Normally our bar chart would contain at least some contributors to the Fund’s performance over the quarter. But we only show the most material in absolute terms – and AGL which returned 5.6% – still failed to make the cut. AGL proved to be resilient even in the face of threats of increased regulation in the Australian energy market (to the extent of forced divestments of electricity generators). We believe its defensive characteristics, and its reasonably cheap price led to its shares being able to withstand that negative sentiment.
The automotive sector remains out of favour. We hold three positions which all appear to have been affected. Over the quarter the US listed Tenneco and Lear Corporation shares fell 35.0% and 15.3% respectively while the shares of the Japanese listed automobile hose manufacturer, Nichirin, plummeted by 25.1%. Collectively, these businesses cost the Fund around 2.6%. Whilst no doubt trade tensions and an expected slowing in general economic activity will have some effects on future cash flows they will generate, the extent that this is being reflected in current share prices feels extreme.
The share price of Transcontinental (the Canadian packaging and media company) continued its decline, despite a small bounce upon release of its full year results. Our updated analysis resulted in this business failing our financial strength criteria – arguably confirming that the poor share price performance of the September quarter was justifiable. We concede our approach is far from perfect. In this instance the numbers validated the market’s concern and waiting for this verification proved costly! We sold our position. It was not a successful investment for the Fund. Although our total return was marginally positive, we held up a lot of the Fund’s capital over a long period of time and we realised a loss on that capital.
Last quarter we wrote about the positive contributions from our airline holdings, which represent around 8% of the Fund’s assets, This quarter they failed to perform, with Delta Air Lines share price falling 13.7%, and Hawaiian Holdings share price tumbling 34.1%. Both still have those double digit earnings yields (now even higher), and just because Hawaiian Holdings downgraded its fourth quarter revenue guidance (and Delta Air Lines did the same in January) it does not mean their long term business fundamentals are affected. We remain comfortable with these positions.
Canfor Corporation announced three noteworthy items over the quarter – and one assumes by the market’s reaction that none were taken too positively. The first two were acquisitions, one small US based operation for USD110m and the other a 70% interest in a larger Swedish private saw milling operation, Vida, for CAD580m. The third announcement was that it decided to curtail its British Columbia sawmill operations over the fourth quarter (later extended to the first quarter of 2019) due to uncompetitive log costs and reduced lumber prices. We are not too perturbed by the sawmill curtailment, as this is part of the normal vicissitudes of the business. But we are always wary of acquisitions, despite rationales always making sense. However, we view the business as being priced very cheaply, and based on that assessment we maintain our position.
We cannot really point to any business developments that warrant the poorly performing share prices of the remaining Fund holdings. We just put it down to general market malaise. In fact, if we were to perform an attribution analysis (where stock performance is compared to Index performance) it is likely none of those would feature prominently. We do not perform attribution analysis because it is not the way we think.
Moving on to Portfolio Activity – we continued our selling of Williams-Sonoma and Canfor Pulp to the point of completely exiting these two positions. Both were solid performers to the Fund’s returns over their holding periods. Of course, had our trading prowess been greater, those returns could have been all the more higher…
With some newly freed up capacity to acquire US retailers (courtesy of our Williams-Sonoma sale) we initiated positions in Michael Kors (since renamed Capri Holdings) and Dick’s Sporting. And increased volatility afforded us an opportunity to acquire Thor Industries, a US listed manufacturer of recreational vehicles, at an attractive entry price.
We also bought JAE (Japan Aviation Electronics), a business that manufactures and sells connectors, switches and interface equipment. Despite its name, its products are overwhelmingly used in mobile devices and automobiles (the aerospace industry accounts for only around 5% of its revenue).
And finally on the acquisition side, we re-established a position in Western Forest, one of the Fund’s former holdings. We bought back into this business at a similar price to that which we paid in January 2017.
Trading is not our passion, but with wildly fluctuating shares prices and new opportunities surfacing, our disciplined process does require us to be active in trimming and topping up some positions. Most notable was our selling of Gap down to 3.6% to facilitate further buying of Capri and Dick’s Sporting, our trimming of Franklin Resources and H&R Block and our increases to our Hawaiian Holdings, Lear Corporation, LyondellBasell and Samsung positions.