The G&W portfolio rose 2.74% in October, while the benchmark declined 6.05%.
*I do not account for cash in the portfolio. The net result so far is that my returns are somewhat overstated.
The result this month was obviously very good though it didn't come as a complete surprise. On a relative basis, I expect to make my money in months like October where the broader market suffers. (Though I won't ever expect another month of 8 per cent outperformance.)
There was quite a bit of activity this month, so this update is a bit longer than usual.
Mitula
In the first week of October, I bought more shares of Mitula (ASX:MUA), which I have talked about in the past. Mitula is being taken over by a Japanese company, Lifull, in a transaction that presented an interesting opportunity for investors with small amounts of capital. Under the scheme agreement, holders of less than 20,000 shares were entitled to a cash consideration of $0.80 per share should the takeover go ahead. Holders of more than 20,000 shares, meanwhile, receive scrip. Lifull's price declined significantly between the time the deal was announced and early October, and the timelines of the deal blew out; Mitula's share price declined to reflect the reduced value of the scrip consideration and the added uncertainty. I spent some time reviewing the situation, to make sure I hadn't missed anything in my research. In the end, I decided to purchase additional shares between 0.635 and 0.645 to top up my holding to 20,000 shares.
I figured that while there was a heightened chance the deal might break, the risk-reward was extremely compelling. At 0.635, the 0.80 consideration implied a return of approximately 26% in a number of months. It is important to keep in mind that Lifull shareholders had approved the issue of additional shares and that Mitula's board and management own approximately half of their company's shares, meaning the deal was unlikely to be voted down. Before the takeover was announced, Mitula traded at 0.45, which implied those managers could potentially lose 30% of the value of their investment in the event the deal fell through. There was also the chance that the scrip deal could be sweetened to appease any disgruntled MUA shareholders. Finally, MUA had released a strong trading update, which suggested that its shares would trade above the pre-takeover price should the deal break.
MUA’s share price continued to drop after my purchase, which caused some anxiety. Compounding this, on October 16, the company released a statement in which the directors threatened to revoke their endorsement of the scheme if the scrip consideration did not improve. There was some positive news about a week later, when Lifull released positive results. Its share price rallied approximately 30 per cent by the end of the month, which means the deal is (again) highly likely to proceed. At the end of the month, MUA closed at 0.68. (Unfortunately though, the scheme has been amended to prevent any new shareholders for receiving the cash consideration.)
While I think my thinking on this situation was mostly correct, I clearly made an error with my position sizing. After purchasing the additional shares in October, the MUA position was approximately 30 per cent of the G&W portfolio, or about 15 per cent of my net worth. In hindsight, this was a mistake. I feel I should have capped the position at somewhere between 5 per cent and 8 per cent of my net worth. Luckily for me, it appears I will profit. I have nevertheless learned my lesson.
Spicers
In October, I sold down half of the portfolio's Spicers shares at 0.059. I discussed my feelings about Spicers in last month's report.
OneMarket
I also bought some shares in a new company. OneMarket (ASX:OMN) is a technology company that was spun-off from Westfield. It came to my attention via a fellow investor, so I can't claim any credit for uncovering it. The thesis for this company is pretty simple. I bought my first parcel of shares at 0.88 and have since bought more at 0.81. At 0.88, the market cap of the company is about $90 million. The company has $US152 million in cash and money market deposits, equivalent to $212 million. So, at that price I am buying a dollar of cash for less than 50 cents. The company is currently burning cash but recently announced its reserves will last until at least late 2020 (and that is excluding any revenue it will generate between now and then). The company appears to have good management and bright prospects. In the event that it doesn't work out, shareholders could quite rightly demand the company be wound up. OMN now represents about 6% of the G&W portfolio and I intend to buy additional shares if prices remain depressed. If this has piqued your interest, you might like to check out this write up on VIC.
Dividends
I also received some substantial fully-franked dividends which boosted my performance this month. I have more of these to look forward to in the coming months.
There have also been some developments in the OPUS Group/Left Field Printing Group situation, which I'll have to get to in another update.
