August portfolio update

In August, the G&W portfolio returned 0.57% while the benchmark rose 1.91%.

	August 3, 2017	August 31, 2018	Since July 1, 2018	Since Inception	Annualised
G&W Portfolio	1.0000	1.0721	0.75%	7.21%	6.68%
Benchmark (SPAX2F0)	61,250.80	71,977.18	4.23%	17.51%	16.17%

Spicers rose strongly after reporting its results for the year. Mitula, which is my second largest position, declined, ostensibly due to the lagging share price of Lifull. The timeline of the takeover has been pushed back, but the key facts remain otherwise unchanged. Capral's report showed the business continues to chug on. We will receive another 0.5 cent dividend in September.

I added one new stock. It is similar situation to the one I described in the May update. This stock has NTA (mostly cash) roughly equal to its market cap, trades on a P/E of 7.75, and has paid out gross dividends in excess of 13% in recent years. It offers both safety of capital and the likelihood of returns in excess of the benchmark over extended periods. I was only able to purchase a small position (about 3.75%).

I made also made one sale in August, of the portfolio's shares in Kangaroo Island Plantation Timbers (ASX:KPT). While I still believe KPT offers great value, I decided to free up the capital for an attractive shorter-term opportunity in Opus Group (ASX:OPG), a printing business with operations in Sydney, Canberra and rural Victoria. OPG was originally a private equity roll-up, and ran into debt problems after listing. A Hong Kong business, 1010 Printing (now renamed as the Lion Rock Group), bought the debt, converted it to equity and ended up owning roughly 80 per cent of the business. I bought some stock in a family partnership outside of the G&W portfolio in December 2016 because it had significant net cash, no debt and a decent operating business, and have been following it since then. The new owners have cut a lot of fat and have been able to squeeze out a decent profit despite the decline nature of the industry the business operates in.

The opportunity relates to a transaction that is currently underway. 1010 is effectively re-domiciling the business to Bermuda and listing on the Hong Kong exchange. As part of the transaction, OPG shareholders will receive three shares in the new company — Left Field Printing — for each OPG share. There will also be an underwritten share offer for 20 per cent of the new business. According to the scheme documents, this money will be raised at a significant premium to the post-conversion price of OPG stock. To simplify things, and to prevent me holding Hong Kong stock in two entities, I purchased additional OPG stock this month in the family partnership for 0.43. At this price, the stock has a market cap of roughly $60 million. It has $40 million in net assets, including about $30 million in excess cash, and a business throwing off a lot of cash. At current prices, it seems far too cheap. Additionally, if we are to believe the scheme documents, and we are able to sell our shares on the Hong Kong exchange at a price roughly equal to that of the share offer, we stand to make approximately 20% between now and early October. I will provide updates as to how this pans out on the blog. In the meantime, if this has piqued your interest, I suggest you investigate Opus Group's recent filings as well as gvinvesting's excellent write-up of 1010 Printing on the Value Investor's Club. You have about two weeks before OPG is due to delist from the ASX. I intend to buy more shares in that time.

July portfolio update

	August 3, 2017	July 31, 2018	Since Inception	Annualised
G&W Portfolio	1.0000	1.0661	6.61%	6.66%
Benchmark (SPAX2F0)	61,250.80	70,970.71	15.87%	16.00%

In July, the G&W portfolio rose by 0.17% compared to the benchmark's 2.78% gain.

In two days, it will be a year since the inception of the portfolio. When compared to the benchmark, my performance since last August has been disappointing. One year, however, is not an appropriate time frame to measure investment performance. As I mentioned when I first set up the portfolio, my aim is to outperform the index over a three-to-five year period. If the G&W portfolio is still trailing the benchmark at July 31, 2020, I will have to seriously reflect on my abilities as a money manager; if I am still behind as of July 31, 2022, I will, to use Buffett's parlance, "hand in my suit" (providing I haven't done so already).

With that said, I am very comfortable with the portfolio's holdings. I own three stocks that trade on the NSX, and two that trade in low-volume markets. These five stocks make up more than half of the portfolio. (The largest accounts for about a quarter of my assets.) In the last year, the five stocks paid gross dividends in excess of 13 per cent. Most of these dividends will be paid later in the year, which will bolster my second half performance. Many of these stock trade a few times a year or less. In rising markets, such as that experienced in the last year, these stocks, with their static prices, are laggards. As I'm still accumulating these stocks, their lack of price appreciation is a benefit rather a curse. The more I can acquire at current prices, the better.

I have one major "workout" position, Mitula, which was mentioned in the June update. There are three other positions at present: Spicers (ASX:SRS), Capral (ASX:CAA) and Kangaroo Island Plantation Timbers (ASX:KPT). Both Spicers and Capral are capitalised at less than their current assets minus total liabilities, and both have businesses with some earning power. KPT, which accounts for less than 4% of the portfolio, has timber assets that were recently valued at $108 million, slightly more than the company's current market cap. There is a margin of safety in all three of these businesses at current prices.

During the month, I added to one of my existing positions. In August, I expect to purchase an additional stock, which, barring any sales, will be the portfolio's 10th.