During the quarter we completely sold seven positions, bought three new positions, and increased our investments in ten of the businesses we already held. This resulted in a concentrated portfolio that at quarter’s end comprised 23 positions and had a cash level of 23.5%. Five of the businesses we sold were only held for a short time. The returns ranged from -17.4% (for our small position in a small US listed supplier of baby bedding products) to 58.5% (for our small position in a Japanese listed software company). Most notably, we burnt a lot of capital with our investment in Goodyear (-11.4% over six months).
The longer term investments we sold included:
- Wabash, where our returns ranged from 95.6% for the parcel acquired in November 2016 to a mere 4.2% for the more recent tranche acquired in April 2017 (the weighted average return was 38.1%). We faced an interesting dilemma with this sale. The timing of our updated analysis (which according to the rules deemed it a “sell”) almost exactly coincided with the one year holding period for the lowest cost base tranche. However, we judged the risk of holding an extra day to be too great so unfortunately investors will not benefit from the capital gains tax (“CGT”) concession. Whilst results are not prima-facie evidence of wise decisions, we do note Wabash fell 7.8% the next day; and
- T-Gaia, where we applied our discretion to delay our selling for a few days post our updated analysis so unitholders would benefit from the CGT concession for at least a portion of the investment. In this instance, hindsight suggests we would have been better waiting longer – the share price has continued to rise.
In May we outlined our increased level of fundamental analysis for retail companies and we commented “We have refined our rules in relation to investments in retail businesses and with the newly “freed up” capacity we accumulated positions in two other US retailers in late March and April”. The retailers we bought were American Eagle and Williams-Sonoma. Initially these performed poorly (down 25.6% and 17.0% respectively at one stage), but in the face of these declining prices, we bought more. Now, largely as a result of that, these positions are showing signs of being fruitful investments. In fact, subsequently our diversification rules required us to trim both of these positions as their outperformance caused them to represent too larger part of the portfolio. This provides an interesting illustration of the way our rules can work. During November we increased our holdings in both only to sell down in part within two weeks. As a result, we realised an average 11.7% return for 0.5% of the Fund over seven days. If we managed to do that for 0.5% of the portfolio – and nothing for the remainder – repeatedly for five years, your $100 investment (if in a tax exempt account) would become $1.7 trillion. If only it were that easy…
“Compound interest is the eighth wonder of the world.” – Albert Einstein
Our three new positions are all Japanese companies. One is a gaming and media business, another manufactures and sells commercial kitchen equipment and the other supplies construction materials. All are small companies with market capitalisations of less than USD500m. Smaller Japanese positions have proved fruitful in the past – let’s hope that continues.
Our closing remarks – the mania continues, volatility remains low, Trump’s a “genius”, and we are envious of those canny investors that recognised Bitcoin’s inherent “value” at the start of the year. Thank you again for your interest and if you’d like to know more, please simply send us an email – we are always happy to discuss.
Don’t spend all those bitcoins at once,