitting from shelter-in-place regulations. The technology sector continues to perform well as products built on top of the internet become more and more utility-like. For example, although Facebook and Alphabet did not trade to their highs (both rely on advertising as a primary source of revenue, which tends to be more economically sensitive), usage of both companies’ products surged in April.  

Consistent with the theme of internet and communications, we added a starter position in Twilio to the portfolio, with a 1.5% weighting. Twilio has created a software telecommunications network that easily integrates into third-party ‘apps’ through APIs. This means that Twilio customers can easily integrate Twilio’s communication network into an app, providing cellular network coverage globally. For example, Uber uses Twilio to send text-SMS messages to riders all over the globe (after failed attempts at creating an in-house system). Software stocks have largely outperformed through the Coronavirus recession. However, Twilio charges users on a per-message/usage basis and thus its revenue has been impacted by lower demand from travel-based companies like Uber and AirBNB. We expect that its shares will recover with additional client wins, new product introductions and increased mobility.  

To fund the purchase, we sold our remaining shares in Gilead. The company has been in the limelight recently as its anti-viral drug Remdesivir could present the best therapeutic treatment option for COVID-19. The company has indicated it does not intend to ‘build a business’ on this drug, which we take to mean that it will not generate substantial economic value. While the goodwill may boost sentiment on the name, we believe there is better value in other sectors.  

INCOME GROWTH FUND

The Income Growth Fund Rose 11.7% in April and is now down 27.1% year to date.   

During the month, we used the weakness in the general market and energy-related stocks to initiate a position in Gibson Energy Services. Gibson has a strong position in the oil storage market in Western Canada. We believe the share price was unjustly impacted with the rest of the sector and expect Gibson will continue to see strong demand for its oil infrastructure assets as crude supply outpaces demand. In 2014-2016, when oil prices fell from ~US$100/bbl to a low of US$30/bbl, Gibson’s infrastructure profit grew ~40%. The company has a strong balance sheet and a low payout ratio.  

We sold two of our holdings during the month. After a strong run (+40%), we quickly sold our Summit Industrial REIT position and redeployed the proceeds into other portfolio positions. We also sold our remaining stake in High Arctic as the outlook for oil services activity is poor.  

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