November 2021 turned out to be a month of two halves, the first fifteen days being very good, the last fifteen, very bad, with most of the indices ending in the red (S&P 500 -1.81%, Nasdaq 100 +0.63%, Euro Stoxx 50 -3.35%, CAC 40 -0.51%). Most of the blame will put down to Omicron, the latest Covid variant, but in truth the downturn had begun before it was even discovered. It is sometimes said that markets can predict the future better than any individual and, while there is some truth to that, there were many other possible reasons for the sudden downturn.
What is most fascinating is that, while indices are still very close to all-time or recent highs (for example, the CAC 40 surpassed its 2000 high for the first time since then during the month), under the hood, there is a real bloodbath going on. One could even talk of a stealth bear market, with smaller companies taken to the woodshed while the biggest companies are holding up the indices.
Some see this as a very negative thing and a harbinger of a larger bear market to come but, historically, there is but little truth to that. The largest companies have always driven the indices. Having said that, it is worth mentioning some examples of companies that have seen their stock prices crater recently.
Zoom Video Communications, a name we have all come to be very familiar with since March 2020, has seen its share prices fall by 40% this year only and by 60% from its all-time highs. Moderna, the vaccine- maker, while still up 200% YTD has seen a 50% downturn from its highs during 2021. While most of our holdings have held up better, we have not been exempt from some of the bloodbath, with PayPal down 20% YTD (it actually fell 20% during the month of November alone) and down 40% from its all-time highs.
Rumors are swirling around of hedge funds in trouble, massive margin calls sent to overleveraged actors crowded in the same favorite names leading to forced selling, thus creating the mayhem we currently see under the apparent calm surface of the indices. These rumors seem to be confirmed when one looks at trading volumes, which have exploded higher. To us, it only confirms the fact that, a) one should be very careful investing in hedge funds and b) hedge funds are just one big fraternity with most of the portfolio managers following each other in the same investments, in the best example of groupthink one can witness.
European markets have, for now, not been as schizophrenic as the ones across the pond but sector rotation is still the name of the game, with previous high flyers such as Total Energies down almost 7%, BNP Paribas down almost 8% and Accor Hotels down 16%. Ever since March 2020, the markets have been in great flux, with massive amounts of money flowing from one sector to the other, from work-from-home stocks to reopening plays and back, according to the latest news. While most of the companies we invest in have somewhat benefited from the changes derived from the pandemic, we have never worried about those flows. We sometimes benefited, sometimes suffered, from them but we never cared about them and nor should you.
To come back to the groupthink prevalent in the finance sector, it seems amazing to us that professionals manage the wealth of their clients according to some piece of news they read in the paper or on the internet. Everybody has become a virologist, it seems. What no one is doing anymore is actually looking at companies’ financial statements. It’s not that we have not been thinking about the current pandemic and its potential impacts, but we have chosen to take a historic approach by looking at past pandemics and what happened afterwards, from the Black Death in medieval Europe to the more recent Spanish Flu of 1918-19. And what we see is that, while they are not game changers, they tend to accelerate trends that were already in place before the pandemic occurred.
For example, while industrialized production lines were already in place before the Spanish Flu of 1918, the lack of specialized workers (some had died during the pandemic) pushed companies such as Ford to dramatically increase the industrialization of their production, thus dramatically increasing productivity in a very short amount of time. We believe something similar will happen again this time and that the trends of more flexible working hours and place will persist and accelerate, which will obviously have negative impacts on some sectors, most of them we did not like way before all this happened (banks, airlines, commercial real estate, etc.).
In this volatile context, the FFM European Selection fund was down -0.45% for the month and the FFM American Growth fund was down -2.82%. Given the bloodbath mentioned above, we believe we have done a good job navigating through extremely complicated markets.
Our portfolio holdings
We would like to take the opportunity of this Newsletter to discuss some of our holdings. Let’s first take a minute to discuss Paypal, our problem child for the year. It is an interesting example in the hedge fund groupthink mentioned before. PayPal has been a massive beneficiary of the pandemic, obviously and, while we did take partial profits around USD 290 (the stock is currently trading around USD 190), the stock never seemed widely overpriced even at its highest levels, given the growth potential.
While we did not expect the 40% drawdown from the highs, nothing really ever surprises us in financial markets anymore. And we can clearly see that trading volumes on the stock have been much, much higher than average since mid- October, an obvious example of hedge funds selling massively once the losses became too important. In markets, prices drive the narrative, not the opposite. And what seemed to be a sublime investment thesis at USD 260 no longer is at 200.
Yes, there are issues at PayPal (the rumored purchase of Pinterest does not seem an amazing idea to us, for example), but the volatility of the share price is much higher than the underlying fundamentals of the company. We therefore remain confident in PayPal’s ability to deliver in the coming years. And, sticking to our investment philosophy, this is the way we look at the fundamental economics of all companies held in our portfolios. In our FFM Global Quality Certificate, we started to invest in Liberty Media Corp - Liberty Formula One.
We are always on the lookout for unique situations such as this one. For example, we love Ferrari because some of their models are worth more used than brand new, which is extremely rare (another example would be the Birkin Bag at Hermès) and extremely valuable to an investor. Formula One, to us, is somewhat. To start with, it’s probably the only real global sport. Yes, people across the world watch England’s Premier League and America’s National Football League stands head and shoulders above the rest in North America, but nothing really compares with Formula One.
To start with, you do not invest in one of the teams so the performance doesn’t depend on the vagaries of the team’s performance (something Manchester United’s shareholders have experienced lately) but just on the overall health of the sport. And, on that front, things couldn’t be better: the only market that was not yet enthusiastic, the United States, has dramatically shifted in the past two years and Netflix Formula One series “Drive to Survive” has probably a lot to do with it. Regardless of the reasons, 2023 will have not one but three Grand Prix taking place on US soil (Austin, Miami and Las Vegas).
The new owners (Liberty Media Group) have imposed a proven US technique in order to level the playing field : a form of salary cap, very common in US sports leagues (baseball being the exception), adapted to racing. In other words, teams are only allowed to spend a certain amount of money each year (around USD 120 million) and no more. This has helped some companies, such as Volkswagen Group, rethink their strategy and it could very well be that both Audi and Porsche could come back to the track in the coming years, which will only increase interest in the sport.
Fisconsult Fund Management
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