We now know that WAM has come back to take control of CYA, after withdrawing their plans early in the year.We are waiting on the details of how exactly WAM will operate things going forward. I wrote a few months back I felt WAA might be the best vehicle to merge because it is relatively small. I suspect I was incorrect in that regard however that is not so important. Where I am correct I feel is that CYA holders will see their shares close the discount to NTA and potentially get a premium. At the current price of 90 cents they should be closer to 95 cents I feel if the ASX can roughly hold these levels, and I am not ruling out topping up my holding even after this news. All the WAM run funds trade at a healthy premium to NTA, and CYA has the benefit of tax losses inside the fund.
Here is a recap of why I decided to pick up a few shares only a couple of months ago. Unfortunately, the liquidity was not there that could have made this news far more enjoyable for me.
In summary, I feel I have picked up all the returns from the discount to NTA vanishing, but sense there is a bit more upside for the shares to trade at a premium as I initially expected two months ago. I am still holding CYA.
Perhaps the upside will occur when more details get released on this transaction, I suppose some may be a little uncertain about all the details it may entail.
KAR / NGE
I continue to hold both. Obviously I must hold NGE as it is still suspended! Holding both previously gave me extra exposure to KAR given it probably accounted for nearly a quarter of the NGE balance sheet. KAR is trading above $2 but it has been volatile. I initially purchased at $1.45 earlier in the year and more recently spoke positively about it at $1.60 when the market enthusiastically greeted the prospect of an acquisition. We saw the shares nearly hit $2.50 a couple of weeks ago only to touch about $1.80 last week when this potential acquisition started hitting some obstacles.
I have been a little critical and uncertain about the management of NGE and their change in structure to a LIC. I feel the remuneration of management is a little high, they have a large interest as a shareholder which should give them enough incentives. Running a concentrated LIC like this when they are already scouring the market for opportunities shouldn’t be such a huge burden I wouldn’t have thought. Anyway that aside, I must pat them on the back for almost picking the low of KAR and selling near the top very recently! This should really help the NTA of NGE when it begins trading again in the next week. Also with large tax losses inside of NGE from previous years, I don’t believe they will pay tax on the profit. I suspect the shares will still trade at a large discount, but probably no greater than when I acquired them. I expect at least to be showing a handy paper profit again when they re-list. Now that NGE has essentially de-risked some of my KAR exposure for me quite nicely, I intend to keep holding KAR and hopefully we seem some favourable news about the prospective acquisition.
Most say taking positions to add value via predicting currency movements is a mug’s game and I am inclined to agree on the most part. When posting on the blog about mistakes I’ve made this year I noted that my negative view on the AUD had been an error. Back about 5 years ago, I did quite well accumulating offshore exposures as AUD/USD went well into the 90s and beyond parity, and rode some of the benefits down to when the exchange rate fell below 70 this year. To be honest maybe I did fall in love with this decision. I’ve argued that when we look back over decades, some of the quantitative models that try and estimate fair value seem to pick the times where extreme over or undervaluation exists quite well. It just can take a long time to revert back. I personally have some set targets of offshore exposure I like to carry, but the question is whether to make bets around this?
I believe when some of those models are suggesting an extreme mis-pricing it is worth considering for the patient longer term investor to look to add value here. Most of the time however I just prefer to rebalance exposures to targets every now and then.
So where is my portfolio at now and how have I been affected by the fx market this year? Well I have always been quite negative on the AUD so I have got this wrong. I did however reduce my underweight early in the year when AUD/USD traded below 70, and subsequently mentioned on various occasions more recently a preference for more offshore exposures when it traded above 75 and particularly close to 77.
Many commodity prices have surprised me this year by moving higher and this has had some impact on quantitative models I referred to above. Here are a couple of recent stories related to that..
Now that we have seen some USD strength recently I have decided to cover some derivative trades earlier last week (around AUD/USD 74) so that I have a more neutral stance. I don’t think my views have cost me much overall here over the year, yet feel it is just a distraction and that I’ve held on to the view more because it worked a few years ago rather than having a strong view now.
My stance now is to not focus on this so much, perhaps if we see a figure like 65 or 85 I may then consider to go against such a move if it seems out of whack with some of the quantitative economic models.