In a bull market like we have seen this year, it is easy for most investors to think they are quite talented. There haven’t been too many weak areas in the markets. Chances are, whatever your method is it is probably at least delivering very solid absolute returns. I must go back about two years to find a period that provided a slight test of investor’s nerves. It has led me to think of a couple of well known sayings in the market.
“Don’t confuse brains with a bull market”. – Humphrey Neill.
“Only when the tide goes out do you discover who’s been swimming naked”. – Warren Buffett.
It is very easy now to get seduced into new investment opportunities as it has probably been a long time since we have seen any of our stock picks showing substantial losses. We are influenced more by the recent past, and this makes it easier to jump in a new stock idea or continue to pat ourselves on the back for recent winners.
I saw a twitter poll last week about whether Bitcoin represents good value, and wondered if the same recency bias thing was going on here? After Bitcoin has moved from 2,200 to 13,000 we have more people suggesting it is undervalued, and less people describing it as a bubble!
I am trying to put my mind back to earlier in the year and imagine if someone told me where some of the stocks I own were trading right now. It is an interesting exercise to imagine what your plans would have been with them had you knew. If the reaction would have been highly likely to sell, but you are still riding the momentum now, maybe there is a message in that?
In that category for me has been some holdings with an overseas flavour. My bias to search for offshore markets (ex US) is starting to pay off more, especially this financial year. To show some respect for the Humphrey Neill quote above, I have reduced some risk in this area. Instead I have directed some proceeds to what I consider “simpler” investments that will be less volatile, and less vulnerable to risks.
Obscure Exchange Listings
I can’t imagine many readers could have cared much about my purchases of Nagacorp or Vinaland. Some probably thought this blogger thinks he is smarter than he is buying a Cambodian casino listed in HK, and a Vietnam closed end property fund listed on the AIMS exchange in London. WTF. I don’t think having that view towards my decisions here is that unreasonable. Hence, I am not trying to confuse the gains associated with my brains!
I concentrate on LICs a lot because I believe in investing you must know your limitations. I find them relatively simple to understand. Sometimes I come across other ideas via LICs though and do get comfort from other investors I know being involved in a stock. I still of course want to fully understand the investment, because you won’t always know if these others are selling or not. This has given me a little more comfort with Vinaland and Nagacorp in the past. I have observed Global Value Fund (GVF) investing in Vina Capital Funds, the Vina Capital equity and property fund. I don’t think I blogged about the equivalent equity fund, but the main Vietnam index has gained almost 50% in the last year. I think it was Ellerston Asia and possibly also PM Capital Asia owning Nagacorp at times a few years back. I have also heard bits and pieces from other investors in the region about these two holdings.
By the way I found this Meb Faber book an interesting read about watching what other good investors are doing. Not a paid ad by the way, just in case you are wondering why I mention his books regularly!
Another reason I thought these holdings are interesting to discuss, is because I have met some successful investors who specifically hunt for companies listed on an unusual exchange on the theory they are often cheap. These listings fitted such a description when I bought. I suppose one of my current holdings in UOS on the ASX also fits that description. I will continue to keep an eye out for such examples. We are at the stage of the cycle though where I suspect it is difficult to find such opportunities. It is though an area where although I don’t mind allocating less for the time being, it always nonetheless interests me. I happened to come across an article on my twitter feed recently that discusses this topic so I’m not trying to create the impression this idea is uniquely found by me! If you are interested in reading a bit more on this area here is the link.
I sold Nagacorp (3918:HK) today at $6.05, as sentiment has been assisted on a variety of fronts. With emerging markets being more prone to volatility, sometimes it is better to get out when all the news is good. Fears that sent the stock to close to $3 in the middle of this year have subsided. These included the political landscape, potential unfavourable tax treatment, competition in the region, development uncertainty over their new casino, expansion plans and the controlling shareholder’s treatment of minorities. These factors have shifted to the background, but potentially some could resurface again. The stock has nearly doubled the last 6 months so time for me to sell and not confuse brains with a bull market! Since I first blogged on this in February 2016 the return has been approximately 64%. Unfortunately, I bought the stock at higher levels before I was blogging, so the results are quite dull and more like 11% annualised for me.
