January portfolio update

The G&W portfolio gained 9.73% in January, while the benchmark gained 3.87%.

	August 3, 2017	January 31, 2019	Since July 1, 2018	Since Inception	Annualised
G&W Portfolio*	1.0000	1.2900	21.22%	29.00%	18.56%
Benchmark (SPAX2F0)	61,250.80	67,739.78	-1.90%	10.59%	6.96%

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

On an absolute basis, it was the portfolio's best-ever month. January was a continuation of a trend that started some months ago: many good things happened to my stocks, and nothing bad. This is unusual, has nothing to do with my abilities as a stock picker, and is unlikely to continue. During January, Spicers, one of my largest positions, announced that it had entered a scheme implementation agreement with Kokusai Pulp & Paper Co. Should the scheme proceed — which seems highly likely — Kokusai will acquire all Spicers shares at an estimated price of 7 cents each. The proposed scheme will involve a return of capital, which will attract a favourable tax treatment, and is scheduled to be implemented mid-year. My current intention is to hold my shares until then.

During the month, I received consideration from Lifull for my Mitula shares. This money was subsequently reinvested in four net-net stocks, which are all based overseas: Minco Gold Corp, Sulliden Mining Capital, Venn Life Sciences and Vical Inc. These stocks were selected on a quantitative basis: they all trade at a substantial discount to their net current assets minus total liabilities. If you are interested in learning more about net-net investing, I suggest you read this blog post from Socks and Stocks from some years back. (I am deeply indebted to Chris for writing this post and for helping me avoid some early mistakes.)

The net-net strategy has a number of attractive characteristics: it should provide exceptional returns over time; there is little to no risk of permanent capital loss; it is feasible for me to find and research companies while working full-time; it is firmly within my circle of competence; and a diversified portfolio should provide more liquidity than some of my current holdings.

I will purchase more net-nets in February, and plan to continue to add more stocks as funds become available. I intend to sell my net-net stocks after holding them for approximately one year. The early results have been promising: the four stocks I purchased have gained more than 10 per cent in aggregate since the first purchase on January 22. (Keep in mind they could have just as easily lost 10 per cent.)

There was not much movement otherwise, except for a further purchase of shares in OMN (now 10.18% of the portfolio), which is also a net-net. The portfolio now consists of 13 stocks.

December portfolio update

The G&W portfolio declined 1.37% in December, while the benchmark declined 0.12%.

	August 3, 2017	December 31, 2018	Since July 1, 2018	Since Inception	Annualised
G&W Portfolio*	1.0000	1.1756	10.47%	17.56%	12.15%
Benchmark (SPAX2F0)	61,250.80	65,216.81	-5.56%	6.48%	4.55%

*Returns are pre-tax, include franking credits, and assume dividends are reinvested. The SPAX2F0 is simply the total return of the S&P ASX200 Index adjusted to include any franking credits received. N.B. I do not account for cash in the portfolio. The net result so far is that my returns are likely somewhat overstated.

The wider market declined for a fourth consecutive month in December. Since the end of August, the benchmark has fallen 9.4% while the G&W portfolio has gained approximately 9.65%. While I am satisfied with the way the portfolio has performed in the recent market ructions, I do not place any real importance on short term results. The portfolio's success will only be apparent over a period of years (five being the minimum). Over such a period, I expect the benchmark will prove to be a formidable opponent — and one that will better most stock pickers.

During the month, the Mitula transaction was approved by a meeting of shareholders. I elected for the cash consideration, which I will receive in January. While the scrip consideration was superior on face value, it entailed exposure to movements in Lifull's share price and the Yen. When transaction costs were factored in, I decided the extra risk was not worth the price of the premium. As it stands, the value of the scrip consideration is about 0.7% higher than the cash consideration (although this does not take into account any transaction costs).

I purchased additional shares in OneMarket (OMN) this month as they continued their decline. I also purchased additional shares in the portfolio's second largest holding, which is currently undisclosed. Additionally, I have been investigating a number of apparently undervalued securities that have been affected, amongst other things, by the broader market's recent decline. When the consideration for my Mitula shares is paid, I'm confident there will be opportunities to redeploy capital into such situations.

Finally, to any readers, Merry Christmas and a Happy New Year! I've had a fulfilling and enjoyable break — I hope you have, too.

November portfolio update

The G&W portfolio rose 6.62% in November, while the benchmark declined 2.21%.

