Tweaks to my portfolio, Asia, addressing the LIC discount & being boring.

Firstly, I will just go over a few changes to some holdings of mine I had mentioned in the past, or some relevant news updates.

tweak

THE TWEAKS

 

COG – They released an AGM presentation on Friday and whilst there wasn’t anything too scary, I decided to sell my remaining holding at 12 cents. After seeing the stock trade at 18 cents it had a losing feeling to it this trade. Yet if I consider that I exited half at 15 cents earlier in the year, since blogging about this it has still returned circa 17% per annum.

A few things led me to prefer and watch this from the sidelines. Early in the year I was not as comfortable with the pace of acquisitions and communicating the story to the market. Recently I was happy to see them walk away from an acquisition and allude to a dividend policy and potential buyback. On Friday they seem to be stepping well away from that and more on the hunt for acquisitions again. I have noticed the MD buying lately which I was encouraged by. Yet this may represent a very long-term view, and I am not sure if moving towards further acquisitions and away from the first dividend will be that healthy for the shares over the next year. In Friday’s voting on remuneration there was a bit of opposition, so others may have similar concerns. I am not sure management are that fussed about the level of the share price in the shorter term, and maybe I will get a chance again to enter at cheaper levels. We shall see.

With this in the back of my mind, some other reasons for selling were probably due to shaping my own portfolio. As the length of the bull market matures I don’t mind the idea of simplifying things, owning less individual holdings at the smaller company end for a while. Since looking at my investments far more often than I had the time to when working full time in the industry, I perhaps appreciate more the time and effort needed to be on top of researching a business. Also the small cap sector the last few months has been hot, so I thought it might be a reasonable time to exit. I highlighted in June that small caps had great potential to outperform, I hope some readers did better capitalising on the theme than myself! I feel I mostly missed this opportunity.

I have mentioned many times Sandon & NAOS are major holders that has given me some comfort. But I made an error a couple of years back sticking with RNY because I thought the fund managers involved were quality. Having said that Monday I happen to be attending a presentation from Sandon, they will possibly make me regret my selling of COG!

 

TTS – Speaking of Sandon, Tatts has had a better run of late and I continue to hold. Before the merger was approved on Friday, Sandon were campaigning to vote this down. Here is a link to the campaign.

http://www.sandoncapital.com.au/site/index.php/campaigns

They make some good points in their latest update in this section. I never quite agreed with how Tatts dealt with the approach from the consortium. I am not sure I am as optimistic about the result as Sandon, but nonetheless generally agree and continue to hold.

If there is anything extra of note I hear on Monday from Gabriel re COG or TTS I shall add it in the comments section here. Or for that matter ILU & APW are a couple of others that spring to mind that I have written about that they own. If anyone reading here spots me there say hello. There has been less than 10 people when I attended in Melbourne so that shouldn’t be difficult to find me!

 

CEF:US – I was planning on staying in this gold & silver exposure via a trailing stop. Part of the reason for entering this is the fund traded at a relatively wide end of a discount to NAV in its long history. I think I may have entered at about 8% discount. Watching the activities of GVF on global markets I have seen many closed end funds wound up or restructured to bridge the gap of the discount. Not that long ago this occurred with CEF:US, so I decided to exit. The returns were quite acceptable over a little over a year without being outstanding for me. The announcement is here below.

http://www.nasdaq.com/article/central-fund-of-canada-to-be-bought-by-sprott-asset-management-cm853804

After the announcement the shares soon rallied about 4%, and the discount moving from roughly 6% to 2%.

 

ASIAN MARKETS

Whilst blogging I have totally underestimated this bull market. But what has in part saved me from any serious underperformance is that I have emphasized the potential for many non-US global markets to outperform the US & Australia.

In about May, to implement this view at the time I wrote about buying PAI for $1 and shorted the S&P500 for the same amount. Obviously if I was a bit cleverer I wouldn’t have done the latter! But I thought it is worth noting as an example you can get some themes wrong but do ok. I recently closed the S&P500 short at a loss. I haven’t suddenly become a bull on the US, but since I have raised cash overall in my portfolio so don’t feel the need to carry the hedge. At the time of the trade I was uncomfortable with my cash levels at lower levels, so hence the offsetting hedge. As I write PAI has returned 28% in this time and I am still holding, and the S&P500 gained a far more modest 6%.

I will discuss just a bit further down another Asian exposure I own. I do this somewhat reluctantly, since I wouldn’t enjoy hearing someone jumping on the bandwagon now, and then Asian markets suffering a large correction. So, I hope my comments are taken in context. I read just a few days ago Kerr Neilson saying that fundamentally he was positive on the Asian economic story, but with the recent huge performance he was taking some chips off the table. I have done something similar recently in certain holdings, so am more making the point I still think there is plenty of relative outperformance left in the region versus the US & Australia from these levels (absolute performance not so sure). If an investor had zero exposure to the region and hadn’t yet done much research regarding potential ways to play it, maybe the video I will link further down could be a useful initial step. I think it is a useful overview that dispels some misconceptions on investing in the region. Maybe we do get a correction during the time one is spending on researching the asset class, if so one can be better prepared when considering an entry later.

When thinking of global market comparisons, I find this site very useful.

http://www.starcapital.de/research/stockmarketvaluation

Fascinating that supposedly one of the riskiest markets if you followed the news in 2017 (South Korea), is not only one of the best performing YTD, but still ranks amongst the cheapest on this table.

I am sympathetic to those with the view it is a mug’s game trying to pick the best region in the world so let’s just save fees and go passive. Just be mindful that the product you are deciding on may not necessarily have an underweight bet on Asia versus “official” global benchmarks, but may well be significantly underweight the region in the context of Asia’s share of global GDP.