Vinaland (VNL:LN) has de-risked for me without me having to sell. It is a wind-up play that has been at large discounts, yet the properties it has been selling continue to generally achieve above the stated NAVs. Last week they announced about a third of the entire capital will be distributed back to shareholders. They also made a capital return in mid-2016 so I have seen half my investment come back to me here. The returns since blogging about this first in March 2016 have been about 53%. In this case I did better personally as I owned it years before blogging from lower levels. The 53% figure considers the fact I mentioned I sold some of the holding a few months ago (too early at 80 cents!). I will still hold the remainder for now as it continues to sell the remaining properties.
I have enough exposure to Asia for the time being with PAI & EAI. Should we see a serious correction it is easier to stay the course when it is diversified over many stocks inside a LIC. Also it gives me a fund manager to blame!
Where have I directed some of the proceeds?
Argo Global Listed Infrastructure Limited
I topped up on my ALI exposure, which I won’t bore you with too much more on since I wrote a lengthy piece on that recently.
I do think of it as a stock though that won’t see me looking naked when the tide goes out in this bull market. I would also consider it simple to understand.
The Other Future Generation Fund
Future Generation Investment Company (ASX:FGX)
Another in that category is a new buy for me in FGX. I have already discussed buying the global version in FGG some months ago. Since then FGG has gained about 15% versus about 5% for FGX. Weakness in the AUD probably the biggest factor there. Also the discount seems to have closed more with FGG.
With the Australian market lagging in 2017 and the discount larger with FGX now I felt it is not such a bad time to direct some funds to FGX.
FGX has investments in underlying funds that you get effective exposure for about 1% a year. (which goes to charity). There are no performance fees. I also bought the stock at an estimate of probably a 5% discount to the underlying asset value.
Despite this, investors don’t mind seeking out some of the underlying fund managers they use via their specific LIC vehicles.
Some examples I looked up total almost a quarter of what you get by buying FGX.
For example, FGX invests about 9% with Wilson Asset, 7% with Watermark Neutral, 4.5% with Sandon Capital, and 3.5% with Bennelong long/short fund.
Let’s have a think about what investors who are going directly to these fund manager’s LICs might be doing.
WAM- paying about 23% premium to assets and incurring a hefty base and performance fee every year.
WMK – Admittedly you can get this at a 10% discount. But you incur higher base fees and a performance fee based on a low hurdle rate. The hurdle rate is just a small margin above the RBA cash rate.
AEG – This has generally been a similar discount to NTA as FGX but is expensive on fees. This Bennelong product has a 1.5% base fee and a very aggressive performance fee structure. Performance fees are based on any positive return, not over a benchmark, just on absolute returns.
SNC – Sandon have a base fee of 1.25% and hefty performance fees. You also probably must pay a 5% plus premium to NTA.
Not only getting exposure via FGX is cheaper, I also prefer 1% of the investments going to charitable causes rather than the fund managers. I have nothing against the fund managers just mentioned, some I have met and seem like good people. They must be congratulated on providing their services to the Future Gen Fund for free. I just feel they don’t need the fee revenue as much as the charities, so am quite happy to get exposure via FGX! Yes they are closed end funds, but when investors bid them up to premiums it allows them to easily raise more funds and collect fees.
The company has been providing more information about their charity work of late. I get the impression a lot of thought is going into the allocation decision on this front also.
Readers should DYOR on Future Generation Investment Company or anything I mention, as whatever I invest in may not be suitable for your circumstances, and could underperform! I kind of glossed over the concept of the company and went into details quickly. If anyone is not that familiar with it, then there is plenty of info here.
I now feel my portfolio is becoming a bit simpler which I don’t mind. After previous bear markets I have often looked at some holdings thinking why was I over complicating things. Or why didn’t I let some of those opportunities pass, they weren’t that cheap. Hopefully I’ll be less prone to those thoughts in the next bear market.