Loftus Peak speaks with Alan Kohler on the Eureka Report – COVID-19 and the acceleration of disruption


Listen to the audio or read the transcript below.


Well, Alex, you’ve been shooting the lights out. Your performance during the bear market or downturn has been fantastic. Tell us how you’ve done it, or tell us firstly what, what you’ve done. Your six-month performance on your main fund is 15, 16 per cent versus benchmark, down 5. That’s probably a good place to start.

Yes. The master day performance as of yesterday was 7.63 per cent. Since December 31, the MSCI was down 7.34 per cent and since December 31, we were up 9.9, so a relative 16 per cent outperformance. So we’ve done quite well and we’re generating positive returns even when most are generating negative returns. And the answer to the question is we’re not doing anything differently to what we set up before. The portfolio was always a disruptive portfolio meaning, one of the watch words of disruption is that it executes a business model in ways that are different and better than what went before. For example, and we’ve talked about this before, the way to sell things in the past has been to open a shop. If you open a digital shop, you cut out the rent roll, and in doing that you get to pass it on to your customers in lower prices, which then makes you a stronger retailer, etc.

So that’s a thematic that’s been with us from day one, this movement online across business, across retailing across health, et cetera, etc. And what COVID has done is actually accelerated that push because it’s pushed people out of physical offices and physical shopping centres to be able to consume goods and work from home using the remote tools, which, Zoom is one, Skype is another, Google Hangouts is a third, there’s stacks of them.

Alex, is it more than just moving online as or is the disruption theme more broadly being accelerated by COVID-19?

It’s more broadly being accelerated by COVID-19 because it’s forcing people who would otherwise have not elected – who would have otherwise hopped in the car and gone to Woolworths to buy things, it’s forced a whole group of people to actually shop online when they wouldn’t have done before, so there’s a lot more sampling going on. That’s point one. Point two, you see the numbers, I think Netflix penetration in the US has jumped from 61 to 69 per cent in the last few months as people have not been able to get local sport on their cable TV service and have gone instead for an over the top service like Netflix. And you’re seeing similar kinds of problems arising in Foxtel in Australia as well.

I think some of your biggest investments have been Amazon, Microsoft, Alphabet and so on. These are big technology companies and they’ve actually done pretty well, haven’t they? I mean, the sort of dominance, if anything, the dominance of these technology stocks has increased in the past couple of months.

It’s not just that, Alan, one of the things that the big players have been on top of is this what we call cloudification, which is the movement at scale onto online platforms. For example, for a million people to be able to shop online or bank online or visit a health professional online, you need very significant cloud architecture and infrastructure. The big players in that are the big tech giants. Amazon is huge in it, Microsoft is huge in it, Alibaba is huge and in it in China, Google is huge in it. So all of those services which were kind of rolling out before have become more available as a result of the cloud capacity that’s being put in place by these majors. It’s not multiple expansion that we’re seeing as a result of this. What we’re actually seeing is the growth of new business lines within the companies.

That was always part of the appeal of these things, the adjacencies that companies have. For example, we call them rails, but adjacencies is a good word. Apple’s got 1.5 billion connected people in the world on the Apple operating system in one form or another. It’s really a bit of a doddle for them to then put in a couple of billion dollars’ worth of content creation and make that available to 1.3 billion or 1.5 billion connected devices as an add on service and then turn that into a much larger business. Indeed, that’s what Amazon is doing as well. These big companies have increasingly got the rails in order to launch ancillary products. Another company we hold his Tencent in China and indeed, Alibaba in China as well and both of those companies have expanded from their original core businesses into financial services and financial products.

And because they’ve got everyone’s, as it were, details already and they’ve, they’ve got the rails, so to speak, the Tencent rails and the Alibaba rails, adding transactions into that infrastructure is a simple and kind of trivial thing for them to do, but very valuable.

One of your stocks and perhaps, I think, according to your latest update, your biggest holding or the largest proportion of your portfolio, is in a company called Xilinx, X-I-L-I-N-X, which is a bit different to these other ones you’ve been talking about. Tell us about that stock.

We break it into two classes, those companies that are actually disrupting and those companies which are providing the tools to the disruptors. Xilinx, if you’ve ever used an auto parking function on your car, it’s more than likely that there’s a Xilinx group of FPGAs in the background, integrating all the different sensors.

What’s an FPGA?

A field programmable gate array. It’s not important Alan, it’s just do-dad!

What in effect is the do-dad?

There’s a thousand different kinds of them. But what they effectively do is they allow processing to take place in parallel massively. And so that all these decisions don’t have to go through a heavily overloaded central processor, which enables your car as it were, to be able to pick data up from the left-hand sensor, from the right-hand sensor, from the forward-facing camera, the backward-facing camera, and be able to tell you how you’re going on the park. And that tool is also massively important for the video that goes over the cloud for that video to be turned from, you know, pictures, so to speak, to actionable pieces of intelligence, for example. It’s the FPGA in a car that is able to tell you that that thing ahead of you isn’t just a picture of a dog or isn’t just a picture of a person. It is a person because it’s moving in that way, and FPGAs do that as well.

Xilinx is a company we hold as a provider of tools for disruptors and are a very, very important part in the next two or three years. We’re in profit, obviously, on the position. There are some issues with that company as there always are, but I think it’s well on track.

