Garraway Global Equity Fund: Review of 2020

The Garraway Global Equity Fund B GBP delivered a return of 22.76% for 2020, outperforming the MSCI World total return by double digits.

Once again, the Fund has beaten a number of high-profile peers and ended the year comfortably ahead of the sector average which yet again failed to beat the benchmark. We are pleased to note that despite the extraordinary test that the pandemic presented, the Fund has met its investment objective of delivering superior risk adjusted returns. The level of resilience the Fund demonstrated when the markets fell off a cliff in March is of great comfort. The Fund drawdown was also amongst the best in class and was the first to turn positive for the year versus well known peers to which the Fund is regularly compared.

The top performance contributors for the year have been PayPal, Microsoft and Adobe. Other significant contributions were derived from Veeva and Amazon. Unsurprisingly all these names have benefited from the pandemic.

PayPal was the top performance contributor as paraphrasing the words of PayPal’s Chief Executive Officer Dan Schulman ‘the pandemic has made PayPal more relevant than ever before’. The company enjoyed a blockbuster year. During the early days of the pandemic, the firm was adding a staggering 250,000 new active accounts a day. Over the third quarter, the company posted its strongest growth in total processed volumes and revenue in its history, and projected to add about 70 million active accounts for 2020. This equates to a nearly 23% growth rate as the company had just surpassed the 300 million milestone in 2019 to end the year with 305 million active accounts.

Microsoft started 2020 on a positive note. The company reported strong quarter end results for the calendar year end of 2019 with particularly robust figures from Azure, LinkedIn and Office 365 commercial. Chief Executive Officer Satya Nadella famously said that the company ‘saw two years’ worth of digital transformation’ during the company’s fiscal third quarter results. As a result of the lockdown, as highlighted in the September quarter, the company continued to enjoy consumer related strength in PC demand and gaming. Microsoft Teams usage growth surged to 115 million daily active users, up from 32 million users in the second week of March.

As the digital content creation software market dominant player, Adobe also benefited from the accelerated shift towards digitalisation. In the initial phases of the pandemic, the company benefited from Adobe’s software as a service model. As companies scrambled to adopt to remote working, management teams were focused on their company’s actual survival, so new projects, capital expenditure and discretionary spending came to a grinding halt. However, Adobe’s subscriptions, which do not require any action from its clients, kept coming in.

The firm reported strong fourth quarter results which beat market expectations on both top and bottom line and management provided a positive outlook. Activity remained heighted as a result of the extended work from home environment. Interestingly, during a recent Investor day, management disclosed that the total addressable market is now expected to be $147 billion in fiscal 2023, up from $128 billion in fiscal 2022.

The main detractors for the year have been Amadeus, Walt Disney and JD Sports Fashion, albeit many of these losses have been marginal. These names have rebounded strongly since the vaccine news was announced.

Our satellite position in Amadeus was the worst performance attributor. The company which operates the leading IT platform in the travel industry was badly hit as traveling came to a practical standstill.

JD Sports Fashion’s share price had slumped 42% in March as the firm had to close practically all its physical stores due to the lockdowns. Its well-invested multi-channel platform, net cash resources and meaningful capital cushion provided comfort that the firm was well positioned and had the financial resources to come out of the pandemic in a better position than most.

Any fears were laid to rest as the firm’s interim results materially beat expectations. The company was able to practically maintain its turnover. This was due to a surge in online volumes which grew threefold during lockdown and an impressive showing from its Finish line acquisition in the US. Whilst the shares have underperformed the market during 2020, the firm is in a far stronger position than before the pandemic. Market share has been won, there is now more clarity on the US Finish acquisition, which increasingly looks like a phenomenal deal for JD Sports Fashion, and there is far greater brand awareness on a global landscape.

We sold out of Disney. Whilst we admire the company and understand the logic behind the company’s push towards DTC, we are sceptical as to whether the company is able to generate cash returns on its invested capital in excess of its cost of capital over the coming years. Therefore, in line with our investment strategy and sell discipline, the position has been sold.

Over the year we bought positions in Illumina, which is the market leader in genomic sequencing, Intuitive Surgical, dominant in robotic assisted surgery and Ayden, a leading payments gateway.

Malcolm Schembri, Fund Manager