Update No. 122 – 21/07/13

Both EGP and our benchmark dipped by 0.04% this week. Our movements are usually quite uncorrelated, but ended up pretty close this week. I am going to talk a little about Sharpe Ratio’s & risk next week, after we’ve completed our 28^th month of operation. We are starting to investigate how some of these ratios will affect the way potential future investors would view an investment in EGP, as such, it behoves us to give more consideration to them (I personally think most measures of risk in the industry are rubbish, but such is the lot of an up-coming Fund Manager).

I hadn’t prepared anything this week & had intended only to do a bare basics update, but I am going to break my usual rule and discuss Politics on the blog tonight, furthermore, the Policy issue has little to do with economics.

I usually refrain from this because I don’t think Politics plays much part in investment decisions (though some businesses affected by this week’s FBT changes might disagree). Interestingly, as I know most of my current fellow EGP investors quite well, I am fairly certain a lot of the views I express tonight will run counter to your own.

You probably think anything relating to Papua New Guinea has nothing to do with EGP; this is not exactly the case… Believe it or not, we do have some exposure to the PNG economy through one of our investment, in-fact I consider that company to be one of the 3 or 4 most exciting prospects in our portfolio holdings.

You probably guessed by the last paragraph that I will refer to Australian Immigration Policy in this week’s post. Our recently returned Prime Minister, Kevin Rudd announced and signed a deal today with PNG Prime Minister Peter O’Neill to send all persons arriving in Australia without a visa by boat to Papua New Guinea to have their asylum claims processed, if the claim is successful, citizenship of PNG would result.

This is probably the best policy announced by the ALP Government’s that have ruled Australia for the last 6 years. Probably the only difference I’d like to see removed is the distinction specifying ‘boat arrivals’. However, there are a great many people who ‘overstay’ visas after arriving by plane, but not nearly the number of un-documented plane arrivals.

It must be remembered Political asylum stems from a fear of living in your own country. PNG, despite being not nearly as wealthy as Australia is a relatively stable country, with good rule of law (I lived in PNG for nearly 2 years, before you write me off as ‘not knowing’ anything about PNG). Someone in genuine fear of their life would be virtually as safe in PNG as Australia; the only major difference is the level of economic opportunity. I have already observed the reactions of Greens politicians and ‘refugee advocates’, who (as you’d expect) decried the decision, but these groups have probably got little credibility after pushing for the current policies which have led to so many lives being lost through the current massive number of unsuitable craft trying to make the journey from Indonesia.

These groups, unfortunately, are like the little girl or boy who brings home every stray kitten and puppy they find, they want to look after every problem that finds its way in front of them, but neglect to realise that this does not address the problem leading to the large number of strays.

This problem will certainly reduce the number of ‘economic refugees’ hitting Australian shores, ‘refugee advocates’ probably haven’t cottoned onto this fact, but the upshot of that is that a very large number of more needy and genuine refugees will therefore take their place, meaning the overall good Australian refugee policy does globally will substantially increase.

I should point out that I’ve no doubt there is a broadly racist undertone in Australia’s current disdain for unauthorised arrivals. Like every single country in the world, there are some people among us who don’t like to be made to mix with other races and cultures. What goes sharply underreported I think is the very substantial number of Australians who are quite happy to see Australia take on a very decent number of refugees, what they abhor, however is the idea that someone with slightly better economic capacity can pay to get their opportunity before someone else with no such financial capacity.

The four major source countries for the current refugees making the journey to Australia by boat are Sri Lanka, Afghanistan, Iraq and Iran. Three of those four countries have higher GDP per capita than PNG, so you can be sure if someone comes once the new policy is in place, then they are genuinely seeking safety and not just economic advancement, as such, they would undoubtedly be happy to find a safe-haven in PNG. Given Australia will continue to take on a large number of refugees, the overall number of refugees finding safe-haven will increase. From a utilitarian perspective, a great deal more good will be done.

Here is the part where I suspect I will depart from many readers’ views. In order to demonstrate this is not some racist knee-jerk reaction, I think Australia should substantially increase the proportion of our net overseas migration (NOM) comprising refugees. We are a prosperous country with a bright future; I see no reason why about 15% of our NOM could not comprise humanitarian intakes of some type. We have had an average NOM of around 250k per year for the last 6 or 7 years, 15% of that would be about 37,500 per annum, a good deal more humanitarian migration than we take on currently each year.

Some groups would undoubtedly choose a figure closer to 100%, given the opportunity. We obviously have to restrict the figure to some sensible level, skilled migration has an immediate positive impact on the Australian economy (if the correct skill-sets are targeted), humanitarian migration has a negative (economic) impact (in the short/medium-term) as humanitarian migration comes with a great deal of cost (it obviously has a massive benefit to overall global wellbeing) and doesn't deliver any special or in demand skills.

So credit where it is due, this is a smart policy announcement that will meaningfully improve Australia’s (and PNG’s) contribution to improving global wellbeing. Politically speaking, I now rate the ALP a much better chance of retaining Government at the next election. Even with the change of leader, I had viewed the switch to Kevin Rudd as only reducing the beating they would take at the next election. If this goes over with the voting public the way I expect I would now say they were more like a 25 or 30% chance of retaining Government.

If nothing else, it probably proves that if you do enough policy ‘on-the-fly’, you’ll eventually get something right – Tony Hansen 21/07/13

EGP Fund No. 1 Pty Ltd. Up by 1.75%, trailing the benchmark by 1.79% since July 1^st. Since inception, EGP Fund No. 1 Pty Ltd is Up by 39.42%, leading the benchmark by 25.62% all-time (April 1^st 2011).

^{*1 after 31May 2013 dividend of 2.333 cents per share plus 1 cent per share Franking Credit}

^{*2 calculated based on dividends reinvested}