2020 – A remarkable year

Frazis Capital’s fund returned 8.5% net in December 2020, outperforming both the MSCI World Total Return and ASX 200 Total Return by over 100% net; returning over $5 for every dollar the local index has made since inception, with an annualized return of 31% net. The fund went straight into two consecutive bear markets, in which the net IRR includes both periods, and the mistakes and missteps.

A local science company backed by Frazis was listed this January. One of the more valuable things Frazis do is to provide capital to companies doing important but complex and risky drug development work.

Frazis now holds over 45 stocks, many growing over 100%, and on a weighted average basis growing at >80% organically.

Achievements of the companies, rather than the price moves, are what made it truly spectacular. Here are few examples: 

– Plug Power is now transporting over 30% of US groceries with hydrogen

Return since purchase

– Moderna successfully brought to market an mRNA vaccine and validated its entire pipeline

Return since purchase

– Ultragenyx is rolling out its treatments for four ultra-rare diseases

– Tesla has changed the way the world looks at electric vehicles and produced over 500,000 vehicles in 2020. The firm managed to grow during a ~50% decline in auto sales, suggesting significant latent and unfulfilled demand, with more than a 10-fold increase in production over the last five years.

Return since purchase, initially purchased around $16 before the launch of the fund

Many were surprised when the stock price went up, rather than down. Having fielded sceptical questions on Tesla for many years now, perhaps some of this scrutiny should be turned on those who were short. 

There are charts of Tesla’s market cap vs the rest of the auto industry doing the rounds, but this is what to be expected, much like how Apple captured the majority of the value of the smartphone industry. As an example of how Tesla affects the fundamentals of other car companies, Tesla caused the entire auto industry to spend tens of billions of dollars retooling their factories to produce electric vehicles. Before Tesla, there was zero serious interest in electric vehicles from the major manufacturers. 

– Pinduoduo took more than 10% market share from Alibaba in a few short years and is the first truly successful combination of gamification and social with e-commerce.

Return since purchase

One of the aspects of the story that gave Frazis comfort was that Tencent was a major shareholder. Tencent is seen as a serious business and humbly suggests that Pony Ma has a better idea of what’s going on in China than short-sellers in Australia. Of all the different companies Tencent has backed to take on Alibaba in e-commerce, this is the one that worked. 

– Carvana grew through a period where auto sales declined 50%. Frazis holds three auto stocks, all of which grew in 2020.

– Twist dramatically improved the emerging foundational science of DNA synthesis, while generating an entirely new drug development platform, and a new way of storing computer data in DNA.

Return since purchase

– Shopify enabled countless entrepreneurs and will be a true challenger to Amazon in years to come as consumers flock to DTC micro brands and entrepreneurs turn away from predatory tactics at Amazon.

– Sea and MercadoLibre maintained >100% growth rates and are simultaneously entrenching themselves in the e-commerce and payment systems of South America and Southeast Asia while bringing the 21st century to some of the world’s youngest populations.

– Farfetch established arguably the first decent luxury online platform that has been embraced by brands and customers alike

– Livongo merged with Teladoc to create the world’s leading digital health platform

– Guardant Health brought the dream of blood tests for cancer dramatically closer, and we think Burning Rock Biotech will be the leader in China 

– Afterpay maintained another year of  more than 100% organic growth with a single product – and forced everyone from Paypal to Shopify to Mastercard to respond

– Square, signing up both merchants and more recently (with their cash app) consumers, is in the process of creating the first genuine closed payment loop, bypassing successive layers of rent-seeking middlemen. Along with Paypal, they’ve helped shift the crypto space mainstream

– Disney developed their Direct-to-Consumer product Disney+ which with ESPN, Star Wars, Marvel and Pixar is perhaps the best media offering available anywhere, today

These achievements of Frazis’ portfolio companies speak for themselves.

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Theory and strategy

As readers will know, instead of starting with historic financials, Frazis focus first on consumers and the key decision points when one product or service is chosen over another. Looking for explosive growth measurable in data, rather than guessing who’s going to perform next quarter or next year. And considering true customer love and a rapidly growing and increasingly engaged userbase as the real sign of quality.

