We will examine ‘market-timing’ in this edition. If you read nothing else, the second to last paragraph is the most important of the blog.
I read once that despite delivering an annual return of 29% over the 13-year period he operated the Fidelity Magellan fund that Peter Lynch’s investor’s weighted average return was meaningfully below that. Investors in the fund tended to add funds heavily after the fund had periods of strong performance and withdraw after periods of weakness.
In discussing EGP with a fellow fund manager a few weeks ago, I said I thought our investors on average would probably be meaningfully higher than our average return. He indicated he didn’t think that was possible. But I explained it is as follows:
Investor 1 invests $100k at the start of year 1. Fund earns a 10% annual return. They stay on for year 2, reinvesting profits.
Investor 2 invests $500k at the start of year 2. Fund earns a 30% annual return in year 2.
Investor 1 has an average annual return of 19.58% at the end of year 2.
Investor 2 has an annual return of 30% at the end of year 2.
The fund reports an average annual return of 20% at the end of year 2, but the IRR of the fund is actually 26.5%:
|
Fund IRR |
|
|
-$ 100,000 |
1/01/2000 |
|
-$ 500,000 |
1/01/2001 |
|
$ 793,000 |
1/01/2002 |
|
26.5% |
IRR |
A similar situation to that described above is what has played out with EGP Fund No. 1. Every time I’ve put out a call to investors that we had really interesting undervalued opportunities, we’ve received strong inflows. The three largest inflows we’ve taken, relative to the size of the business at each time were in mid-2012, early 2015 and mid-2016, each large swelling of the assets the fund operates preceded a period of very strong performance for the fund.
I back-calculated the IRR for all investors since inception and found it is actually 29.9%, with the simple average of IRR’s for our current 67 investors of 25.6% and the median result is 20.3%.
This figure is distorted heavily by a very substantial swelling of our fund in the last 12 months or so and the fact that we are up very sharply over that period. These figures are also swelled somewhat by the substantial holdings of B-shares of my family and some charitable organisations that do not incur performance fees.
In order to understand how regular A-shareholders who have been long-term investors have performed, I looked at our 4 remaining A-shareholders who joined us when we first took on fee-paying shareholders. This was the intake based on the June 30 2011 share price and the fund has delivered 17.0% net of fees and costs since then. Their results:
- Shareholder A1 (initial investment and 13 subsequent additional investments plus 4 dividend payments reinvested) – IRR 19.6%
- Shareholder A2 (initial investment and 8 subsequent additional investments plus 4 dividend payments reinvested) – IRR 17.4%
- Shareholder A3 (initial investment and 1 subsequent additional investment plus 4 dividend payments reinvested) – IRR 16.8%
- Shareholder A4 (initial investment and 7 subsequent additional investments plus 4 dividend payments reinvested) – IRR 20.3%
Each of the above investors joined us more than 5 years ago and never withdrew any funds (yet). All 4 have between a very slightly lower and a meaningfully better return than the fund has generated since they joined. Despite all being EGP investors for exactly the same period, there is a fairly wide 3.5% gap between the best and the worst IRR result, with higher IRR results strongly correlated with a regular investment program.
By the way, there’s a vein of self-interest in mentioning that when I put a call out for new funds, investors have historically done well to heed the call. We have a very good opportunity for the fund imminent that will substantially deplete our cash balance, and possibly necessitate sales of some securities that we still consider reasonable value. It is an investment opportunity that if we get all we are bidding for will immediately become our second largest holding and we expect it to underpin a good portion of our returns for the next 5 to 10 years. We prefer not to sell stocks that are still fairly priced, but the opportunity appears good enough that we will if we have to. Hopefully our investors will again flood us with cash; I’m really excited about this prospect.
If you’re curious to know how good an investment timer you are and what your IRR is, send me an email & I’ll send you your personal IRR calculation as at 31 October 2016 – Tony Hansen 31/10/2016
|
|
Apr 1st 2011 |
Jun 30th 2016 |
Current Price |
Since July 1st 2016 |
Since Inception |
Annualised |
|
EGP Fund No. 1 |
1.00000 |
1.70130 |
2.02305*1 |
18.91%*1 |
149.93%*2 |
17.83%*2 |
|
37333.23 |
52006.69 |
54351.65 |
4.51% |
45.59% |
6.96% |
*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 and a 31 May 2016 Dividend of 6.0000 cps plus a 2.5714 cps Franking Credit
*2 calculated based on dividends reinvested
