Some of the best performing funds of 2023 are holding firm on bitcoin and mega-cap tech stock picks that made them big money last year, betting that the surge in prices will broaden out to as-yet untouched areas of the market.
While Regal Partners’ small-cap fund eked out the top spot for Australian equity managers, it was homegrown DigitalX’s bitcoin fund that was the best performer overall, returning just shy of 150 per cent in 2023, according to preliminary data from Morningstar.
2023’s winners: DigitalX’s Lisa Wade, Jason Orthman from Hyperion, Regal Partner’s Todd Guyot, and Cathie Wood of ARK Investment.
DigitalX’s broader digital asset fund also took the third spot behind fellow crypto-asset manager ListedReserve and just ahead of Sydney-based crypto trading house DACM’s fund.
Crypto catapults returns
DigitalX boss Lisa Wade said the rally in bitcoin – up more than 160 per cent in the last 12 months – powered much of the industry’s strong annual gains last year. But for 2024, sifting through the thousands of available crypto assets would be key to future returns.
“When you’ve got such a tailwind, often asset discernment doesn’t really pay off but once people start to understand the volatility, differentiating through sound investment methodologies is what will start to pay dividends.”
Among the major wins last year, Ms Wade’s holding in alternative cryptocurrency solana, which also went on a tear in the lead up to the US regulator approving the first spot-bitcoin ETF earlier this month.
“We had to really take a hit on SOL following the FTX collapse,” she said, referring to the demise of Sam Bankman-Fried’s crypto exchange.
“We downsized but reweighted, when it became clear that the fundamentals were still very strong with lots of people building on that network.”
She’s “cautiously optimistic” for 2024 but said that investors should prepare for more volatility.
“I will say this ten times over: please do your research. Managing these assets is a specialised skill and people shouldn’t take that lightly,” she said.
“Don’t leave money on exchanges, put your assets in cold storage – if you don’t know what I’m talking about, use an asset manager.”
Lisa Wade’s DigitalX fund is the best performer of 2023. Edwina Pickles
Cautions aside, Ms Wade predicted there could be more upside ahead, not just for bitcoin but also for the smaller tokens that are still lagging the rally.
“Bitcoin and the S&P 500 have a performance gap of about 33 per cent, I predict that gap is going to close,” she said. “Beyond that, the broader crypto space is underperforming bitcoin itself by 57 per cent, I think that gap will also close.
“We’ve been getting a lot of people worried that they’ve missed the boat, I just don’t believe that.”
Ms Wade added that uncertainty from major geopolitical events this year, including a heated US election, could also buoy the still-burgeoning alternative asset class.
“The wildcard for the year for many managers is geopolitical risk and the changing political landscape.
“Without wanting to go over my skis, I think bitcoin could be an obvious winner as people start to see it as something that’s agnostic from the Federal Reserve and other central bank currencies.”
The comeback kids
Turning to traditional asset classes, it was the rebound in a handful of key US tech mega-stocks – including Microsoft, Nvidia and Amazon – that drove the returns of the best performing equity funds of 2023.
Morningstar’s director of manager research, Michael Malseed, said that many of the top-performing funds were coming off the back of a difficult 2022.
“Technology stocks in the US took off on the prospect of artificial intelligence and the funds that weren’t overweight those stocks have really struggled to keep up with the benchmark,” he said.
“A lot of these funds that benefited from overweight positions are rebounding from significant weakness.”
That was the case for Brisbane-based growth bulls Hyperion, which took out the top spot among stock pickers in 2023, pipping US investment guru Cathie Wood’s ARK Global Disruptive Innovation Fund by just a few per cent to return 69.3 per cent.
The performance has all-but written off the fund’s challenging 2022, when it tumbled more than 40 per cent. The three-year return now stands at 5.2 per cent per annum
Hyperion’s Mark Arnold and Jason Orthman rode the AI-fuelled rebound. Attila Csaszar
In Hyperion’s most recent letter to investors, portfolio managers Mark Arnold and Jason Orthman appeared as excited as ever about the prospects of AI and machine learning.
“We believe this paradigm shift into AI and ML is real and may have the potential to create a rarely seen opportunity to increase equity values,” the pair wrote.