August 3, 2017
|
October 31, 2018
|
Since July 1, 2018
|
Since Inception
|
Annualised
| |
G&W Portfolio*
|
1.0000
|
1.1235
|
5.57%
|
12.35%
|
9.81%
|
Benchmark (SPAX2F0)
|
61,250.80
|
66,769.61
|
-3.31%
|
9.01%
|
7.18%
|
*I do not account for cash in the portfolio. The net result so far is that my returns are somewhat overstated.
The result this month was obviously very good though it didn't come as a complete surprise. On a relative basis, I expect to make my money in months like October where the broader market suffers. (Though I won't ever expect another month of 8 per cent outperformance.)
There was quite a bit of activity this month, so this update is a bit longer than usual.
Mitula
In the first week of October, I bought more shares of Mitula (ASX:MUA), which I have talked about in the past. Mitula is being taken over by a Japanese company, Lifull, in a transaction that presented an interesting opportunity for investors with small amounts of capital. Under the scheme agreement, holders of less than 20,000 shares were entitled to a cash consideration of $0.80 per share should the takeover go ahead. Holders of more than 20,000 shares, meanwhile, receive scrip. Lifull's price declined significantly between the time the deal was announced and early October, and the timelines of the deal blew out; Mitula's share price declined to reflect the reduced value of the scrip consideration and the added uncertainty. I spent some time reviewing the situation, to make sure I hadn't missed anything in my research. In the end, I decided to purchase additional shares between 0.635 and 0.645 to top up my holding to 20,000 shares.
I figured that while there was a heightened chance the deal might break, the risk-reward was extremely compelling. At 0.635, the 0.80 consideration implied a return of approximately 26% in a number of months. It is important to keep in mind that Lifull shareholders had approved the issue of additional shares and that Mitula's board and management own approximately half of their company's shares, meaning the deal was unlikely to be voted down. Before the takeover was announced, Mitula traded at 0.45, which implied those managers could potentially lose 30% of the value of their investment in the event the deal fell through. There was also the chance that the scrip deal could be sweetened to appease any disgruntled MUA shareholders. Finally, MUA had released a strong trading update, which suggested that its shares would trade above the pre-takeover price should the deal break.
MUA’s share price continued to drop after my purchase, which caused some anxiety. Compounding this, on October 16, the company released a statement in which the directors threatened to revoke their endorsement of the scheme if the scrip consideration did not improve. There was some positive news about a week later, when Lifull released positive results. Its share price rallied approximately 30 per cent by the end of the month, which means the deal is (again) highly likely to proceed. At the end of the month, MUA closed at 0.68. (Unfortunately though, the scheme has been amended to prevent any new shareholders for receiving the cash consideration.)
While I think my thinking on this situation was mostly correct, I clearly made an error with my position sizing. After purchasing the additional shares in October, the MUA position was approximately 30 per cent of the G&W portfolio, or about 15 per cent of my net worth. In hindsight, this was a mistake. I feel I should have capped the position at somewhere between 5 per cent and 8 per cent of my net worth. Luckily for me, it appears I will profit. I have nevertheless learned my lesson.
Spicers
In October, I sold down half of the portfolio's Spicers shares at 0.059. I discussed my feelings about Spicers in last month's report.
OneMarket
I also bought some shares in a new company. OneMarket (ASX:OMN) is a technology company that was spun-off from Westfield. It came to my attention via a fellow investor, so I can't claim any credit for uncovering it. The thesis for this company is pretty simple. I bought my first parcel of shares at 0.88 and have since bought more at 0.81. At 0.88, the market cap of the company is about $90 million. The company has $US152 million in cash and money market deposits, equivalent to $212 million. So, at that price I am buying a dollar of cash for less than 50 cents. The company is currently burning cash but recently announced its reserves will last until at least late 2020 (and that is excluding any revenue it will generate between now and then). The company appears to have good management and bright prospects. In the event that it doesn't work out, shareholders could quite rightly demand the company be wound up. OMN now represents about 6% of the G&W portfolio and I intend to buy additional shares if prices remain depressed. If this has piqued your interest, you might like to check out this write up on VIC.
Dividends
I also received some substantial fully-franked dividends which boosted my performance this month. I have more of these to look forward to in the coming months.
There have also been some developments in the OPUS Group/Left Field Printing Group situation, which I'll have to get to in another update.
