MORE LIC SUPPLY AND MARKET SENTIMENT COMMENTS, NEWS ON SOME HOLDINGS, FX UPDATE, DOMINOS PIZZA.

In my last blog update I shared my concerns about the number of new LICs that have come to the market of late. Not long after this I read another story to add to the supply picture.

http://www.financialstandard.com.au/news/contango-am-launches-growth-lic-92098301

Many globally focused LICs that only started a few years back are already trading at sizeable discounts. If you really wanted to invest in one surely one of these existing LICs would be a better bet rather than participating in the launch of a new global LIC? The Switzer fund referred to in the link is slightly different to a LIC but still highlights that there is cheap money sloshing around in the system and every man and his dog wants a piece of it right now.

I now wait for the Ross Greenwood / Koshie / Tom Piotrowski Frontier Markets Convertible Debt Arbitrage Leveraged Long/Short LIC to hit the market which may finally give the “ringing of the bell for the top of the market” signal. (No disrespect to those 3 mentioned). Or if I suddenly get emails asking for the prospectus and priority allocation of this fictional entity that in itself may be the ringing of the bell!

I always regularly take a close look at every one of my holdings with the mindset of, if I was handed new cash to start a portfolio today would I still buy what I own? Perhaps with these stories on new LICs I have taken an even closer examination of the LICs I own and asked myself this question. Here is a quick update on my thinking of some LICs I mentioned I bought last year.

NGE – This was a shell company in the energy sector that Kentgrove Capital played the activist role in, where I took a position when the shares were more than 20% below NTA. The NTA never included some potential for value in some prospecting licences they owned. Kentgrove then turned the entity into a LIC with a high management expense ratio. The recent news on the licences was not great. Frustratingly I recently sold this position with a loss of a bit over 10% in about a year. The shares trade at a hefty discount to NTA but I worry that this discount could widen further because of the lack of communication from management about what they are investing in amongst other reasons.

SNC – Readers would know I rate this fund manager highly. Around July last year I picked up some shares below 85 cents and they have been a good performer both from the portfolio rising strongly and the discount to NTA contracting. My positive view on the fund manager themselves has not changed, yet they do charge high fees. I sometimes hold directly some stocks in which they do. Now that the shares are trading in line with the post-tax NTA compared with the 15% plus discount when I bought I don’t consider them that compelling to keep holding. At the same time my portfolio cash levels have drifted down so with the strength of global equity markets I thought I would sell all my SNC shares. I picked up a 3 cents franked dividend along the way so in approximately 6 months the return was around 26%.

MVT – I first discussed MVT on the blog around the time of some market jitters surrounding Brexit and picked up some shares at 14 cents. The MVT portfolio hasn’t done as great as I might have expected since. I have recently also sold MVT now for similar reasons as cited above with SNC, i.e. discount narrowed somewhat, MER is not particularly cheap, global markets and the LIC sector seems quite exuberant. The discount to NTA has tightened since then so my return on these shares bought is still around 18%. Quite respectable but bear in mind plenty of other stocks have done a lot better if we measure from that date. Once again, I want to stress that I still think the MVT team are very clever operators, but for my portfolio I wanted to take a few chips off the table somewhere. Hope this stance doesn’t confuse anyone given I have praised these fund managers in the past.

TGG & CYA are the other LICs I have left and continue to hold. CYA may hopefully get a boost when the army of Wilson shareholders are made more aware of the CYA restructure. The TGG portfolio still seems a bit lacklustre but I feel my reasons for buying are still in place. I posted on TGG in November last year.

MARKET SENTIMENT

When markets were falling a year ago, I didn’t capitalize on the buying opportunity that was there. In hindsight when I look back now I should have paid more attention to sentiment indicators. Many were showing at that time a lack of bulls out there and high readings on bearishness. From a contrarian point of view sometimes it can pay to go against such extreme sentiment measures. I don’t advocate using these tools to make huge bets in the portfolio, rather just to keep them in the back of your mind. Buying back then amongst high levels of pessimism certainly paid off.

The few holdings I trimmed above I was going to do about a month or so ago but noticed some sentiment readings I follow still showed a fair bit of worry about so I held off just to see if markets can climb the wall of worry a little further. As discussed it was more stock specific reasons I lightened up but I wanted to bring to your attention a few things I have read in the last week that gave me the impression market sentiment may be dangerously too complacent.

I disclose once again my words of caution have been a waste of time since blogging so feel free to ignore!

Firstly, there are the stories about new LICs that I have been discussing, that may be a sign of excessive optimism.

The AAII sentiment reading showed a sharp drop in the number of bears last week, slipping below the long-term average, arguably showing more complacency in the market.

http://seekingalpha.com/article/4044617-aaii-sentiment-survey-bearish-sentiment-drops-6_5-percentage-points

This story on investment newsletter sentiment showed the most bullish picture since 2004.

http://blogs.wsj.com/moneybeat/2017/02/09/newsletter-writers-are-the-most-bullish-since-2004/

The VIX is quite low at around 11, with the range for the last year being 10 to 27. If I am reading a graph going back over 25 years correctly, it almost never goes below 10. It is simple to cite key risks on the horizon such as trade wars, European elections & rising bond yields yet the VIX is telling us that most investors feel the extraordinarily low volatility of late should be here to stay for a little while yet.

