Loftus Peak Global Disruption Fund aims to deliver a return over the benchmark (below) over the medium term by bringing a disciplined investment process to listed global companies impacted by disruption.
The Fund fell -6.1% net-of-fees during September, underperforming the MSCI All Countries World Index (net) as expressed in AUD from Bloomberg by -2.4%.
The relief rally that powered the first half of the year faded as investors came to understand that no further interest rate hikes was not the same as an interest rate cut, which some fear will not come until calendar year 2025.
The stellar performance of the magnificent seven – Apple, Alphabet, Nvidia, Microsoft, Amazon, Meta and Tesla (which is not a Fund holding) – came to a halt days after the June quarter reports were issued before accelerating (down!) in September, generating the first quarterly negative return for the Fund this calendar year. Markets don’t care for a hiatus. So, there has been discomfort with the lack of visibility of AI applications which some may have thought they were buying when they invested in Microsoft or Google earlier in the year.
It’s true AI won’t butter toast for you. But deployed at scale in datacentres, even the productivity boost of the already available co-pilot for code writing alone is colossal. Large language model usage will also be behind the ever-increasing instances of AI applications like writing marketing materials for Amazon-sized product sets, summarising long documents, instantaneous translation (which Spotify is considering rendering its podcasts into different languages using the voices of the speakers) among literally thousands of others.
The biggest negative for the month was Netflix which detracted -1.3% from the portfolio value. The company lowered its ‘soft’ guidance for operating margins and warned investors that advertising was not yet material to overall revenue. The Fund’s other streaming play, Roku, also declined over the month, detracting -0.5%.
Nvidia generated a negative contribution of -0.7% for the month. Despites the chip company’s meteoric guidance beat last month, investors have sold the stock down as the surge in demand obscures the scale of Graphics Processing Units following the initial demand ramp up from generative artificial intelligence.
Amazon, Google and Microsoft together cut -1.3% from the value of the Fund. The former two have become embroiled in antitrust litigation. Nevertheless, all three are making progress with their burgeoning artificial intelligence offerings. Amazon has made a substantial investment in Large Language Model (LLM) maker, Anthropic AI, Google is nearing the release of its reinforcement learning based Gemini LLM and Microsoft is committing to defend AI Copilot commercial customers against copyright claims.
CrowdStrike, Meta and Teradyne made up the Fund’s top contributors for the month. These three holdings increased Fund value by +0.2% collectively. Better-than-expected quarterly financials from CrowdStrike helped to lift the stock price at the beginning of September with the company beating on key metrics including revenue and earnings. CrowdStrike is benefitting from strong secular tailwinds in cybersecurity which have only intensified with the move to hybrid workplaces and digital transformation. The company’s cloud-delivered platform simplifies security management for analysts, making it an attractive proposition for customers looking to consolidate spending onto a harmonious, best-of-breed solution.
The Australian dollar depreciated -0.3% against the US dollar over the month, which meant the value of the Fund’s US dollar positions increased. As at 29 September 2023, the Fund carried a foreign currency exposure of 89.3%.
What is Loftus Peak Global Disruption Loftus Peak Global Disruption is an Managed Funds investment product that is benchmarked against Developed -World Index and sits inside the Foreign Equity - Large Growth Index. Think of a benchmark as a standard where investment performance can be measured. Typically, market indices like the ASX200 and market-segment stock indexes are used for this purpose. The Loftus Peak Global Disruption has Assets Under Management of 167.23 M with a management fee of 1.2%, a performance fee of 15.00% and a buy/sell spread fee of 0.5%.
How has the investment product performed recently? The recent investment performance of the investment product shows that the Loftus Peak Global Disruption has returned 0.16% in the last month. The previous three years have returned 14.35% annualised and 14.18% each year since inception, which is when the Loftus Peak Global Disruption first started.
How is risk measured in this investment product? There are many ways that the risk of an investment product can be measured, and each measurement provides a different insight into the risk present. They can be used on their own or together to perform a risk assessment before investing, but when comparing investments, it is common to compare like for like risk measurements to determine which investment holds the most risk. Since Loftus Peak Global Disruption first started, the Sharpe ratio is NA with an annualised volatility of 14.18%. The maximum drawdown of the investment product in the last 12 months is -3.82% and -47.5% since inception. The maximum drawdown is defined as the high-to-low decline of an investment during a particular time period.
