Update No. 302 – as at 31/08/17

Welcome to the first blog relating to the EGP Concentrated Value Fund.

The monthly report relating to August can be found in the performance section of the website (here), along with every other report we’ve ever produced for the predecessor fund.

The first fortnight went well, with a 1.1% positive result for the fund against a slight decline for the benchmark. I mentioned the approximate performance to a fellow fund manager (who is also an investor in the fund) his comment “not a bad result for a CMT” is an apt description. Currently, after taking on some new investment, the fund holds approximately 55% cash, so we remain more ‘cash management trust’ than equity fund at this stage.

We made a couple of new additions to the fund in August, but I will devote this blog to discussing a disposal.

We had a migrated a small holding in Servcorp (SRV) when the portfolio was transferred from the predecessor fund, it was our 4th smallest holding. We acquired our first shares in SRV back in September of 2013 for $3.65 per share. We sold the shares this month for an average price of $6.60. Including dividends, our IRR on SRV was a respectable 21.2%. The result is obviously a little better than that when you add the franking to the dividends (as one always should for a fair, pre-tax comparison).

I am of the view that the business is among the better run businesses on the ASX. But it is an industry that is quite cyclical, as the earnings profile shown below demonstrates:

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
Earnings (cents) 41.2 42.6 5.6 3.9 16.1 21.7 27.0 34.0 40.4 41.4
Dividends (cents) 19.6 24.9 10.0 10.0 15.0 15.0 20.0 22.0 22.0 26.0

Through the cycle, if history is any guide, holders of SRV are likely to earn above-market returns, but we are trying to run a concentrated portfolio where we have the majority of our capital in our very best ideas. Given SRV was already a very small holding and I was of the view that with the considerable challenges SRV will face from well-funded competitors the likes of WeWork (among others), we thought $6.60 represented a price from which returns of the level we are targeting was highly unlikely.

The sale of SRV was among our better timed ones (selling is usually not our strong suit, we tend to buy very well), but in this case, the market came to agree with our assessment in fairly short order. As with all things investment, the better assessment will likely be to look back in a few years’ time.

You can expect a couple more disposals of some of our smaller legacy positions in coming months as they either cannot be scaled into a suitably sized position in the fund, or no longer meet our required rate of return based on our current expectations of the businesses performance – Tony Hansen – 05/09/2017

August 15th 2017 ..Current Price.. ..FYTD.. ..Annualised..
..EGP CVF 1.0000 1.0110 1.10% %
  Benchmark .. 56174.93 56146.82 (0.05%) %

 

DISCLAIMER:

EGP Capital Pty Ltd (ABN 32 145 120 681) (EGP Capital) is the holder of AFSL #499193. None of the information provided is, or should be considered to be, general or personal financial advice. The information provided is factual information only and is not intended to imply any recommendation or opinion about a financial product.  The content has been prepared without taking into account your personal objectives, financial situations or needs. You should consider seeking your own independent financial advice before making any financial or investment decisions. The information provided in this presentation is believed to be accurate at the time of writing. None of EGP Capital, Fundhost or their related entities nor their respective officers and agents accepts responsibility for any inaccuracy in, or any actions taken in reliance upon, that information. The EGP Concentrated Value Fund (ARSN 619879631) (Fund) discussed in this report is offered via a Product Disclosure Statement (PDS) which contains all the details of the offer. The Fund PDS is issued by Fundhost Limited (AFSL 233045) as responsible entity for the Fund. Before making any decision to make or hold any investment in a Fund you should consider the PDS in full. The PDS will be made available by contacting EGP Capital (info@egpcapital.com.au). Investment returns are not guaranteed. Past performance is not an indicator of future performance.

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