How are you feeling about the market overall? I mean, obviously it’s been tremendously strong since the middle of, well, since the 23rd of March, to be honest. And a lot of market commentators I speak to say, well there’s this massive disconnect now between the economy and the market. Does that apply to your universe as well?

I guess? Look, we are a little bit concerned because in Australia we’ve got one level of COVID management, which is very, very strong and elsewhere in the world it’s not as strong and I’m not sure that everybody appreciates the difference. But it is worth remembering that two of the significant components of the S&P 500 are technology and healthcare. Both of those areas have done very well; technology and healthcare. Obviously, technology for the reasons that I’ve just outlined and healthcare because you know, there are extra strains being put on the hospital system and the healthcare system itself, which is, you know, arguably creating some positive outcomes for the healthcare stocks. Those are two things that are happening. And when you then add in the possibility that there is a limited amount of reopening that can take place.

And therefore, I wouldn’t say that I’d be, you know, flying anywhere internationally, just yet, but you will have already seen that a number of restaurants are doing takeaway services. They will start selectively allowing people back in to eat, et cetera, et cetera. So that is the wellspring for the market’s optimism. I’m not sure that I share it entirely, but, but for the stocks that we are in, we are outperforming significantly, as I said, and we’re not doing anything differently to what we did a year ago, frankly.

Yeah. So, I mean, when you say you’re not sure you share it entirely, do you think it’s possible that the market’s right, or not?

Well, that’s a broad question, Alan. It’s always possible that the market’s right!

In fact, I was always brought up as probably you were, to say that the market’s always right, the market’s never wrong. It’s getting a bit hard to feel that at the moment.

I think we do not have enough data points to actually say conclusively that the market is right. That is the problem with this COVID thing. We just don’t have enough data points, and so I’m not prepared to say that the market is right. I’m prepared to say that that stuff that we’re in will outperform and that is what it’s doing. But it may outperform a worse market than we are currently seeing. I don’t know the answer to that. I think the market’s a little bit ahead of itself. But we’re in the outperformance game and if our numbers are positive, which they are, then so much the better as well.

Do you think this pandemic, we’ll look back on it as being a sort of a turning point or a big shift in disruption in general that there’ll be a big move in disruption?

Yes. This will change the way the world operates for the foreseeable future, without question. Even if they develop a vaccine in the next 12 months and everyone is vaccinated in two years etc, it will change the way food is bought. It’ll change companies and countries’ supply chains. It will have significant impacts on every part of the supply chain and every part of business going forward. It will raise questions as to whether office property trusts, need to be as, you know, are worth what they were worth before as people increasingly can work from home. It’ll raise questions about the value of retail malls, as people increasingly shop online from home. It is already the case that a Zoom call with your doctor is a rebateable health item. That would have been unthinkable only three months ago.

It will very definitely change the way the world operates. One of the reasons that we’ve always been very focused on this disruption area is because it removes significant parts of the supply chain that are actually unnecessary to the end product. I think we said before, you know, if you want to be a retailer, you started a shop, but actually you don’t really need a shop to be a retailer. You just need to have a virtual shop and, and a customer who may be anywhere in the world and that chops out the value of the retail malls in between, and you can see that taking place everywhere.

I suppose that’s been the case for a while, but it’s really now got to shove along, accelerated as you’ve been putting it.

Yes. It’s a forcing event as they like to discuss. This COVID is a forcing event, meaning that people who may not have been inclined to test a whole lot of new ways of doing things, have been forced to do it. And now that they’ve understood that it works and this and that, you know, some behaviours we’ll go back of course, but not all and the trends that have started 20 years ago, which we’ve been investing in for the last six, you know, will continue and accelerate, I believe.

Are there any other stocks worth mentioning in your portfolio that aren’t in the sort of the top five or six that you actually reveal in your update that are worth talking about?

Well, we’re very focused on this company, Roku, I don’t know whether you know it, but in the United States currently, people have their cable subscriptions because of sport. There isn’t any sport going on. The only other way that you can effectively get television for most people is through a Roku box or a Roku television.

How do you spell that?

R-O-K-U, Roku. We bought first bought that company at $30. It’s $124 last night because there’s massive movement onto the Roku television platform. It’s the free version as it were of Netflix. It’s a different business model entirely but the underlying proposition is the same, which is it offers you entertainment that you otherwise would have got from your cable channel and that is a significant grower. I think Netflix is a company that people know and they know we hold it. I think it’s not within people’s understanding that within two years the company will be doing $5 billion buybacks.

They are generating a lot of cash and they are just about they’ll have one more debt raising, I believe, probably about $2 billion, maybe a bit less. And then after that in 2022/23, they will be actually doing buybacks. People haven’t really crunched out the numbers on that.

Isn’t Netflix being disrupted by Roku?

No, not at all. Roku is an aggregator of everybody else’s streaming platforms and Netflix is one of those streaming platforms. For Roku to succeed what they want is richness. In other words, a great variety of streaming platforms and once there is a great variety of streaming platforms that makes Roku itself more valuable. So there’s a sort of a little bit of a network effect taking place inside of there. Netflix and Roku are not competitors. As far as Roku is concerned, the more streaming services and the higher the quality, the better it is for them.

Great to talk to you, Alex. Thanks.

Thanks Alan. Good to talk.

That was Alex Pollak, the founder and CIO of the Loftus Peak Global Disruption Fund.

Please note that this interview was first published to the Eureka Report here and has been republished with permission.

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