What is the relative performance of the investment product? Relative performance is what an asset achieves over a period of time compared to similar investments or its peers. Relative return is a measure of the asset's performance compared to the return to the other investment. The Loftus Peak Global Disruption has a 12-month excess return when compared to the Foreign Equity - Large Growth Index of 16.69% and 2.02% since inception.
Does the investment product produce Alpha over its Peers? Alpha is an investing term used to measure an investment's outperformance relative to a market benchmark or peer investment. Alpha describes the excess return generated when compared to peer investment. Loftus Peak Global Disruption has produced Alpha over the Foreign Equity - Large Growth Index of NA% in the last 12 months and NA% since inception.
What are similar investment products? For a full list of investment products in the Foreign Equity - Large Growth Index category, you can click here for the Peer Investment Report.
What level of diversification will Loftus Peak Global Disruption provide? Loftus Peak Global Disruption has a correlation coefficient of 0.83 and a beta of 1.25 when compared to the Foreign Equity - Large Growth Index. Correlation measures how similarly two investments move in relation to one another. This establishes a 'correlation coefficient', which has a value between -1.0 and +1.0. A 100% correlation between two investments means that the correlation coefficient is +1. Beta in investments measures how much the price moves relative to the broader market over a period of time. If the investment moves more than the broader market, it has a beta above 1.0. If it moves less than the broader market, then the beta is less than 1.0. Investments with a high beta tend to carry more risk but have the potential to deliver higher returns.
How do I compare the investment product with its peers? For a full quantitative report on Loftus Peak Global Disruption and its peer investments, you can click here for the Peer Investment Report.
How do I compare the Loftus Peak Global Disruption with the Developed -World Index? For a full quantitative report on Loftus Peak Global Disruption compared to the Developed -World Index, you can click here.
Can I sort and compare the Loftus Peak Global Disruption to do my own analysis? To sort and compare the Loftus Peak Global Disruption financial metrics, please refer to the table above.
Has the Loftus Peak Global Disruption been independently verified by SMSF Mate? This investment product is in the process of being independently verified by SMSF Mate. Once we have verified the investment product, you will be able to find more information here.
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Performance Commentary - August 31, 2023 The Fund’s value fell -0.9% net-of-fees during August, underperforming the Fund’s benchmark, the MSCI All Countries World Index (net) as expressed in AUD from Bloomberg by -2.0%.
Kicking off August was the worrying news that credit ratings agency, Fitch, had downgraded US sovereign debt from AAA to AA+, sparking fresh concerns surrounding the health of the US economy. Further cuts to ratings of US regional banks by leading ratings agencies Moody’s and S&P Global added to these concerns, pushing share markets down in the first half of the month.
Late in the month the US Federal Reserve had its Jackson Hole meeting at which it flagged the possibility of higher rates were the economic data to support it. It has not – immediately following the meeting both job growth and inflation data suggested that the Fed need not raise nor cut, at least until November or even further. Markets subsequently rallied to close out August.
Contributors and Detractors to Return
The largest contributor for the month was Nvidia at +0.7%, on considerable volatility – starting the month at US$465, before falling to US$408 and then rallying into the results and beyond all the way to US$492. The company exceeded quarterly revenue expectations by 24% and is on track to deliver US$17 a share EPS in FY25 (CY24), implying a forward price-to-earnings multiple of under 30x. While this may not be viewed as cheap by some, the company’s historical EPS was around $3/share, so growth in earnings is fivefold, which helps to explain the share price move to US$492.
Beyond Nvidia, there are many other portfolio companies that are benefitting from increased demand for AI solutions, such as Advanced Micro Devices, Arista Networks, Marvell Technology, Microsoft, Alphabet and Amazon. All these companies can lay claim to a valuable piece of the AI puzzle, and so provide diversification away from just one company, thus reducing risk for investors.
Palo Alto Networks, one of the Fund’s cybersecurity holdings, had a tumultuous month. The stock fell after announcing that it would report earnings on a Friday evening – an unconventional time slot (and one which the market interprets with uneasiness) and fell again after one of its peers indicated slowing growth in a key segment. However, earnings came through strongly. The downtrend reversed and the company showcased the robustness of IT security demand despite the tough macroenvironment. This was similarly reflected in the solid earnings of the Fund’s other cybersecurity holding CrowdStrike.
