Update No. 3 – 17/04/11

Current Period
 Apr 01 2011
Since Inception
EGP Fund No. 1
S&PASX200 (TR)

EGP Fund No. 1 Pty Ltd. The benchmark lags us for the first time since launch.  Our inaugural lead is a handsome 2.8%.  Please don’t read too much into these weekly swings, we are bound to have some ups and downs along the way, but beating the market by 1% per week is not sustainable (obviously).  We have had some considerable good fortune in acquiring assets particularly late in the week.  We are now holding just a little over 20% in cash, so the initial allocation is almost done.  With a little luck we’ll be reaping the rewards of the recent asset-allocation for many years to come.

EGP 20.  The EGP20 index has moved by -3.44% since launch. Unfortunately, it has not been nearly as successful as the Fund.  7 out of 20 selections are out-performing the benchmark, but 13 are lagging and some, particularly KCN and ERA are really lagging, which is why the shortfall is so large.  Mining is inherently more ‘white-knuckle’ than most other businesses, so you need to remember that when deciding how to allocate your funds.  Now with the caveat that this is not investment advice, I would say, KCN had a slightly ordinary quarter and as a discounting machine, the market in its infinite wisdom has decided that these results mean that all future cash-flows from the assets KCN own are now reduced in value to a figure 13.7% below that of 11 trading days ago.  It is exactly these opportunities that allow us to beat the market, and it is all at once the problem of passive investing (such as setting an index of 20 stocks with 5% allocated to each) – for if I still believed the KCN story, I can now buy a piece of it for 86.7% of what I could on 1 April (remember, we consider the EGP20 as a poor cousin of EGP Fund No. 1 Pty Ltd, if we considered its constituents as better value than our selections, we would not have them in a sample group, but in our fund). As for ERA, I knew it was a big risk when I put it into the index on April 1.  I knew that there was a reasonable likelihood that the Fukushima Nuclear Plant issues relating to the earthquake and tsunami could combine with the known production issues they were having at Ranger due to the flooding etc.  The question investors need to ask themselves is does this really make them 20.4% less valuable than 11 trading days ago.  I must confess, I am a big fan of uranium as a commodity (long-term), if the world really wants to reduce its carbon output, nuclear is the only viable (read cost-effective) option available, maybe build them in more seismically stable locations though…
S&PASX200TR  The benchmark index is up 0.31% since April 1 launch. It did us the enormous favour of retreating by over 1.8% this week; we have always produced our best out-performance in periods of market declines.  I expect this will continue to be the case.  I must confess I sleep better when the market is in decline, for two reasons, firstly I truly believe the businesses I own are less risky than the broader market and secondly, I go to sleep believing there is a good possibility I will be able to buy more of a good business for less than I did the day before.
The S&P website is a font of interesting & useful information.  Some long-time readers will remember my post on managed fund returns.  Well from the S&P website I found an analysis which quite ably demonstrates the same effect.  For those too lazy to click the link & read, I will summarise – basically 70.57% of the funds measured failed to beat the S&PASX200TRover 5 years.  I came up with over 80%, but you get the idea.  Basically it is not easy to beat the benchmark and for the majority of people who would like an exposure to equities, a low-cost index fund makes most sense.  For those who chase a little extra mustard on their hot-dog; they should look for a fund with the investment manager’s incentives correctly structured, minimal up front-fees and most earnings derived in the event of out-performance.

I will be attending the Blues Festival in Byron Bay over the Easter weekend, but I will do my best to update somehow before I hit the campground – Talk next week (I Hope) – Tony Hansen 17/04/2011