Update No. 18 – 31/07/11

A question without notice to readers:

Without researching, which sectors of the market do you think have been the best and worst performers this year?

To help those less familiar, the main sectors are these:

Energy, Materials, Industrials, Consumer Discretionary, Consumer Staples, Health Care, Financials, Information Technology, Telecommunications Services, Utilities and Real Estate Investment Trusts.

I would hazard most readers would have suggested Materials (-6.30%) including BHP & RIO and a raft of other miners.  But interestingly, Telecommunications Services +7.13% has been the best performer, that sector is substantially made up of Telstra (TLS), who it seems may have staunched their decade long share-price decline this year (still a very ordinary business).  Coming in second is Utilities (-2.26%), closely followed by Consumer Staples (-2.45%), comprising beer and grocery purveyors Woolworths (WOW), Coles (WES) and Fosters (FGL) among others.

The worst sector thus far in 2011 is Information Technology (-18.38%).  The major constituent of these indices is Computershare (CPU), which is basically responsible for the whole decline.  Second worst performing sector is a sector I delved into somewhat last week, Consumer Discretionary (-15.14%), chiefly retailers such as MYR, DJS, & JBH, the most interesting thing about these indices in my view is the inclusion of funeral home operator Invocare (IVC), I don’t believe there is truly much ‘discretionary consumption’ in burying the dead, but I guess where else would you put them? Surely not in Health Care? Perhaps IVC is a ‘consumer staple’…

I put this out there just to make readers think about sector allocations.  In my opinion, portfolios should be virtually sector agnostic, concentrating instead on acquiring good businesses at below intrinsic value.  I very much doubt whether 8 months ago, anyone with any market understanding would have nominated Telecommunications as the place to be for 2011.  Nor IT & retail to be the worst performing sectors.  It pays to focus on the business, not the sector.

Throughout reporting season, I will provide a little of my take on some of the more interesting results from reporting season.

To start with, I mentioned last week that Alesco (ALS) would essentially kick-off our FY2011 reporting period (as they have a May balance date).  ALS started the day at $2.70 per share and after announcing rapidly rose about 7.4% to $2.90 (closed up 5.5% with market up 0.9% on the day, and held most of the gain as the market declined further through the week).  Interestingly, ALS’ results were only fair in relation to analyst expectations, but they still jumped pretty hard, I reckon you might see that a bit this reporting season ‘oh, that’s not too bad…’ bounce.  I like to keep an eye on Alesco as they represent a good diverse set of businesses that give a useful feel about the economy (particularly housing/construction).  In my view the result does nothing to weaken my view that the market is undervaluing the current state of the Aussie economy.  This aside, in my view, the most interesting thing (at least to me & other accountants) about the results were that my attention was drawn in the documentation to a recent ruling by the Australian Taxation Office (ATO) whereby if:

“net assets below book value of capital and accumulated losses –dividends are unfrankable”

This would mean that that ALS’ 1.5c interim & 5.5c special dividend could be unfranked (though the company takes a dissenting view) preventing a 3c Franking Credit from being distributed with the dividend to its rightful owners (shareholders).  Most interesting to me is that the ATO feel they should be able to interfere in the capital allocation decisions of business.  The actions of CEO’s & boards are often frightening enough in this field without a cumbersome government bureaucracy getting involved.  There are already laws around boards responsibilities, the ATO have no place in this area in my view, if the tax has been paid at some point in the past and the Franking Credit earned, it should be distributable with any dividend.  The implication would be that a company in such a situation should unlikely be paying dividends (until NTA exceeds capital & losses), and again I question whether the ATO has any business in this realm.

The other announcement that may be of interest to followers of the EGP20 this week was appendix 4D of Oceanagold (OGC). After announcing Thursday night, the shares were hammered Friday by about 11.5%.  The reaction was chiefly to a change in accounting which made the production cost seemingly jump significantly over the previous quarter.  This is purely an accounting change, OGC’s New Zealand assets were always high cost, and should be viewed as a funding engine for the Didipio project, which is where the company’s future lies.  A market over-reaction in my view, they still managed to fund about $11m in development out of cash-flow in the quarter.

Finally, there are huge concerns out there about the US debt-cap.  It would not trouble me if it doesn’t get resolved, it will cause an enormous global over-reaction which should present a good opportunity to buy long-term assets very cheaply, but I think that is unlikely – Tony Hansen 31/07/2011

EGP Fund No. 1 Pty Ltd. Up by 3.44%, leading the benchmark by 7.41% since July 1^st. Since inception, EGP Fund No. 1 Pty Ltd is Up by 12.13%, leading the benchmark by 19.96% all-time (April 1^st2011).

EGP 20.  The EGP20 index is Down by 2.6%, leading the benchmark by 1.37% since July 1^st.  Since inception the EGP20 is Down by 13.93%, lagging the benchmark by 6.10% all-time (since April 1^st2011).

S&PASX200TR  The benchmark index is Down by 3.97% since July 1^st. The benchmark is Down 7.83% all-time (since April 1^st2011).