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AIM 2021 Interim Letter

07/07/21

The first half of 2021 has provided no shortage of ‘big picture’ topics to be concerned about: take your pick between the pace of vaccine-rollouts, ongoing border closures, geopolitical sabre-rattling, the risk of personal and corporate tax increases, or fears of rapidly increasing inflation requiring an offsetting rise in interest rates.

Unsurprisingly, whether the current pick-up in inflation is ‘transitory’ or ‘structural’ is the topic du jour. It remains a question that will only be answered towards the end of 2021. While we remain mindful of the risk of inflation, the AIM Global High Conviction Fund owns a concentrated portfolio of highly cash generative businesses with pricing power, meaning we should benefit from a possible uptick in inflation. As an investment team, we remain focused on the fundamentals of the businesses we own and understanding their long-term destination, rather than trying to predict short-term macro-economic outcomes in which we have very little edge.

As an example: around this time last year, the ‘shape’ of the economic recovery following the COVID-induced global recession was endlessly debated. Would we have a V-, U-, L-, J-, or K-shaped recovery? (Or our favourite: the ‘Nike swoosh’-shaped recovery, which is really just a J-shaped recovery with better branding!) This topic is hardly mentioned these days, despite the vast amount of energy expended on predicting it last year.

To our thinking, the lesson is not that the macro-economic backdrop does not matter, but rather that long-term investors are better served in trying to understand how the businesses they own (or might look to own, should they go on sale) are positioned to navigate periods of distress and subsequent recovery. Given that we favour well-capitalised and cash-generative businesses with deep economic moats, we believe that most of our holdings took the opportunity presented by the pandemic to a) take market share, b) allocate capital to attractive acquisition opportunities, or c) permanently reduce costs without reducing their capability to service their clients, which will lead to sustainably higher margins.

For the financial year ended 30 June 2021, the AIM Global High Conviction Fund (GHCF) delivered a return of +25.80% after all fees. This compares to a benchmark return of +27.52% over the same period.

Though we have slightly lagged the benchmark over the measured period, a deeper analysis of the drivers of our performance (see Part One of this letter) gives us confidence that our process in identifying and owning high-quality businesses is functioning as desired. Since November 2020 – when vaccines were first announced – there has been a meaningful rally in sectors that we simply consider outside the bounds of our investable universe due to the businesses not meeting our minimum sustainable return on invested capital hurdle-rate. This includes the banking sector, as well as most commodity-based sectors (such as energy, mining, etc.) and real estate.

We believe that being able to keep pace with the benchmark over the financial year despite not owning businesses in the abovementioned sectors reflects positively on our stock selection and balanced portfolio construction processes.

Please find a link to the full letter below, it is split into the following sections:

• In Part One, a detailed review of the drivers of performance for the 12-month period ended 30 June 2021

• In Part Two, an update regarding our current Fund positioning and composition

• In Part Three, a discussion of how we have structured investment our process to deliver repeatable outcomes

• In Part Four, an introduction to HEICO Corporation, which is a recent addition to the Fund

I would like to take this opportunity to thank all our investors – new and long-standing – for partnering with AIM. I am happy to report that our quality-focused process is delivering strong, repeatable results and doing what it was designed to do - protect capital and build wealth by compounding returns through the investment cycle.

The Fund is open to new investors, if you would like to increase your allocation to global, high quality equities or if you would like to discuss anything with me personally, don’t hesitate to get in touch. You can reach me directly at ca@aimfunds.com.au

Kind regards,

Charlie

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