Update No. 294 – 30/04/17

Statler & Waldorf

We disposed another two portfolio holdings in the second half of April. Neither of them resulted in an especially wonderful outcome, but they generated a respectable return with very little risk.

I was given to think about two favourite characters from my childhood (Statler & Waldorf, the critics/hecklers from The Muppets) when trying to think of a way to describe these investments:

Putting that in investment terms, it’s like this:

Waldorf: What was that?

Statler: It’s called the medium investment.

Waldorf: The medium investment?

Statler: Yeah, it wasn’t rare. And it certainly wasn’t well done!

Together: Mwahahahaha…

The first was an investment in Blackwall Property Trust (BWR.AX). BWR is a property trust trading not far below the NTA. We consider the NTA to be conservatively measured (i.e. it’s probably higher than the accounts state) and so when Blackwall raised a little capital for that entity in December last year, we bought a couple of hundred thousand units.

We never considered ourselves a long-term owner of such an entity, but we really like management (we own shares in the management company Blackwall Funds – BWF.AX) and wanted to support them, we had excess cash and thought we were a good chance of earning a return over a short time-frame that was meaningfully better than the miserable rate our cash presently earns. We managed to sell the position for slightly more than we paid for it after fees and costs and earned a handsome tax-deferred distribution. Our IRR for this investment was 9.5%. Unfortunately, the annualised return of the market over the holding period was more than 30%…

After such a result, we need to remind ourselves that the target is ‘risk adjusted returns’, and this was a meaningfully less risky prospect than the broader market presently is.

The second was an investment in Sietel Limited (SSL.AX). EGP and the board of directors of SSL have purchased substantially all of the very limited trading in SSL shares since we made our first purchase at $2.85 per share in January 2013.

At the time we began buying SSL shares for $2.85, there was $6.82 of NTA and an additional $0.47 per share in the ‘directors valuation’ of the investment properties. Before buying, we did substantial research into the properties SSL owned and with the help of one of our investors who is a realtor in the Melbourne property market, we took the view the properties were worth meaningfully more than the directors’ valuation. In any case, if we took the directors valuation at face value, we began buying the stock at a more than 60% discount to the asset valuation.

We sold this month at an average price a little over $5.80, with the final tranche sold for $6. The NTA is now $7.71 per share, but there is now an additional $2.05 per share in ‘directors’ valuation’ of the investment properties. We still view the directors valuations as conservative, but not quite as conservative as they were when we began purchasing.

So on a ‘like-for-like’ basis, we bought at 39.1c in the dollar ($2.85/$6.82+$0.47) and sold our last tranche at 61.5c on the dollar ($6.00/$7.71+$2.05). Interestingly, there is nearly $2 per share in Franking Credits to consider also…

The buyer of our SSL stock, if they’re a patient, long-term investor is very likely to do very well, SSL is in the process of rebuilding a hot water business (which is how they made much of their original capital). We view this business as very likely to succeed, given the long experience of management in that business. They are extraordinarily conservative in the presentation of the accounts, writing off all the costs of getting the hot water business launched as they’re incurred.

Our IRR on our SSL investment was 13.1%. The annualised return of our benchmark over the SSL holding period was around 10.5%. So our annual advantage over the benchmark was a lean 2.6%, which is less than the 3-5% outperformance we target, but reread the above and tell me we didn’t take a lot less risk to get our return than there has been in the broader market over the same period…– Tony Hansen 30/04/2017

Apr 1st2011 Jun 30th2016 Current Price Since July 1st 2016 Since Inception Annualised
EGP Fund No. 1 1.00000 1.70130 2.0687*1 21.60%*1 155.57%*2 16.68%*2
Benchmark 37333.23 52006.69 61871.64 18.97% 65.73% 8.66%

*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

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