CV Capital – 30 April 2019

To my fellow shareholders,

The market continued its strong run in April. Since the beginning of the year, our benchmark (STW) has returned 17.3% inclusive of dividends and franking credits. I have to admit that I am surprised at the strength of equity markets globally given the trade hostilities between the two largest economies in the world, USA and China. I continue to believe that investors should thread carefully and err on the side of caution as I believe there are heightened risks in today’s markets.  

I believe one of the major driving factors pushing up the equity markets is the low interest rate environment. The recent proposed acquisition of Duluxgroup by Nippon is an example of this. The proposed acquisition price offered by Nippon represents approximately 25.3 times Duluxgroup’s prior year net profit after tax. Now assume Duluxgroup can achieve 3% long term net profit growth after adjusting for inflation (equivalent to about 5% nominal growth) and whilst this is lower than recent growth rates (which I believe have been boosted by the housing boom), it is still higher than 1) long term housing stock growth and 2) population growth. This means that it will take Nippon approximately 20 years to recoup the price paid (ignoring any cost savings in combining the two entities). For a company that already dominant locally and is legally restricted from using the Dulux name outside Australian and New Zealand, it is certainly a very rich valuation and I believe the availability of cheap financing from Japan is one of the factors that enabled the high price.

In relation to the fund activities, we did not buy or sell any positions in April. I did try to add to an existing position but the illiquidity in the stock meant that we were not able to buy any shares without moving the share price. I will continue to try and add to this position.   

Our portfolio was up 4.8% in March.

Although I have been reporting CV Capital’s performance on a month end basis, I’ve done it mainly for the purposes of transparency. CV Capital’s objective is to beat the benchmark over the long term (3-5 years) and therefore I do not place too much emphasis on the current performance given the short history. The table below shows our performance (before taxes). Our cash position is circa 23% of the portfolio.

I will be opening the fund to new subscriptions/ investments in the first week of July. The deadline for new subscriptions/ investments will be 5 July 2019. Please contact me directly if you would like to subscribe to more shares.

 15 Jan 1830 Apr 19Gross dividends
(cumulative)
Simple return
(pre-tax)
Compound return
p.a. (pre-tax)
CV Capital1.001.14-13.6%10.4%
Benchmark - STW56.758.994.1711.4%9.0%

Leave a Reply

Your email address will not be published. Required fields are marked *