CV Capital – FY2019

To my fellow shareholders,

Following on my 31 Dec 19 quarter report, I would like to provide a quick update on the FY2019 results (our 2nd year milestone was passed on 14 Jan 20). Last year has been a fantastic year for stocks. Most major stock markets in the world experienced eye-watering gains and the local market was no exception. The table below shows the returns of some major global markets (in no particular order).

The gains across the ASX 200 were very broad based. Out of 200 constituent stocks in the ASX 200 index, 154 (77%) stocks went up in value in 2019. To put the 2019 gains into perspective, the 20.3% price return achieved in 2019 was the best return for the ASX 200 over the last decade. Ranking returns over the past 20 years, 2019 was the third best year. The only materially stronger year was 2009 when the market recovered from the global financial crisis in the previous year. I wouldn’t count on a few more consecutive years of 20%+ gains in the immediate future.

Our performance trailed our benchmark in FY2019 and although it would be nice to beat the benchmark every year, in reality this is extremely difficult to achieve over a long period of time. We do not aim to beat the benchmark annually but rather to beat the market over the long run (3 – 5 years with preference for the latter). In any given year, our investment philosophy of selecting beaten down unfavoured stocks generally leads to underperformance in bull markets and outperformance in bear markets.

An underappreciated fact which is rarely a topic of discussion is portfolio risks. It is obvious to me that if earnings are at similar level then the index at 7,000 is inherently riskier than when the index is at 3,500. As compared to returns (which always gets the news headlines as it is easy to measure), risk cannot be measured (I do not believe price volatility to be a true measure of risk but that discussion is for another time) and therefore much harder to illustrate in a simple manner.

I define risk as the probability of a permanent loss of capital which is fundamentally different than the risk of a share price falling purely based on market sentiment.  

Conceptually, risk adjusted return is the best measure to compare investment performance. However as risk cannot be accurately measured, the risk adjusted return concept is limited to being a mental framework. In terms of our risk profile, I believe our portfolio risks to be moderate given:  

  1. Our average cash position was 20.4% throughout FY2019 and cash remains our largest position at the end of FY2019.
  2. I believe the market has yet to appreciate the inherent value in the majority (circa 70%) of the positions in our portfolio.
  3. On our large positions such as Baby Bunting and Schaffer, I believe Baby Bunting will become the “Bunnings” of their segment and it still has a long runway of growth ahead. The sum-of-the parts valuation of Schaffer is, in my opinion higher than the current market price. It has significant real estate value which is not being recognised.   

I selected our benchmark purely on the basis of it being an opportunity cost. Our portfolio looks nothing like our benchmark. At the end of FY2019, our portfolio has 16 positions with only a single position being a constituent of the ASX 200 index. Given such little overlap between our portfolio and the benchmark, there is little value in analysing difference in performance other than to say we could have gained X% if we invested in the benchmark.

These are the top 6 positions of our portfolio at the end of FY2019 and they account for circa 69% of our portfolio’s value:

FY2019 performance

CV Capital returns for FY2019 and since inception was 16.4% (to be verified by our accountant) and 11.9% respectively. Given the market’s sensational return in FY2019, I think trailing our benchmark marginally after two years is not such an unsatisfactory outcome. The table below shows out performance (before taxes). Our cash position is circa 16.7% of the portfolio and the unit price (pre-tax and including franking credits) as at 14 Jan 20 is $1.25 (rounded).

Note 1: Total returns are calculated by including dividends, franking and other tax credits. The benchmark return calculation does not assume reinvestment

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