February saw the biggest one-month drop from the benchmark since the portfolio's inception in 2017. The S&P/ASX 200 Franking Credit Adjusted Annual Total Return Index (Tax-Exempt) — or SPAX2F0 — dropped 7.69%. My portfolio held up well in the market ructions, dropping only 2.88%
The performance of my portfolio and the SPAX2F0 are summarised in the table below.
*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. My returns are not audited. I do not account for cash in the portfolio. The net result is that my performance is somewhat overstated, although I endeavour to be fully invested. I unitised the portfolio to assist in calculating performance.
Over time, I hope to do better than the average stock market investor. The strategies I use mean that it's likely I'll do worse than the market averages during bullish markets, and (hopefully) a little better during downturns. It's pleasing that — at least for the time being — things have been going to plan.
So why did my portfolio hold up better than the market this month? There are a few reasons.
The performance of my portfolio and the SPAX2F0 are summarised in the table below.
August 3, 2017
|
February 28, 2020
|
Since July 1, 2019
|
Since Inception
|
Annualised
| |
G&W Portfolio*
|
1.0000
|
1.4811
|
4.06%
|
48.11%
|
16.50%
|
Benchmark (SPAX2F0)
|
61,250.80
|
79,191.88
|
1.42%
|
29.29%
|
10.50%
|
*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. My returns are not audited. I do not account for cash in the portfolio. The net result is that my performance is somewhat overstated, although I endeavour to be fully invested. I unitised the portfolio to assist in calculating performance.
The good news
Over time, I hope to do better than the average stock market investor. The strategies I use mean that it's likely I'll do worse than the market averages during bullish markets, and (hopefully) a little better during downturns. It's pleasing that — at least for the time being — things have been going to plan.
So why did my portfolio hold up better than the market this month? There are a few reasons.
- About 40 per cent of the portfolio is invested in a basket of statistically cheap unlisted stocks. These stocks rarely trade, and I expect to earn my returns from dividends rather than price appreciation. (Sometimes I will be lucky and get both.) These stocks were flat for the month, which insulated the portfolio from the market falls. They remain very cheap, and I would happily buy more of many of these companies at current prices.
- More than half the portfolio is invested in overseas stocks. The three largest of these — Boustead Projects (which dropped -5.2%), Million Hope Industries (-3.94%) and Naked Wines (a recent purchase) — fell less than the benchmark. On top of that, I had a tailwind from the weakening Australian dollar, which is product of luck rather than skill.
- My net-nets generally performed poorly, but they have become a smaller part of the portfolio in recent months.
I've done all the dumb things
Now for the bad news. I made at least three big mistakes this month. The first one was to buy Salmat (ASX:SLM). Salmat recently sold off its major assets and will distribute the proceeds to shareholders in coming months. I have been aware of Salmat for a while, because a few smart investors I know hold the stock. (In fact, I should have bought it when I first looked at it and it was trading around 55c.) I hadn't kept up with the story, but when it traded down to 80c in late February, I took another look.
At 80c, SLM's market cap was roughly ~$160m. Following the sale of its two businesses, SLM had roughly $170m in cash and other current assets. (I applied a haircut of 50% to other current assets and 25% to receivables.)
I assumed the distribution would happen by early July, and assumed another ~$3m of expenses, which is in line with the December half-year. That left me with an estimated distribution of roughly $167.45m, or 84c per share. That would imply a return of 7.83%. Should the funds be distributed on June 30, that works out to be 22.88% annualised. On top of that, SLM has roughly 9.5c per share in franking credits. If they were able to be distributed too, the return would be quite attractive. Salmat has tax losses of ~$55m available at the corporate level, which I assumed would account for any tax arising from asset sales.
My eyes lit up, and I put about 4% of the portfolio into SLM at 0.80. It was a mistake.
While I am no expert on corporate tax matters, it appears SLM could be liable for $11.3m in tax arising from its asset sales. (In calculating this, I assumed $93.32m gain on disposal, less tax losses of $55.6m, which leaves $37.72m net. That works out to a liability of $11.32m at the 30% corporate tax rate.) Once we subtract that, we are left with an estimated distribution of ~78.4c, which is less than my purchase price.
There's a few things to note here. First, I could be wrong in assuming SLM's tax liability. Second, there is a possibility that the distribution could be above 80c. This could happen if SLM spends less than $3m to wind up the company, or if there is some premium paid for the company shell, which is a possibility. Third, if you have a low-tax entity to invest in, such as an SMSF in pension phase, SLM could still be a very good investment due to the franking credit situation. If the proceeds are distributed soon, it could result in a very decent IRR, and the situation appears to be low risk.