The same reason these companies have such high short interest is the same reason they perform so well. They look like shorts because they don’t generate significant earnings and cash flow. Many of them look like they’re losing more money each year as they double in size.

A better way of looking at this is that investing in human capital at rates of return orders of magnitude higher than those available from factory and plant. Hiring new staff, spending on sales marketing, and opening new offices. All with strictly measured rates of return.

These companies look bad because these investments are treated as costs, but perform well because the return on these investments is so exceptionally high. 

Most managers and allocators are not thinking this way, which Frazis knows, because they have met so many. In return, It is good for them as a fund.

More diversified than ever, with over 45 positions (largest is ~7%). Returns seem to have improved.

Frazis is also now allocating more and more to the life sciences, where there are exceptional tailwinds (rare positives from the coronavirus era) and the companies trade independently of the rest of the growth complex. 

Goals

Frazis has quite ambitious goals but has never actually stated them before. Broadly, our target is to 10x the fund’s capital on a net basis every decade. $100,000 would become $1 million ten years later, then $10 million. This implies 26% net per annum (and of course, while staying healthy and focused).

This might sound ambitious – perhaps too ambitious, but Frazis’ portfolio companies are growing at multiple times that rate. And their fifth year as a firm, they are comfortably ahead of this goal. Frazis’ has done this in relatively large companies too, suggesting size is not going to pose a problem any time soon. To pick a handful of the moves they have captured:

– Afterpay from ~0.9 billion to over $30 billion

– Carvana from ~$6 billion to $49 billion

– Pinduoduo from sub $30 billion to over $200 billion

– A ~$700 billion increase in Tesla

– Twist Bioscience from ~$1 billion to over $8 billion.

The best thing about an ultra long-term goal like this is that it strengthens decision-making. In March 2020 Frazis wasn’t trying to figure out what to do in that particular moment. Instead, they have considered what they should do in every future scenario where a sudden shock causes a steep sell-off, as last year won’t be the last they’ll have to face. Which led them to the correct answer, namely, to stay steady and stay invested, as this is the right long-term strategy.  

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Outlook for 2021

So where is Frazis now? Markets have clearly run hard. The reality is most people kept their jobs in 2020. Spending on restaurants and travel was down, so many are actually better off now than they were a year ago. It’s not considered good form to say so when so many are still suffering in the handful of industries that remain deeply affected. But that is the reality.   

During the sell-off we repeatedly ran the ruler over our portfolio answering the same questions:

– Does this company have customer love?

– Is it truly doing something special?

– Is it growing explosively and visibly adding users, revenues, gross profit dollars, and value every single day? 

– In the life sciences they constantly ask, are medical end-users and payers going to want this?

The process at the lows of March is precisely the same as the highs of January 2021 – maintaining a diversified portfolio of these kinds of companies. Dodging 15-30% multiple contractions is a very false victory when it comes to companies growing at over 100% organically, even when the timing is precisely right. The real gains are made by capturing that growth several years in a row.

Frazis’ also added a number of new positions that have much in common with the companies above in their early stages, and already feature amongst the top returners.

Promise on returns cannot be done, but Frazis’ can commit that they will constantly maintain a portfolio of the highest quality and fastest-growing innovators on the planet. 

Investing is a contact sport played in public. Frazis is quite used to these high and low cycles and has confidence that overall they will end up ahead because the companies themselves are performing so well. If the companies weren’t, they wouldn’t be in the portfolio.  

Sincere gratitude for all the support – Michael

If you’d like to invest with them, you can access their investment portal and fund documentation here. 

About Frazis Capital

The Frazis Fund invests in leading innovative growth companies around the world, specifically we focus on companies with;

• Intense customer love
• Exponential revenue growth, and
• Genuine market leadership.

Our team conducts detailed research into highly innovative areas and identifies the industries driving global growth, such as software, the life sciences, renewable energy, and the technology sector more broadly. Our team then undertakes a deep analysis to identify the market leaders and category creators with the strongest industry tailwinds, and the most robust competitive positioning.

The Fund has broad discretion to invest across various liquid asset classes.

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