Update No. 144 – 01/01/14

Calendar 2013 has been a particularly prosperous one for us. In terms of personal recent performance, it is the best calendar year since EGP was incepted. We ended the year 34.97% better than our starting point after allowing for any fees and costs (and adding back in dividends paid).

As for the last 8 or 9 years (I didn’t really have enough assets to make formal performance measurement especially useful before then!), it is second only to 2009 in terms of total results extracted from the share-market (I felt like Ned Kelly in 2009…).

It is this time of year that we see a lot of ‘experts’ prognosticate on the likely events of the coming year. The popular ‘expert’ expectation for the Australian market at the start of 2013 was for a year of sideways movement in share prices and a collapse in the Iron Ore price. I don’t need to tell you how these predictions fared…

I usually refer to the efforts of these experts as ‘Reading the Entrails’, the ancient art of pretending to know more than you do based on some apparent (self-determined) skill at determining outcomes based on some selected inputs (usually of dubious usefulness – like animal entrails). People who make predictions are generally idiots, setting themselves up to look foolish.

With that said, I will now make my 2014 prediction! Actually the intent of this post was to point out an interesting anomaly, but when I phrase it as a ‘forecast’ or a ‘prediction’, it generates more interest. The anomaly is the performance lately of the ‘Small Ordinaries’ (SO) against the ‘ASX200’. In the report this time last year, I reminded fellow owners that the performance of the SO in 2012 was 13.68% weaker than the ASX200 including dividends. I mentioned this because the holdings of EGP are potentially more suited to benchmarking against the SO because the majority of our holdings are ‘small capitalisation’ companies. Well 2013 was another shocker for the SO, which has returned -0.76% in 2013. As against a result for the ASX200 of 20.20%.

So since January 1 2012, the SO including dividends has risen from 5,108.93 points to close on December 31 2013 at 5,403.42 for a very modest gain of 5.76%. In the same period, the ASX200 including dividends rose from 30,879.12 to 44,635.11 for a gain of 44.55%. In the ‘reach for yield’ over these 2 years, the larger (dividend paying) stocks in the ASX200 have pulled away from the smaller constituents of the SO.

So my bold prediction for 2014 is that the Small Ordinaries will turn the tables on the ASX200 after a long period of being soundly beaten. The weakness of the SO of course (and the reason that it is not our chosen benchmark) is that it is full of a great many ‘rubbish companies’, small speculative miners with unlikely prospects of ever making money. But within the index, there are a number of very good companies with proper businesses, generating real cash that will, as a group, grow more rapidly than the larger businesses of the ASX200. What we will hopefully do is capture the good results of these ‘proper’ companies, whilst leaving the swill behind.

For the ASX200TR (our benchmark) I would hazard the year ahead has marginally better than average prospects. By marginal, I would estimate the market has probably a 60% chance of exceeding its long-term average (around 9% total return), and around a 40% chance of falling short of that. That is obviously a pretty gutless prediction, but the upside/downside in the market at present is not immediately obvious, and the foregoing is my view, absent any unforeseen event. The cessation, or at least massive reduction of ‘money-printing’ is the only obvious threat globally and a better than average year is likelier than not, well that and the Chinese economy facing trouble (which keeps Australian investors perpetually nervous).

I would suggest the benchmark including dividends will land in the +3% to +15% range in 2014. Believe it or not, despite around 9% being a long-term average, the ASX200 has not finished in that range in the last 6 years, starting in 2008, the run is -38.44%, +37.03% (2009), +1.57% (2010), -10.54% (2011), 20.26% (2012) & 20.20% (2013).

So without further ado, the report for the first half of Financial Year 2014 is attached here, and can be found as with all previous reports on our ‘Reporting’ tab on the website.

Enjoy your New Year’s Day recovery. My next update will be on or about 11 January to get back into weekend posting patterns – Tony Hansen 01/01/14

EGP Fund No. 1 Pty Ltd. Up by 20.28%, leading the benchmark by 6.31% since July 1^st. Since inception, EGP Fund No. 1 Pty Ltd is Up by 64.29%, leading the benchmark by 39.02% 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}