HOLDINGS RECAP

Last year I mentioned I may not have the time to blog about as many trades, but I will try to continue to provide a rough snapshot that tells a story about how I approach my investing. At a minimum, I’ll particularly try and follow up for discussion news on companies I mentioned last year. The first two some may not have heard of but offer some exposure to faster growing areas of the global economy, at this snapshot in time anyway.

3918:HK NAGACORP – The search function on the right-hand side of the blog can be used to see my earlier comments on Nagacorp. I just wanted to note they reported their 6 month results last week. The stock dropped nearly 5% on the day, yet they rose by a similar amount in the week or so leading up to reporting. I still hold and continue to feel they are a little unfairly swept up in the general negativity surrounding the sector. That is, investors have been burnt in Macau gaming stocks in the last few years but the Nagacorp story is not as bleak in my opinion. Perhaps there is a little uncertainty in the stock about the relationship with Nagacorp’s monopoly Phnom Penh licence, the government and taxation structure. It has been widely flagged the very generous taxation arrangement may be tweaked this year so that Nagacorp will pay more. Management seem to deliver although the controlling shareholder has made some dilutive placements in the past so one should DYOR there and on the company in general. Obviously, a business in Cambodia should carry some sort of discount to the valuation compared with operating in a developed market. The discount here though might be too much given their track record of delivering on growth. Here is a recent interview from management post the recent results last week.

https://www.bloomberg.com/news/videos/2017-02-09/nagacorp-chairman-feels-very-optimistic-about-2017

VNL:LN – The slow wind up is progressing well. We received a 9 cents capital return around the middle of last year. Sales more often than not have achieved at least the NTA, and aside from the capital return the realisation program allows for funds also to buy back shares at large discounts.

A few weeks back they announced that due to revaluations the NTA jumped 2.5 % during Q4 2016, the best result I can remember after owning this for a few years. The shares still trade at around a 21% discount to NTA. All up this has returned about 27% since I first blogged about it, but I still think some good returns from these levels can also be achieved.

WCB – Mop up bid was announced recently at $8.85, which was the premise for going into this last year. All up to Lion I guess from here. Not sure I have a lot of insight but just for fun I’d guess Lion expect a sweetener bid, and that Saputo have kept one up their sleeve. A price near the $9.40 odd struck 3 years ago, and maybe both parties can feel ok. Sandon own a tiny bit and making noises for them to throw in a franked dividend to keep certain holders happy as part of a deal so maybe we can expect that. I bought just under $7 about mid last year, decided to continue to hold still and with a bit of luck get a bit more.

TTS – This takeover I have not handled so well, missing buying at opportunistic times and then trying to make an arbitrage and paying near the highs in December. We have seen TAH report some lacklustre profit numbers, and TTS has in part weakened due to the TAH bid being part scrip. It is quiet of late in terms of rumours what may happen next here. It was possibly always going to be quiet until TTS report their numbers to the market which I think are due this week.

ILU – The last day of January saw Iluka release their quarterly and the shares have had a retracement of around $1 around this. I have seen a couple of brokers subsequently shave off 4% & 9% of their values respectively, whilst one leaving theirs unchanged. My entry late last year was under $6.50 and the shares are now still above $7. I would like to ideally give this stock some room to run as it can be volatile. My experience with following Sandon into BSL and taking profits way too early last year because it was moving around a lot, is probably playing on my mind.

 

THE AUSTRALIAN DOLLAR

I am not claiming to be adding value here but at least I reduced a bit of USD in the portfolio late November and during December upon looking at some charts suggesting that AUD/USD was in fact nearing cheap valuation levels if anything.

One of those charts I referred to back then was from Westpac and this week in the press I read Westpac had updated this model, suggesting fair value of 0.77.

http://www.afr.com/markets/currencies/is-the-australian-dollar-overvalued-20170210-gu9wl7

The new RBA governor seems relaxed about current levels. Whilst I don’t have any biases in my portfolio, I would prefer to see it climb above 80 cents and it hopefully wrongfoot many AUD bears and we can see a short covering rally. If that occurred, I might become interested in again betting against the AUD.

DOMINO’S PIZZA

July of last year I warned about buying high growth stocks or those considered high quality stocks that were trading on extremely high multiples, specifically citing DMP as one example. Over the weekend, they have received some negative press leading to the shares trading weaker yesterday.

http://www.afr.com/business/retail/dominos-pizza-investigates-wage-fraud-denies-network-pressure-20170212-gubdst

Despite the shares being about 15% lower in a very strong overall market since my caution, I wouldn’t go near them. Since then not only is there this story about investigations into underpaying staff and debate about the sustainability of margins, we also have learnt that Pizza Hut has improved in Q4 under new management. Buying the shares to me look about as appetizing as one of their $5 pizzas.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s