March portfolio update

The G&W portfolio gained 0.07% in March, while the benchmark gained 0.73%.

	August 3, 2017	March 31, 2019	Since July 1, 2018	Since Inception	Annualised
G&W Portfolio*	1.0000	1.3290	24.88%	32.90%	18.72%
Benchmark (SPAX2F0)	61,250.80	72,316.67	4.73%	18.07%	10.54%

*Returns are pre-tax, include franking credits, and assume dividends are reinvested. The SPAX2F0 is simply the total return of the S&P ASX200 Accumulation Index adjusted to include any franking credits received. N.B. I do not account for cash in the portfolio. The net result is that my returns are somewhat overstated (though I am nearly always close to fully invested).

March was a quiet month in terms of activity. I bought one new stock, Yowie Group (ASX:YOW), early in the month. At my purchase price of 7.3 cents, Yowie was a classic net-net with a decent margin of safety. At that price, the company's market cap was approximately $16m. The most recently half-yearly reported showed NCAV of approximately $26m. (This calculation was based on the prevailing USD/AUD exchange rate and included haircuts of 50 per cent for inventory and 25 per cent for receivables.) Shortly after my purchase, Keybridge Capital — one of Yowie's major shareholders — announced it intended to make an off-market takeover bid for all of the company's shares. The consideration is 9.2 cents: the first $9 million will be paid in cash, the rest in junk bonds. 

The bid is highly opportunistic, considering that Yowie had about 11.8 cents in net current assets as of December 31 (of which the majority was cash). It appears I am not alone in my view: Geoff Wilson, a vocal critic of KBC and its associates, bought 25 million Yowie's shares in March, bringing his voting stake to 13 per cent. In response, KBC's lawyers referred Wilson's purchases to the takeover panel, alleging they were in contravention of s606 of the Corporations Act. Due to my ignorance of the finer details of Australian corporate law, I have no idea as to the merits of KBC's allegations. I will be watching keenly from the sidelines (with popcorn in hand).

Despite the boost from Yowie, which closed at 8.7 cents on Friday, the portfolio remained flat over the month. Many of my positions drifted lower on no news. I currently hold 18 stocks in the portfolio. Ten of these (including Yowie) are net-nets, and six are illiquid stocks with strong balance sheets and high dividend yields. The remaining two are ASX-listed deep value plays: Capral (ASX:CAA) and Spicers (ASX:SRS), which I have discussed in earlier blogs. I intend to add another net-net to the portfolio in April.

February portfolio update

The G&W portfolio gained 2.95% in February, while the benchmark gained 5.98%.

	August 3, 2017	February 28, 2019	Since July 1, 2018	Since Inception	Annualised
G&W Portfolio*	1.0000	1.3280	24.79%	32.80%	19.77%
Benchmark (SPAX2F0)	61,250.80	71,789.85	3.96%	17.21%	10.62%

*Returns are pre-tax, include franking credits, and assume dividends are reinvested. The SPAX2F0 is simply the total return of the S&P ASX200 Accumulation Index adjusted to include any franking credits received. N.B. I do not account for cash in the portfolio. The net result is that my returns are somewhat overstated (though I am nearly always close to fully invested).

February was kind to my portfolio, but kinder to the benchmark. This is not cause for consternation. During the month, I reduced my position in OneMarket, previously one of the portfolio's largest holdings. I purchased more shares in late January, while the stock was trading at 61 cents. While the share price has improved modestly since then, the company subsequently reported increased cash burn — which considerably increases the risk of the investment. I underestimated the chance that the business would continue to deteriorate. As a consequence, I sized the position poorly. There are a number of lessons to take from the experience. Firstly, I should have waited to have an update from the business before adding further to the position (which was already above 5 per cent of the portfolio). Secondly, I suspect at least part of my overconfidence stemmed from the fact that Samuel Terry Asset Management — a fund management firm I admire greatly — was involved. As those who lost money coat-tailing Buffett into Kraft Heinz found out, following your heroes into an investment can be costly — and cloud your judgement. At the end of February, the OMN position was roughly 5 per cent. While OMN trades below net cash, it could go to zero. For that reason, a 10 per cent position is inappropriate.

During the month, I added four new net-nets to the portfolio: Aberdeen International, Katsuragawa Electric Co, HG Metal Manufacturing and Merchant House International. I was unable to get a full position in MHI, which quickly appreciated after my purchase to a price I was unwilling to pay. I also received reports from a number of holdings, which in the main have performed as expected. The portfolio now contains 17 stocks. I expect to add at least one new position in March.

On benchmarking

The recent changes to the portfolio raise questions about the adequacy of the ASX200 accumulation index as the benchmark. More than 40 per cent of the portfolio is now held in stock of companies listed outside Australia. While the portfolio in no way resembles the ASX200, it is similarly vastly different from the various international stock indexes. Considering this, I have decided to stick with the SPAX2F0, which remains a proxy for the experience of most Australian stock market participants. If you have a more elegant solution, I would love to hear from you.