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Investment update May 2022

Friday 06 May 2022

Investor insights

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The share prices of our investments have been significantly impacted by global fears over the last two quarters. Consumer Technology companies have been squarely in the cross hairs of this fear with the largest impact occurring in companies exposed to ecommerce and digital advertising. The war in Ukraine and recent lock downs in China have further constrained supply chains leading to lower demand for advertising and lower ecommerce sales. Both factors are transitory and will recover when supply chain pressures ease.

We acquire our portfolio companies paying close attention to the long‐term economics of each business. We don’t buy them because we think they will be higher in the next quarter, we do so because we believe in the strength and durability of the business. When a company falls in price, we immediately return to test our investment thesis. If it is intact and we retain our conviction, we may add to the position. Lower prices provide opportunity.

We understand no‐one likes lower share prices. However, at this juncture, it is imperative that we focus on the strength of our companies and the future opportunity. Fortunately, tough times don’t last for ever. Even wars, recessions, inflation spikes, and supply chain bottlenecks eventually resolve. The best way to respond to this uncertainty is by maintaining our investment discipline and focusing on the long‐term economics of our companies.

Our portfolio companies are selected for their ability to grow irrespective of the macroeconomic back drop because they are supported by structural growth drivers like the growth in digital advertising and ecommerce. And following the most recent quarterly earnings season, these drivers continue to grow, albeit at a slower rate as the effects of
inflation and supply chain imbalances influence the economy.

Zillow, a major holding, and the leading real estate website in the US, experienced share price decline in recent months and is now trading with a market capitalization of $9B. Zillow boasts $3.6B in cash and marketable securities and $1.6B in debt. We expect it to deliver around $1.0 billion in operating profit this year and forecast $2.25B by 2025. Overnight, management announced an additional $1.0B buyback which we expect to begin imminently.  The stock is exceptionally cheap and highlights one of the valuation anomalies in the market today.

We see similar stories across much of our portfolio. And while we do not know what the economy will do over the next 12 months, we are confident our companies will deliver higher revenues and profits in the years ahead.

About the Author
Lachlan Hughes, CFA

Lachlan Hughes, CFA

Chief Investment Officer

Lachlan is the CIO, with responsibility for all investment decisions of the Swell Global Portfolio. Previously Lachlan was a Senior Analyst with NovaPort Capital. During his tenure, the team achieved an annual return of 23.56% over the period from 2009 to 2013, outperforming the S&P/ASX Small Ordinaries Accumulation Index by 15.42% and earning the Lonsec Fund Manager of the Year (Rising Star) award in 2012. Prior to that, Lachlan was a corporate lawyer working with King & Wood Mallesons (Sydney), The Bank of New York (London) and Allco Finance Group.

Lachlan earned the right to use the CFA designation granted by the CFA Institute in 2010. His professional qualifications include a Bachelor of Commerce (Finance) and a Bachelor of Laws.

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