Pie funds

[D. Fender]

From their latest slice of PIE

"Prior to Titan’s downgrade, Pie had been reducing,and its weighting in the funds had halved from12 months earlier. It was no longer a top 5 stockin Growth and Dividend and our plan was tohave exited by March 2015. In recent times I’d hadgrowing concerns about the robustness of theirbusiness model. That said, the team clearly gotthis one wrong and for that I will admit we madea mistake. "

Pie is now out of TTN completely.

[Joshuatree]

ihave no need or interest in doing that but maybe you do

[D. Fender]

ihave no need or interest in doing that but maybe you do

OK. It's up to you.

[D. Fender]

What happened with TTN was the number of shares held reduced by 7% in the 12 months prior to the profit warning on 2nd October.

[kiora]

I think there are some good points on both sides of this debate. But I've done my research and here are my final thoughts on the matter:

1. Pie Funds Board - there have been a number of changes to the board in the past 2 years, especially for such a small company. The current board is Mike Taylor, Richard Avery-Wright, Steve Nichols and Roy Knill. Richard Avery-Wright is also the sole shareholder in Castle Point (a new NZ/Aust fund manager) so is in almost direct competition with Pie Funds. Steve Nichols used to work with Mike Henry, who was also on the Pie board. Mike Henry is Mike Taylor's father in law. Roy Knill is an Auckland doctor (GP) with no fund management experience. He owns 5% of Pie's equity and is also on the investment committee. My concern: who on that board is going to stand up to Mike Taylor as a truly independent director?

2. Investment Committee - includes Mike Taylor, Mark Devcich, Chris Bainbridge and Roy Knill. Mark and Chris work at Pie Funds, have been trained by Mike Taylor and have never worked anywhere else in fund management, and Roy is a GP as outlined above. There is not a single independent voice on this committee. Again, who's going to stand up and ask the hard questions on stocks like TTN?

3. Capacity - if a fund is closed, it should be closed. In this type of concentrated small cap strategy, fund size is the enemy. Letting in more money is detrimental to existing investors. If the Pie Funds directors/staff want to invest more, they should take capacity as investors withdraw, not keep adding more on top of that.

4. Transparency - or lack of it. Sure, some stocks get written up in the newsletters, and some mistakes get discussed. But what about stocks like TIL (Ecoya), ECV, PSZ and CGO, on all of which Pie has filed substantial notices? Note that in the sector breakdown in the newsletters, TTN was classed under 'Energy'. It's not an Energy stock.

5. Changes to performance reporting/being selective with dates - when a fund manager changes the way it reports performance with no explanation, it throws up a few questions. As does changing the dates on charts to make the story look better.

6. Focus - not only is the CEO running Pie Funds (now with 5 funds and $190m FUM) and managing 8 employees, he's also running (and writing) a financial/lifestyle magazine and flying round the world doing manager research. Compare this to 2.5 years ago when it was 2 funds, $30m FUM and 3 employees.

The track record is beyond reproach, but it is past performance. The big question is where it goes from here.

OR the contrarian view regarding the board could be DON'T elect an independent accountant/lawyer/fund expert as then Piefunds performance is MORE likely to revert to an average fund performance ?

[D. Fender]

The performance numbers to 31 October are now available from Morningstar.

[bull....]

The performance numbers to 31 October are now available from Morningstar. There are 20 funds in the Australasian Equity PIE fund category.

Pie Growth is last place with a return of 3.92% for the 12 months to 31 October. Pie Dividend is 17th out of 20 with a return of 5.04% for the last 12 months. Pie Emerging is in 10th place with a return of 13.55% for the last 12 months.

The top performing funds all achieved returns of 15%-19% over this period.

Maybe one year is too short a period to judge a trend, but let's see how things play out from here.

Interesting, I find most fund managers stated returns on websites as potentially misleading as they tend to display a rolling 12mth return, I would prefer calendar yr return.

[D. Fender]

Interesting, I find most fund managers stated returns on websites as potentially misleading as they tend to display a rolling 12mth return, I would prefer calendar yr return.

I'm not sure how 12 month rolling numbers are misleading. I think they're useful. Calendar year returns don't help an investor see what their own returns have been, whereas rolling 12 month/3 year/5 year numbers give a better idea, because at least once a year you see these numbers from the month you invested. The vast majority of managers show rolling numbers rather than calendar year returns.

[D. Fender]

Are all the PIE funds limited to only buying small cap companies? (Although surely the Dividend Fund would not be small caps but REITs?). That would explain a lot. Its getting much harder to find any value in the small cap space, most are now fully valued, if not over-valued. Anything that is cheap is cheap for a good reason, and the market seems to be quickly trimming the over-valued stocks like RFL and AZV. With Australia staring down the barrel of a recession, the small caps are usually the first to suffer (and the last to recover which is why 2011 - 2013 were such great years in this sector) so its going to be tough going in this space from here. Unemployment is rising in Australia, the heat is coming out of the property market, consumer confidence is down to GFC levels. I have found myself buying into big cap stocks, for the first time in a few years (eg. LEI, COH) - if you don't have the flexibility to change your style of investing because you are locked in to a fund mandate you can be stuck in an underperforming sector for the entire length of time it takes to come out of the cycle.

They usually invest in the small end of small caps (typically up to $300m market cap) and concentrated (max. 15 stocks per fund for the Australasian funds). The Dividend Fund is small cap equities too, just ones that pay dividends.

The Global Small Cap Fund is a global small cap fund of funds, but they manage the Australasian allocation both direct and via their own funds.

They can go to 100% cash in all funds.

[D. Fender]

This is so true. Those outsized portfolio returns of 250%+ are not the result of every company you buy appreciating by 35% a year. Its the result of one of those companies appreciating by 300%+ a year. And being in that "lift" is something you would not have been able to pick beforehand. Its luck that you got in early, and good fortune that the company did so well. In my case, I had two stocks doing the heavy lifting, INA and MNF. INA managed to survive the GFC and went on to recover (although its still not back at its pre-GFC levels) and MNF was a tiny little niche VoIP provider that no-one could see turning into the serious telco it is today. I've only ever had one other big lifter in my portfolio and that was during the 2000's when ALL went from 88c to $11 - and again no-one expected it to go to such lofty heights, let alone surpass them and head to $17, before crashing and burning again back to $1.88.

So yeah, we all look like geniuses, but when you look deeper and realise it is more the case of striking it lucky once or twice, then those years when you don't have one of those stocks in your portfolio the "real" returns come out. Problem then is that people get desperate for the next big 10-20 bagger in order to keep up their portfolio performance, and they take on more risk in the search for it, buying things that they normally wouldnt touch in the hope that it will be a huge turnaround, discover the cure for cancer, strike oil, or ride an industry boom etc - anything that will see the company's share price soar. But the increased risk usually results in reduced returns, not greater ones.

That is why you should always beware past performance, as its no guarantee of future performance.

Outstanding post KW. Worthy of inclusion in a Warren Buffet shareholders letter.