Whilst I can’t say I am considering buying the likes of PAI & EAI after the current run up, the main reason I wanted to touch on this is more about catalysts of closing the discount to NTA. I touched on this in a post a couple of months back here.

http://www.etfwatch.com.au/blog/time-for-global-active-managers-to-outperform–common-catalysts-for-lics

I just think it is useful in the context of my recent blog post on ALI. It probably sounded like a whinge so just to show I am not always a grumpy old man, I will point out I am pleased the way PAI & EAI are being handled by management.

 

IS A LIC SERIOUS ABOUT CLOSING THE DISCOUNT TO NTA?

Over the years I have observed that Platinum when running PMC have a clear message with discount /premium to NTA. We didn’t quite see PAI get to much more than a 10% discount to NTA, but based off Platinum’s comments in the past and actions with PMC, I felt it highly likely they would aggressively buy back shares in PAI if the discount got just a little larger.

They also talk regularly about getting money in the profit reserve for future dividends.

Ellerston soon after listing their LICs didn’t quite “get” what drives the discount to NTA. They can say investing in growth is better than paying dividends out to shareholders, but the fact is that dividends are a huge factor to where the share price trades with LICs. They were also initially very slow in considering a buyback with EAI.

After attending their investor presentation, they totally get it now, and for both their LICs there has been a clear shift with thinking on dividends. They have made it a serious share buyback with EAI rather than a Clayton’s one. They are featuring on Livewire more, and ran some very useful investor presentations in the capital cities with a strong message about addressing the NTA discount. So we have seen talk and action.

Contrast that to ALI, I have come across a slide in the presentation suggesting they will boost marketing, communications & use capital management. Just awaiting more on the action front in this case!

Here is a link to a presentation regarding EAI if you are interested. Before you think this is an advert for them I concede their performance v benchmark is quite disappointing, Platinum have done a much better job. The Ellerston brand has been very good over a long-time period with a variety of products, so I am cutting some slack here and expect they can deliver eventually.

This is the video I referred to earlier that also offers a good overview of what may make up a typical portfolio focused on Asia.

https://ellerstoncapital.com/roads-lead-asia-2018/

WHY I AM BORING

I should rephrase this, I wanted to get the message across about how I don’t mind if a lot of the investing ideas on this blog seem boring. Personally, I have found this is what generally gets the results for me, and when I chase a good story is often when my returns suffer. Hence in the recent post I don’t mind if the likes of ALI & ALF seem quite boring right now. How do I explain why this is the case though? The answer is I don’t have to because Forager have done it well for me. I found this YouTube link quite interesting. It is a long video, but a good discussion in my opinion about how sometimes chasing exciting investing themes can get you in trouble.

https://www.youtube.com/watch?v=duOsDFvYdHY

Forager incidentally are a manger with higher than average cash balances running in their domestic and global product offerings right now. I have tended to be the same for most of this year so it will be tough to match the returns of some of the stronger global markets this year if this bull run continues. As I have said previously though I am more comfortable with this approach, and at the same time a few other strategies that might give me a chance for higher returns in a “melt up” scenario. For example, being in the higher performing global markets, some occasional out of money call option exposure and on occasions running trailing stops on well performing stocks with further upside potential.

That last sentence is sounding like it’s getting away from a boring approach so probably is sure to fail!

6 thoughts on “Tweaks to my portfolio, Asia, addressing the LIC discount & being boring.”

  1. I also bought PAI at 1.00 around the same time I picked up ALI at 1.75. Seems we think alike! PAI has certainly performed better of the two but hopefully ALI will start to close the gap too.

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  2. thanks for a nice blog.

    good work on PAI and the US name.

    also on AIK/COG probbaly 🙂

    Geoff Wilson at one stage couldnt go three months without recommending it ‘for the patient investor’ but nothing for quite a while now.. probbaly since the name change and move to an operating co.
    but GW had foreshadowed that … hmmm

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    1. Thanks mate. Was interesting how Wilson gave it a bit of a plug at higher levels. In the back of my mind one reason I held part of COG holdings til the second half of the year as I thought the new WAM microcap might be interested to accumulate but seems quiet on that front.

      It’s a patient story that still has potential. I thought I would lose my patience perhaps earlier than others may still do. I could see myself owing again if it falls but quite possible it could find its support here and I never get that chance.

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  3. I did say in this blog post if I heard anything at the Sandon presentation about some of the stocks I had mentioned in the past I would add to the comments here.

    I wouldn’t say that I picked up anything that I haven’t already mentioned for the likes of COG, ILU, APW. Regarding Tatts though it was discussed how many instos owned both companies and perhaps more TAH. So if the perception is TAH are getting a good deal then this makes it more likely to go ahead. But this was mentioned in the AFR last week anyway.

    I sold my Tatts shares today at $4.42 with this in mind. Sentiment has improved of late on a number of fronts and it caught me by surprise a bit the stock had edged up to this level. My return is only about 5% in nearly a year so I regard it as a failure. I eyeballed this around $3.70 and paid about $4.40 in the end but received a couple of dividends. Not the greatest example of market timing, but now the reasons I bought in the first place seem to be in the past and I don’t have much of an opinion from here.

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  4. Thanks Steve. The starcapital page is fascinating. The link to the Asia video doesn’t work – it says the youtube video has been removed?

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    1. Thanks for letting me know Noddy, I fixed the link now I believe. With CAPE and other value metrics like on the star capital page, I just keep in the back of my mind for likely returns over the next decade, not for any timing indicator.

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