Performance Commentary - July 31, 2023 The Fund grew +5.4% net-of-fees during July, generating +2.6% outperformance against our benchmark index, the MSCI All Countries World Index (net) as expressed in AUD from Bloomberg, which was up +2.8%.
It now seems that markets were right to rally in the first half of the year, with the US Federal Reserve’s program of interest rate rises to curb inflation appearing to have worked. The consumer price index remains controlled and even more pleasing is the absence of the predicted recession, with unemployment sitting around a respectable 4% and second quarter GDP up +2.4% annualised.
Contributors and Detractors to Return
The Fund’s performance was underpinned by Roku (increasing Fund value by +2.1%), Qualcomm (+1.3%) and Alphabet (Google) (+0.8%), with good contributions from companies such as ON Semiconductor (+0.2%) and Wolfspeed (+0.3%), the latter two of which are important players in vehicle electrification. ON reported on the last day of this month, with better-than-expected earnings and revenue for the quarter and an upgrade to guidance to both in the three months to September this year.
Qualcomm, our largest position, advanced because of the perception that smartphone and laptops are set to recover in the coming months. Roku performed very well late in the month from an oversold position. Investors again contemplated the company’s commanding lead in free ad-supported streamed television (FAST) at a time when advertising growth is poised to re-accelerate.
Alphabet (Google) surprised with a return to advertising revenue growth and an extension in profitability for the Google Cloud Platform first shown last quarter.
Taiwan Semiconductor was the biggest detractor for the month, cutting -0.2% from the Fund’s value, with the next three worst detractors (Netflix, Microsoft and Arista Networks) summing to only a -0.4% reduction.
Microsoft’s relative underperformance is to a certain extent a function of timing – the company is up around +40% this year as it has made all-time highs fuelled by artificial intelligence (AI). Microsoft’s AI products have access to one of the broadest groups of enterprise customers in the world today. Already, the company is adding AI to applications including Office, Teams and Enterprise, with new tiered pricing announced earlier in the month.
Performance Commentary - June 30, 2023 The Fund grew +4.1% net-of-fees during June, as markets continued digesting the opportunity in AI and the economy proved more resilient than expected in the face of rising interest rates. The MSCI All Countries World Index (net) as expressed in AUD from Bloomberg rose +2.6%, resulting in outperformance by the Fund of +1.5%. Notably, the Federal Open Market Committee elected to pause the benchmark Fed Funds Rate at 5.25% – the first time since the beginning of their inflation-busting campaign in early 2022. The move was guided by May data that showed a drop in the US consumer price index to just 4% year-over-year from a peak of 9.1% in June 2022, giving policy makers some comfort that interest rate hikes are having the desired effect on the economy. Nevertheless, Fed Chair Jerome Powell reiterated his resolve to hike rates further if needed.
The Fund’s quarterly performance of +13.2% net-of-fees was supported by gains in long-held companies like Netflix, Amazon and Microsoft, together making up almost half of the contribution. Our semiconductor holdings, including Advanced Micro Devices (AMD), Nvidia and Marvell Technology enjoyed a boost from the advent of generative artificial intelligence and its potential future iterations and uses. Loftus Peak has always held exposure to this megatrend, recognising its nascent potential. For the six-month period to end June, the Fund grew +42.5% net-of-fees which was again thanks primarily to our core exposures to semiconductors, hyperscalers and streamers.
Samsara was the largest contributor to return in June, increasing Fund value by +1.2% in the month. The company’s June performance cemented its strong run in 2023 thus far, becoming one of the Fund’s top performers year-to-date. Samsara’s first quarter earnings revealed revenue growth of +43% year-on-year and improving operating margins, raising the stock price early in the month. Netflix was the second largest contributor, adding +0.8% to Fund value. The company is currently embarking on a campaign to monetise the ~100 million users accessing Netflix via password sharing. Preliminary third-party data released during the month has suggested the crackdown has been effective. We await confirmation of these figures at Netflix’ second quarter earnings result in July.
