The last few months have been unusually active ones for EGP. FY2017 will likely see our highest ever level of portfolio turnover. We are already very near 10% and not yet 6 months through the year. Based on our average holding period of nearly 10 years, we’ve been as busy in the first half of the financial year as we are in the average year.
We disposed of our Challenger Group (CGF) holding this month. We first purchased CGF shares at $3.08 each in November 2012, so we’ve held the shares a little over 4 years. We added to our holding in January 2015 when the share price dipped to $6.15. We sold the holding for an average of $10.99 this month. Allowing for the dividends received along the way, our IRR on the CGF investment was 41.8%.
The holding at disposal was a shade under 2% of the portfolio. An annualised return exceeding 40% indicates the position sizing was too small, but the fact is the portfolio grew faster than the position and it was one of those rare cases when we timed our purchase nearly perfectly, making it psychologically difficult to add to the holding. The share price bottomed 2 weeks after our purchase and then went up in a nearly straight line for almost 2 years to well more than double our purchase price, it simply never looked quite as compelling again. Though in hindsight, would still have made a decent purchase at most of that period.
For a fairly large and liquid business, CGF was uncommonly cheap when we purchased it. At $3.08, based on the FY2012 normalised earnings (normalising is always risky, but we felt it made sense in this case) the stock traded at less than 6x trailing twelve months (TTM).
We don’t always buy ASX100 companies, but when we do, we prefer them blindingly cheap:
Our sales at $10.99 per share were at a price exceeding 17x TTM normalised earnings, so this was an interesting and rare case where substantially all of the gains came from dividends and multiple expansion. There was only very modest EPS growth. The NPAT of the business grew substantially, but there were a few equity issuances along the way, which served as an important reminder of the importance of avoiding dilution.
The buyers of our CGF stock will likely do quite well over an extended period, it is a good business with substantial tailwinds, our reason for selling was simply that 2 interesting opportunities have arisen this month with expected returns meaningfully higher than what we expect from CGF and we didn’t have enough cash to fully exploit these as we wished, so we sold our CGF stock to provide the funding.
The past month has not seen the portfolio perform well relative to the market. Our portfolio is down about 2.4% since mid-November, while our benchmark is up over 4% to new all-time highs. Almost everything we own has drifted downwards in price as everything we don’t own has caught ‘Trump Fever’. This has trimmed a few points off our YTD outperformance.
We remain confident that the market will eventually see the undervaluation in our portfolio holdings and things will again swing in EGP’s favour. The past two months or so has seen the most substantial repositioning of the portfolio in many years and we think we’ve embedded the underlying elements of a strong performance for the next few years – Tony Hansen 15/12/2016
|
|
Apr 1st 2011 |
Jun 30th 2016 |
Current Price |
Since July 1st 2016 |
Since Inception |
Annualised |
|
EGP Fund No. 1 |
1.00000 |
1.70130 |
2.00468*1 |
17.83%*1 |
147.66%*2 |
17.22%*2 |
|
37333.23 |
52006.69 |
56993.94 |
9.59% |
52.66% |
7.69% |
*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
