Investors received their copies of our statutory and management accounts this week. Such accounts can demonstrate the trickiness of valuation for the inexperienced, for on a per-share earnings basis, FY14 was substantially behind FY13 for the fund. The difference was almost solely created by one holding which was subject to a takeover in FY13, causing a meaningful spike in realised gains that year. Fortunately, underlying asset values are very simple to understand.
EGP is and always will be small and focused solely on generating above market returns. We don’t generally short-sell; our protection in periods where we feel the market is expensive will be to hold more cash than usual. But primarily, our protection in the event of a serious decline in the market will be that our holdings as a group are, based on a number of metrics less expensive than the market on average. If the market were to fall by 30 or 40%, as it is prone to doing from time to time, EGP would decline substantially, but I expect by a good deal less than the market as a whole. It might upset some current investors, but I would actually like to see this point tested.
The preceding paragraph, whenever I find myself talking to a potential investor is not a particularly compelling ‘pitch’. You can understand how much easier it would be to get investors excited about ‘cutting edge technology’ or ‘revolutionary new biotech discoveries’ or some technique that combines fundamental analysis with complicated technical analysis. The truth is, what I do at EGP is 100% fundamental. I keep track of lots of listed businesses and when one gets really cheap in my assessment, I buy. The price frequently declines thereafter, sometimes I will buy more. If a company we own is trading beyond what I feel is a reasonable valuation, and I have a good alternative home for the capital, I will sell. If a really good opportunity presents and I have insufficient cash available to exploit it, I might sell the position trading closest to fair value, even if that position is below my conservative assessment of fair value.
My experience has been that really solid results have been the result of this process, over time.
This ownership of relatively simple businesses, mostly eschewing debt, operating in relatively understandable industries might not sound that sexy, but we’ve managed to generate roughly twice the markets annual return so far doing it. I would be surprised if a fund management methodology that has worked well since the inception of capital markets suddenly stopped working permanently.
Both EGP and our benchmark hit new all-time highs this week. Generally good results this week were held back by a meaningful decline in the market price of our largest holding, United Overseas Australia Limited. Fortunately, this also presented an opportunity to buy UOS at the steepest discount to intrinsic valuation arguably since EGP’s inception, the relatively small success we’ve had in purchasing at low prices this week will prove to be very good value sometime within the next 5 years I expect – Tony Hansen 22/08/2014
|
|
Apr 1st 2011 |
Jul 1st 2014 |
Current Price |
Current Period |
Since Inception |
|
EGP Fund No. 1 |
1.00000 |
1.56145 |
1.60375*1 |
2.71% |
74.90%*2 |
|
35632.05 |
45991.23 |
48299.90 |
5.02% |
35.55% |
EGP Fund No. 1 Pty Ltd. Up by 2.71%, trailing the benchmark by 2.31% since July 1st. Since inception, EGP Fund No. 1 Pty Ltd is Up by 74.90%, leading the benchmark by 39.34% all-time (April 1st 2011).
*1 after 31May 2013 dividend of 2.333 cents per share plus 1.000 cent per share Franking Credit & 31 May 2014 Dividend of 7.000 cents per share plus 3.000 cent per share Franking Credit
*2 calculated based on dividends reinvested