Sydney fund manager Loftus Peak was also among those to benefit from the AI-led relief rally, with the Global Disruption Fund boasting a return of more than 60 per cent last year.
“I can’t say that we built these positions over the last five years knowing that in 2023 AI would suddenly spring up,” said Loftus Peak chief investment officer Alex Pollak.
“But I can say we’ve owned Nvidia and Advanced Micro Devices, and a whole stack of those companies, for the optionality they’ve provided into AI.”
Mr Pollak said a focus on finding technology-led disruptors had placed the fund in a strong position coming into 2023.
“We were conscious that generative AI was in the wings, but it’s bigger than even we thought,” he added.
“But that didn’t matter because we were already in the most advanced tools either way.”
Among Mr Pollak’s top picks in 2024, he pointed to their long-standing bet on US tech developer Qualcomm. He said the stock had begun to push higher in recent months, after missing out on much of the tech-led rally that its peers benefited from earlier in the year.
“That’s just started its run,” he said.
Loftus Peak’s Alex Pollak says the rally in Qualcomm is only getting started. James Brickwood
“There’s really quite a big story inside of Qualcomm that people haven’t necessarily appreciated.”
Mr Pollak said a cyclical rebound in tech sales would propel the share price alongside rising demand for its products as generative AI makes it way onto hardware. The stock has already climbed 38 per cent since late October.
“We’ve held that for five or six years. At one point it was our largest position, and we’ve just held it patiently.”
His conviction in Qualcomm is part of a broader trend that he sees playing out in 2024. Like Ms Wade’s view on bitcoin, Mr Pollak is betting that the sharemarket’s narrow rally in 2023 will broaden to other companies as the shift to AI proliferates.
“What you’re going to see this year is mass adoption of AI by corporates, governments, educational institutions, etc,” he said. “For whatever reason, the market has been slow to work that out.”
Regal fund crowned
While bitcoin bulls and tech funds rode the strong tailwinds to great heights in 2023, broader Australian equity funds couldn’t say the same, largely because they missed out on the surge in US mega tech stocks.
“It really wasn’t a strong market until the Santa rallies in late November and December. A lot of the Australian equity funds had to wait until then to make their returns,” Morningstar’s Mr Malseed said.
It was the small-cap fund from Phil King’s Regal Partners that posted the strongest performance among Australian equity funds in 2023, returning just over 35 per cent.
Regal beat several other smaller companies funds for the top spot, including boutique firm TAMIM Asset Management and Hyperion’s ASX-focused small companies fund.
Todd Guyot, co-portfolio manager for the Regal Australian Small Companies Fund with Mr King and James Sioud, said the strategy’s ability to short stocks had helped it outperform in what proved to be a difficult year for the smaller end of the market.
Todd Guyot, portfolio manager at Regal Partners, says going short helped his fund. Oscar Colman
“We saw a lot of small cap stocks down 30, 40, 50 per cent last year – you get a couple of those wrong and that’s a lot of alpha that gets taken away,” Mr Guyot said.
The small cap fund was one of many short-sellers to profit from the collapse of lithium stocks, amid a prolonged slump in the price of the commodity.
“Over the past two or three years we did pretty well on lithium after getting in early on, but we’ve been net short for most of last year,” he said.
“There were just a number of lithium stocks that were grossly overvalued and looked like they were going to need to raise capital, which is what happened.”
Notwithstanding lithium, Mr Guyot said Regal was sticking with its long-term bullish view on the resources sector, which he thinks will help drive the fund’s returns.
“We’ve been of the view for a while now that resources are a really attractive part of the market, and we’re still seeing things we like,” he said.
Mr Guyot noted critical minerals tearaway WA1 Resources and assay tech provider Chrysos, which both rallied more than 100 per cent in 2023, as two resources stocks that had fared well for the fund last year.
Fellow resource play, Champion Iron was among the stocks Mr Guyot said the fund was still holding in 2024, as well as hotel booking software company SiteMinder and online luxury retailer Cettire.
“We still think [Cettire] is an impressive global leader in that luxury space. It’s volatile, but we think it can still grow strongly”.
This article was originally posted by The Australian Financial Review here.
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