My portfolio, however, is subject to personal income tax of >32.5%, which means I'm still liable for some tax from distributions franked at the 30 per cent rate. (If you'd believe, in my excitement to buy SLM, I also overlooked this pertinent fact.)
What is disappointing is that this is not the first time I've been too quick to pull the trigger on a situation like this. (See, for example, my recent discussion of Nzuri Copper.) And while SLM — like NZC — could work out, it was clearly a mistake in process. Thankfully, with the help of a fellow investor, I was able to recognise the mistake quickly. I recently sold my SLM position for 78.5c for a loss of about 2.4% in a week. While the impact on the portfolio will be limited, I'm upset by the sheer stupidity of my decision making. In future, I will use a checklist to ensure I avoid dumb mistakes in these types of situations.
I also made two mistakes of omission in February. I had two opportunities to buy more of the unlisted stocks I described earlier in the post. Both times, I was reluctant to pay the asking price, because I didn't want to bid up the stock. Both parcels of shares were sold to other buyers who were willing to pay up. Even at these higher prices, the trailing gross yields were > 15%. I think it was a mistake to pass up on these opportunities.
If you have thoughts on SLM, or if you think there's a mistake in my thinking outlined here, I'd be very interested to hear from you. You can find my contact details in the "get in contact" tab at the top of the page.
At 80c, SLM's market cap was roughly ~$160m. Following the sale of its two businesses, SLM had roughly $170m in cash and other current assets. (I applied a haircut of 50% to other current assets and 25% to receivables.)
I assumed the distribution would happen by early July, and assumed another ~$3m of expenses, which is in line with the December half-year. That left me with an estimated distribution of roughly $167.45m, or 84c per share. That would imply a return of 7.83%. Should the funds be distributed on June 30, that works out to be 22.88% annualised. On top of that, SLM has roughly 9.5c per share in franking credits. If they were able to be distributed too, the return would be quite attractive. Salmat has tax losses of ~$55m available at the corporate level, which I assumed would account for any tax arising from asset sales.
My eyes lit up, and I put about 4% of the portfolio into SLM at 0.80. It was a mistake.
While I am no expert on corporate tax matters, it appears SLM could be liable for $11.3m in tax arising from its asset sales. (In calculating this, I assumed $93.32m gain on disposal, less tax losses of $55.6m, which leaves $37.72m net. That works out to a liability of $11.32m at the 30% corporate tax rate.) Once we subtract that, we are left with an estimated distribution of ~78.4c, which is less than my purchase price.
There's a few things to note here. First, I could be wrong in assuming SLM's tax liability. Second, there is a possibility that the distribution could be above 80c. This could happen if SLM spends less than $3m to wind up the company, or if there is some premium paid for the company shell, which is a possibility. Third, if you have a low-tax entity to invest in, such as an SMSF in pension phase, SLM could still be a very good investment due to the franking credit situation. If the proceeds are distributed soon, it could result in a very decent IRR, and the situation appears to be low risk.
My portfolio, however, is subject to personal income tax of >32.5%, which means I'm still liable for some tax from distributions franked at the 30 per cent rate. (If you'd believe, in my excitement to buy SLM, I also overlooked this pertinent fact.)
What is disappointing is that this is not the first time I've been too quick to pull the trigger on a situation like this. (See, for example, my recent discussion of Nzuri Copper.) And while SLM — like NZC — could work out, it was clearly a mistake in process. Thankfully, with the help of a fellow investor, I was able to recognise the mistake quickly. I recently sold my SLM position for 78.5c for a loss of about 2.4% in a week. While the impact on the portfolio will be limited, I'm upset by the sheer stupidity of my decision making. In future, I will use a checklist to ensure I avoid dumb mistakes in these types of situations.
I also made two mistakes of omission in February. I had two opportunities to buy more of the unlisted stocks I described earlier in the post. Both times, I was reluctant to pay the asking price, because I didn't want to bid up the stock. Both parcels of shares were sold to other buyers who were willing to pay up. Even at these higher prices, the trailing gross yields were > 15%. I think it was a mistake to pass up on these opportunities.
If you have thoughts on SLM, or if you think there's a mistake in my thinking outlined here, I'd be very interested to hear from you. You can find my contact details in the "get in contact" tab at the top of the page.
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