Plenty of solid reasons for optimism

There is certainly plenty to be worried about and we continue to take a balanced view of the economic backdrop and market opportunity set. Economies are reopening and then closing again in fits and starts, which is exhausting the patience and resources of people and business. We also can’t ignore that markets have rallied hard from their lows while unemployment remains elevated in most markets.

But there are plenty of solid reasons for optimism. In terms of markets, we note that the market’s rebound is on the heels of the steepest drawdown ever, markets are forward-looking, and that policy makers have demonstrated an unprecedented commitment to supporting consumers, businesses, and markets. In terms of the virus, we have a better understanding of treatments and spread prevention measures, testing has dramatically increased as has the availability of masks and ventilators, mortality rates may be falling, and the scope of money and talent fixated on finding vaccines and treatments for COVID-19 is unrivalled in the history of medical research. And, of course, there’s the simple reality that history usually sides with the optimists.

We’re rooting for a V-shaped recovery but take comfort knowing that our core philosophical tenets should continue to serve well whether the recession and elements of social distancing drag on for an extended period or otherwise:

Long-Term: In an era where monthly jobs reports are slobbered over, our strategy is centred around putting time on our side. A long time horizon is never more valuable than during a market crash and it was our focus on the long-term drivers of company performance -- competitive dynamics, leadership, capital allocation, corporate culture, etc. -- that kept us oriented on multiyear opportunities while many around us panicked and went to cash. 

High-Conviction: Having a tight portfolio assembled via a consistent, rigorous process is always a positive but it was especially valuable during the COVID-19 crash as we were able to quickly contextualise the impacts of the virus and social distancing on our portfolio companies and make adjustments where appropriate. 

Asymmetric: We’re very particular about the specific traits we seek in our portfolio companies. Namely, we’re after strong positions in growing markets, with pricing power, durable competitive advantages, aligned and experienced management teams, conservative balance sheets, and attractive valuations. Doing so puts us in situations that we think skews the range of outcomes in our favour by offering multiple ways to win and fewer ways to lose. Executing on such an approach should theoretically lead to a portfolio with a high strike rate at the position level.

Investing in beneficiaries of COVID-19

Just because the broader economy is struggling doesn’t mean that some specific areas aren’t thriving. For example, as we first flagged in late February, social distancing would and has changed how we live, work, play, and spend. Cyclically, in some cases -- e.g. toilet paper sales have boomed but end demand hasn’t changed -- but structurally for the likes of ecommerce, digital payments, and social networking, among others

Adyen (AMS: ADYEN) had a strong year due to impressive client wins and the accelerating shift to e-commerce despite weakness in travel-related volumes. The European payment processor delivered year-on-year net revenue growth of 34% during the first calendar quarter despite a 3.8% drop in Eurozone GDP. The company sees no change in the long-term outlook and has continued aggressively increasing headcount in sales and technical areas while still being incredibly profitable with an incremental EBITDA margin of 75%. 

The business has shown the ability to grow outside of core markets and offerings by successfully expanding into physical point of sale terminals, winning deals with massive restaurant groups including Subway and McDonalds, introducing an issuing product that allows marketplace sellers and gig workers instant access to funds, and opening offices in new markets like India, Japan and Malaysia. We can see a significant growth runway and, with net dollar retention of around 130%, there’s still plenty of profitable, high-quality growth to come even just from the existing customer base. We did take the opportunity to slightly trim our position due to sizing reasons but we remain very confident in the long-term prospects of the business. 

PayPal’s (NASDAQ: PYPL) long run of impressive growth -- the business has been consistently gaining share of ecommerce, which itself has been gaining share of total commerce -- was accelerated by the effects of COVID-19. PayPal’s daily new user additions were up 135% in April 2020 relative to the prior year and new users transacted at a significantly higher rate than usual, suggesting these new users are here to stay. To that end, fellow fund holding Visa told the market that card not present volume (basically, ecommerce) excluding travel finished up in May on year-on-year terms to comparable degrees as during the peak of the lockdowns. 

Meanwhile, the online channel became even more important to omnichannel merchants and the many brick-and-mortar merchants who had dragged their feet on selling online before being forced to dive headlong into the channel. Joe, for one, is elated that three different local butchers will now deliver to his home. That’s all to say, both users and merchants, including Joe and his butchers, are finding more counterparts on the other side of the platform, spinning the flywheel of the company’s network effect even faster. The Fund was an aggressive buyer of PayPal in late February through mid-March, increasing our position at very favourable prices, before shaving some off the top late in the year as the position had swelled. It remains a large holding. 

M3 (TYO: 2413) performed well throughout COVID-19. The company’s engagement increased across the board with March site visits in China, UK and the US increasing by 42%, 69% and 129%, respectively. The company acted as a key infrastructure in the Japanese healthcare landscape, providing up-to-date information to consumers and healthcare professionals through articles and webinars, offering additional marketing support services for pharmaceutical companies, providing digital channels for medical representatives to reach doctors, and enabling telehealth consultations for those potentially at risk. LINE Healthcare, a partnership between LINE and M3, has been a huge success, with 5.5 million users acquired by the end of March. 

Though overall a positive year, M3 did have some negatives, such as a slowdown in clinical trials and healthcare professional career mobility. These category impacts appear cyclical, though, while the positive changes to the business look enduring. We look forward to the coming year, as the weaker parts of the business begin to rebound, more partnerships are signed, and M3 participates in the continued digital migration in healthcare. 

Disclaimer: Joe Magyer owns shares in Paypal

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