Fisher and Paykel chief executive Lewis Gradon. Photo / File
OPINION:
We have been on an extreme rollercoaster ride in 2020, experiencing all the highs and lows of a full market cycle in just 9 short months.
Periods of turbulence like this often prove to be great learning experiences for investors. There have been some new investing lessons from the Covid-19 pandemic - we have learned a lot at Fisher Funds.
And sharp reminders of age-old investing and business principles that have been learnt in prior crises.
So, reaching out to all those pre-1990s babies, this is our RTR Countdown. The top five lessons from a remarkable year. Lessons that resonate over time.
1. CASH IS KING
As Johnny Cash said, "Success is having to worry about every damn thing in the world, except money".
Many companies learnt this lesson the hard way in the 2008 Global Financial Crisis (GFC). Keep debt levels low, have access to cash and credit. Bill Gates used to insist on Microsoft holding enough cash to pay all its people for a year even if it had no revenue. That would have come in very handy for most businesses in 2020.
While key Fisher Funds holding Auckland Airport did not have enough cash and liquidity on hand to do what Bill insisted, the Airport realised very early that Covid was going to significantly impact its business. So it raised capital early and aggressively. This has allowed Auckland Airport to navigate the unprecedented shock to its revenues with clear eyes.
On the flipside, United Airlines did long-term damage to its businesses by trying to maximise short-term shareholder returns. United (also Delta, Southwest and American Airlines) borrowed billions of dollars in recent years and paid out the majority of cash flow to shareholders in dividends and share buybacks. Shareholders are now paying the price as the airlines were forced to take a government bailout and United Airline's share price has plummeted 50 per cent+ this year
2. GO THE EXTRA MILE FOR YOUR CUSTOMERS
I am sure Marvin Gaye was referring to customers in "Aint no mountain high enough" when he sang, "If you need me, call me, no matter where you are".
With a lot of people struggling during Covid there was a real opportunity to help your customers and build long term loyalty. Going the extra mile to help when other suppliers are unable to deliver the usual level of service provided a chance to gain new customers.
Xero (one of Fisher Fund's largest holdings) put a freeze on product price increases while simultaneously introducing more products into its offering for free. Within 7 days of the jobkeeper subsidies being announced in Australia, Xero released a turnover calculator that allowed its small business customers to easily calculate whether they were eligible for the subsidy.
Xero introduced a starter plan that made it cheaper and easier for its customers and to cater for the acceleration in small business formation. Xero accelerated the release of very short term (30 day) cashflow forecasting tools.
Vista released a cinema re-opening software package to help its customers get back on their feet. The software allows the cinema to easily allocate "socially distanced" seating. Vista's Movio business released Movio Cinema Essentials which helps a cinema sequence the re-build-up of its marketing budget. It is early days but Vista has been winning big customers off its smaller competitors recently, even though its products are more expensive.
3. LOOK AFTER YOUR PEOPLE
Surely Josh Groban had Mainfreight and its people in mind when he sang "You'll Never Walk Alone"?
Look after your people, especially in a crisis. Fisher Funds second largest holding, Mainfreight, did just this - retaining all its permanent people and paying discretionary bonuses in-line with last year during Covid-19.
Actions like this supercharge the existing strong team culture at Mainfreight. As a result, its people want to go the extra mile and deliver superior customer service.
On the flipside, some of Mainfreight's competitors responded to the crisis by cutting costs, impacting culture and people. That usually results in lower customer service. And is one of the reasons Mainfreight's market share accelerated at the fastest pace ever during the crisis.
4. BE PREPARED AHEAD OF TIME
As Pink Floyd taught us in "Time", be prepared before "the time is gone, the song is over"
While Covid was impossible to predict, many companies had learnt from the GFC and developed financial and crisis management plans to deal with deep recessions. These companies identified costs and projects that could be cut back on without damaging the business, if needed. As a result, they were quicker to react than peers.
House price inflation (HPI) is a key driver of Summerset's business (Fisher Funds owns more than 5 per cent of the company). And HPI is outside of its control. For this reason, Summerset has been doing stress tests on the impact of changing HPI on its earnings and balance sheet for years.
It was obvious early during Covid that Summerset's balance sheet could withstand a severe slump in sales (almost no new sales for 9 months). This provided investors that understood this a great opportunity to buy shares at bargain prices.
On the flipside, the US healthcare system has struggled with Covid-19 more than most developed countries. Its private healthcare system, driven by businesses targeting efficiency and short-term profit, resulted in a lack of capacity and pandemic preparedness.
5. TAKE ADVANTAGE OF UNEXPECTED GROWTH OPPORTUNITIES
Eminem's "Lose Yourself" is an arguably timeless reminder about seizing the day.
Some businesses were lucky to be positioned in industries that benefited from consumer behaviour changes. Some handled this better than others, accelerating growth strategies and increasing spending to support this growth.
Unlike Marshall Mathers, Lewis Gradon's palms weren't sweaty, knees weak, and arms heavy. But Fisher & Paykel Healthcare (Fisher Fund's largest holding) aggressively accelerated its production of hospital products that remain in heavy demand during Covid.
The company was prepared ahead of time with a strong balance sheet and 30 per cent of its production capacity idle for just such an emergency. Fisher & Paykel Healthcare seized the day and saved lives.
Innovation, agility and coming to grips with technology are three themes this year.