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:
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
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