The biggest detractors for the month were Alphabet and AMD – two stocks that made significant gains in the first few months of the year. Regulatory headwinds contributed to Alphabet’s June fall with news that both Canada and California were moving to institute legislation aimed at charging big platforms for linking to news stories. The bills echo the familiar Australian legislation passed in 2021.
Performance Commentary - May 31, 2023 May’s performance saw the Fund rise a strong +13.7% net-of-fees – the Fund’s best absolute monthly result since inception in November 2016. The benchmark grew a more subdued +1.3% resulting in outperformance by the Fund of +12.5%, a record for monthly relative performance.
These figures come after a short but significant rally took hold in the second half of the month. Following Nvidia’s earning call – the first time the AI opportunity was enumerated by the company at the revenue level – AI exposed companies soared. This was particularly true of the semiconductor companies which produce the tools driving artificial intelligence.
Across the month, investors wrestled with the risk of the U.S. reaching its debt ceiling and the possibility that the world’s largest economy could default for the first time in history. These fears were alleviated following bipartisan support for a bill; increasing the debt ceiling and cutting back future spending modestly. The bill passed the U.S. House of Representatives on the final day of the month.
Year-to-date, the Fund is up +36.9% net-of-fees. The Fund has generated returns of +18.2% p.a. net-of-fees since inception – which translates to +6.4% p.a. outperformance net-of-fees.
Performance Commentary - April 30, 2023 April saw the Fund value fall -4.4% net-of-fees as investors fretted over the prospect of a recession of uncertain duration and depth, and one which would be exacerbated by a further interest rate hike. This was despite the bank bailouts the previous month, including the troubled First Republic Bank which limped through April badly wounded. First Republic’s issues are part of a larger story around regional banks, however the latest batch of big bank earnings have reassured investors of the health of the overall financial system.
The poor April outcome is not ideal but comes after the +25.9% net-of-fees gain the Fund generated in the first quarter of this calendar year, with March alone contributing an uplift of +9.1%. The -4.4% net-of-fees performance by the Fund was -7.1% below the MSCI All Countries benchmark in Australian dollars which gained +2.7% in April.
Performance Commentary - March 31, 2023 March numbers built on the strong January and February performance with the Fund finishing the month up +9.1% net-of-fees. Economic data released early in the month implied that inflation could be more persistent than expected, requiring a more hawkish response from the US Federal Reserve, with comments from Chair Jerome Powell exacerbating these concerns, driving yields up and stocks down. Then Silicon Valley Bank and Signature Bank collapsed, followed by the fire sale of an embattled Credit Suisse to rival UBS. US regulators acted swiftly to guarantee the deposits of American banks, halting a possibly more severe systemic banking crisis. It appeared to spell the end of the aggressive rate tightening from the US Fed, with one wag noting that ‘whenever the Fed taps the brakes, someone goes through the windshield.’ Markets rallied, and Loftus Peak rallied harder: the Fund outperformed substantially in March, finishing +5.2% above the benchmark MSCI All Countries World Index (net) as expressed in AUD from Bloomberg.
For the March quarter, the Fund gained +25.9% net-of-fees which is outperformance against the benchmark of +16.7%. Through the quarter, the Fund benefitted from easing macroeconomic concerns and a rotation back to technology, particularly in semiconductors and big tech.
Performance Commentary - February 28, 2023 February opened weaker after January’s strong performance, with evidence of persisting inflation curbing investor optimism that US interest rate cuts would happen this year. Nevertheless, the Fund gained +3.7% net-of-fees, with solid outperformance of +2.3% relative to the benchmark MSCI All Countries World Index (net) as expressed in AUD from Bloomberg. Since inception, the Fund has generated +15.8% p.a. net-of-fees which is +4.8% p.a. outperformance against the benchmark.
Turning to the bigger picture, inflation is still the major worry and is driving market volatility, with the United States consumer price index (CPI) rising +0.5% in January and +6.4% annually (Source: US Bureau of Labor Statistics 14/02/2023) against estimates of +0.4% and +6.2% (respectively). This pushed 10-year Treasury note yields to the highest level since November last year (Source: Bloomberg 28/02/2023). The futures market is pricing in rates of ~5.4%, which indicate at least three more 25 basis point increases from the current upper bound level of 4.75%.
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