Update No. 98 – 01/02/13

The AFR last week had an interesting graph last week which showed what a powerful factor dividends are in the performance of Australian equities.  In fact, they account for 43.21% of all gains over the last 20 years in the ASX200.  The graph in this article (pay-walled) shows the ASX200 index is up a compounded 5.73% per annum since 1993, whereas the Accumulation indices (which are what EGP Fund No. 1 benchmarks against) are up 10.09% compounded annually.

10.09% is an excellent rate of return over the last 20 years, provided you are in (as we were) a low inflation environment. Matching that result would have turned a single 1993 dollar into $6.84 of 2013 cash.  Unlike many who believe we are in a permanently lower return world, I believe the next 20 years could be nearly as good for Australian business, generating between 7-10% per annum on a total return basis, depending on a variety of factors.  EGP will continue to target a medium-term (3 – 5 years) outperformance of 3 – 5%.  This level of outperformance may sound modest, but consider this, if the midpoint (4%) of that range had been achieved against the 1993-2013 market performance above, instead of having $6.84 of 2013 cash, you would have $13.96, or in simple terms about twice as much.

We also have several holdings which are heavy dividend payers and our portfolio would have a slightly higher yield than the market, however the majority of our returns has been and will still be (I expect) from capital gains.  This is because as a group, I believe the retained capital will have a much better return than the average listed business.

I will produce some valuation and business characteristic metrics for the portfolio in March after mid-year earnings season has passed, as I have done in the past.  This should be instructive for comparison with the broader market.  Without doing the calculations, I can tell you our P/E ratio will be much lower, EV/EBITDA will be much lower, we will be ‘net cash’, meaning the portfolio will on a weighted average basis hold more cash than debt on balance sheet.

EGP Fund No. 1 hit new records this week both in terms of assets per share and lead over the benchmark.  13 of the 15 companies we hold will report in February, 11 of those late in the month.  I am expecting a set of reports which will justify the recent gains and set a base for further gains into the future.  We are again over 90% in equities after a further round of recent buying, I am still comfortable that our portfolio is undervalued on any basis, but particularly when compared to a market that is returning to more ‘normal’ (based on history) valuation metrics – Tony Hansen 01/02/13

EGP Fund No. 1 Pty Ltd. Up by 10.15%, leading the benchmark by 4.29% since January 1^st. Since inception, EGP Fund No. 1 Pty Ltd is Up by 34.09%, leading the benchmark by 23.76% all-time (April 1^st 2011).