Strong quarterly earnings in some of our largest holdings led to an impressive month for our global fund.

 

October

Year to Date

Since Inception (Annualized)

Motley Fool Independence Fund (FOOLX)

4.13%

27.09%

13.06%

FTSE Global All Cap Index

2.16%

20.01%

11.89%

For a standardized list of performance for the Independence Fund, please click here. For fund holdings, please click here.

October was a great month for the Independence Fund, which returned 4.13%, beating its benchmark by nearly 200 basis points. A few of the fund’s largest holdings released impressive quarterly results that the market rewarded handsomely. Year to date, and since inception, the Independence Fund is surpassing its benchmark.

Each day, we study businesses and make judgments on whether they’re capable of generating results above and beyond what is expected and that will, over time, result in higher intrinsic and market values. Sometimes we get it wrong. Sometimes we get it right and it takes a long time to play out. And sometimes we get it right, and we see the results quickly. October felt like that last category. The three strongest performers during the month were Align Technologies, IPG Photonics, and Amazon.com (up 28%, 15%, and 15%, respectively). Since these are large holdings for the Independence Fund, the pops had a meaningful impact on results.

Year to date, the stocks of these three businesses are up a blistering 154%, 122%, and 49%. Yet I confess I had to look up those performance numbers. You see, my team and I don’t stare at the jumping green and red dots on our monitors each day. Instead, we immerse ourselves in reading company filings, talking to management and customers, and debating secular trends and competitive responses. Without looking anything up, I can point to how Align, IPG, and Amazon have strengthened their competitive positions, expanded their addressable markets, and increased relevance with customers over the past year.

We study businesses first, and we check on the prices the market has attached to those businesses second. Always in that order. What makes us comfortable maintaining large positions in these businesses is how they’ve all invested adequately in their operational guts to be able to handle a scorching rate of product adoption and sales growth. We’ve seen many a promising growth company crumble under the weight of strong sales growth because the foundational investments in operations weren’t there. Not so with these three, and while their recent stock performance isn’t likely to continue apace, we think that as businesses they’re just getting started and are thus attractive places for continued investment.

Our worst-performing stock during the month was System 1 Group, which fell 22%. This small, UK-based marketing and advertising agency has been expanding into the United States, just as it’s seeing a shift in how its customers are buying – namely, moving from people-based research to more automated solutions, given the shift to digital and mobile advertising. This headwind is unlikely to subside, but we believe System 1 will need to work harder to prove the value in its people-centric methods. The company is upgrading products to better compete in the new world order, but to date, things have gone slowly. Recent results only highlighted the company’s struggles.

Ctrip.com, a China-based travel booking company, fell 9%, as the Civil Aviation Administration in China declared that default add-on options were no longer allowed. Previously, Ctrip would automatically include things such as flight insurance and airport lounge access for flights booked through its app, forcing customers to traverse a maze of clicks to opt back out. Now customers will have opt in to these add-ons, and company management expects a revenue decline in the coming quarters. Longer term, though, we think this setup is better for the customer. In the internet age, transparency is king and customization is queen. We remain optimistic about the long-term outlook for the online travel market in China and, specifically, on Ctrip’s position.

It was a quiet month for transactions. The Independence Fund had only one, selling longtime holding Shimano. This has been a Japanese hidden gem, with strong positions in bicycle components and fishing tackle. But over time, investors have begun to realize the quality of Shimano’s business, and we can no longer claim it to be “hidden.” Shimano has surpassed our team's expectations, and we now think  there are better places to put our money.

 

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