	August 3, 2017	November 30, 2018	Since July 1, 2018	Since Inception	Annualised
G&W Portfolio*	1.0000	1.1920	12.01%	19.20%	14.16%
Benchmark (SPAX2F0)	61,250.80	65,294.78	-5.44%	6.60%	4.94%

*I do not account for cash in the portfolio. The net result so far is that my returns are somewhat overstated.

The portfolio had another excellent month on both an absolute and relative basis. In each of the last two months, the portfolio has outperformed the benchmark by more than 8%. This is highly improbable and unlikely to be repeated.

There were two key drivers for the good result this month. Mitula (MUA), the largest holding in the portfolio with a weight of 30 per cent, started the month at 0.68 and ended at 0.775 —a gain of 13.97%. During the month, Lifull, the Japanese company which is seeking to acquire Mitula, rose 15% on the Tokyo exchange. Additionally, the scheme was amended to provide additional downside protection for shareholders receiving Lifull scrip. As of the end of the month,  the implied scrip consideration is 0.85, about 6 per cent above the 0.80 cash consideration I'm entitled to should the deal close. The final scrip price will be based on the 10-day VWAP as of December 7. I have until December 13 to lodge my election. At current prices, I am still inclined to take the certainty of the cash offer. I will continue to monitor the situation carefully. 

The other major contributor was the 10.5% gross dividend paid out by the portfolio's second-largest holding, which is undisclosed. This company is unlisted, and its shares trade via appointment, usually only a few times a year. The shares have not traded since the dividend was paid, so there was no ex-dividend effect. 

In other developments, OneMarket (OMN) released its financials for the nine months to September, and announced that CEO Don Kingsborough was stepping down for health reasons. The share price remained flat, and I added to my position during the month. One of the smaller positions in the portfolio, Capral, also issued a downgrade. The shares were initially sold down significantly but recovered somewhat by month's end. Capral had current assets less total liabilities of $83.47 million at June 30 (if we include the expense for the most recent special dividend). It last traded at 0.13, which puts it on a market cap of $62.44 million. It is still continuing to generate profits, and I am happy to stay on the register at current prices.

October portfolio update

The G&W portfolio rose 2.74% in October, while the benchmark declined 6.05%.

	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.

September portfolio update

The G&W portfolio rose 1.99% during September while the benchmark fell 1.26%.

	August 3, 2017	September 30, 2018	Since July 1, 2018	Since Inception	Annualised
G&W Portfolio	1.0000	1.0935	2.75%	9.35%	8.02%
Benchmark (SPAX2F0)	61,250.80	71,070.06	2.92%	16.03%	13.69%

There was no buying or selling activity during the month. My ASX-listed stocks continued to rise during the month and Capral (ASX:CAA) paid a special dividend. Late in the month, Spicers (ASX:SRS) announced it was selling its Asian operations. Spicers has been the best performing stock in the portfolio. I bought it in August and October last year for an average cost of 3.4c. At the close of trading today, the stock was trading at 5.6c. At the time I bought it, Spicers was an ugly stock in an ugly industry that no-one wanted to buy. Some simple back of the envelope calculations were all that were required to see it was a screaming bargain. There have been a number of favourable developments since then, and I now believe the stock is trading at, or just slightly below, fair value. Nevertheless, there is still potential for the business, and thus the share price, to improve. During the month, I sold Spicers shares I held in a joint brokerage account with my family members — about one fifth of my total position. (The rest of the shares are held in the G&W portfolio.) I will continue to monitor the position closely.

I will also briefly discuss the Opus Group/Lion Rock Printing situation described in last month's blog. Since my last post, Opus Group has ceased trading on the ASX. Left Field Printing Group is due to begin trading on the HKex on October 8. Shortly before OPG ceased trading, I bought additional shares for my family's joint brokerage account at 40c. The indicative price for the Left Field Printing Group share offer is HK$1-$1.10. Under the transaction, OPG holders receive three Left Field shares for each OPG share. If the shares trade at the share offer price, which is certainly not guaranteed, that implies each OPG share is worth HK$3-3.30 — or, 53.17-58.48 Australian cents at current exchange rates. For that most recent parcel, that's a premium of between 33-46%. Not bad, especially considering the short holding period. I will continue to provide updates as the situation progresses.

*Edit, October 3, 2018: The performance figures for this month were restated due to a mistake; in my earlier post, I forgot to account for the Capral dividend discussed in the post.

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.