Update No. 227 – 07/08/15

A position was eliminated from the fund last week. And a new one started. As is my custom, I will discuss the sold position.

It was an unusually short term holding for us, and unusual in another way as it was one of only two IPO’s we have participated in to date with the fund.

The company disposed was Citadel (CGL), which we bought at IPO for $2.25 last November. I participated in the IPO because I liked the look of the businesses prospects and it looked inexpensive (about 7x earnings when you backed out the cash raised at IPO). Unfortunately, we got less than half the allocation we applied for in the IPO, and it was consequently a very small position. To some extent I failed in my capital allocation duties with CGL, as between late November and mid-February, 1.74 million shares traded at below IPO price, so I had ample opportunity to, at the very least build the stake up to the originally intended size, or if not larger. It is the right type of stock for EGP, right in our area of advantage, a little too small and illiquid to attract the sizeable funds.

Most painfully, for a period of about a month over December/January, almost a quarter of a million shares changed hands at $2. A juicy 11.1% discount to the price I had happily paid 8 weeks earlier, with no reason to have changed my assessment.

I am not sure what the failing was, I am usually very good at backing my opinion over Mr Market. But I thumb-sucked and eventually the price started rising. Then they announced what looked to be a company transforming acquisition, and the price has not seen the south side of $3.50 ever since.

I disposed the holding for 3 reasons. Firstly, I think the $3.75 we sold for represents a reasonably fair price. I have said before, our primary focus is to buy cheaply and to sell when we get a fairer price. My preference is that the gap closes very slowly and the intrinsic value rises meaningfully along the way, but when prices rise very quickly, we will sometimes have shorter holding periods. The acquisition will be a meaningful change in the business and as such, some execution risk creeps in as it is the largest acquisition in the company’s history (though success with integrating previous acquisitions pre-IPO must be acknowledged). Secondly, it was a small holding and I have been trying to refocus our efforts on concentration on our largest and most undervalued positions. Finally, our full-service broker (Shaw & Partners) recently informed us they would not be dealing on the NSX anymore. Outside of the CGL holding, all our other Shaw holdings were all NSX listings. I decided when I transferred to the new full-service broker that I would jettison the CGL holding as it was fairly valued, and relatively small.

All told, our internal rate of return for the holding period was 98.6%, so we generated a very sound return from the holding. I wish continuing shareholders all the best and I hope CGL go on to make me regret the sale.

This week was a pretty brutal week for the market. The 6^th worst weekly performance for our benchmark since inception in fact. It is for this reason we leapfrogged from being well behind to take our first lead of FY2016, and widened our advantage over the benchmark to a new all-time record of 51.06%. We will be happy to see further falls if it widens our advantage, as relative performance usually turns into sound returns over time – Tony Hansen 07/08/2015

EGP Fund No. 1 Pty Ltd. Up by 2.33%, leading the benchmark by 0.47% since July 1^st 2015. Since inception, EGP Fund No. 1 Pty Ltd is Up by 90.00%, leading the benchmark by 51.06% all-time (April 1^st 2011).

^{*1 after a 31 May 2013 dividend of 2.333 cents per share (cps) plus 1.000 cps Franking Credit, a 31 May 2014 Dividend of 7.000 cps plus 3.000 cps Franking Credit and a 31 May 2015 Dividend of 8.6667 cps plus 3.7143 cps Franking Credit}

^{*2 calculated based on dividends reinvested}