Author: DC

To my fellow shareholders,

I wish everyone a happy and prosperous new year.

Overall, 2021 has been a year of many economic challenges; China sanctions on Australia’s exports, lockdowns in Sydney and Melbourne during the Delta variant outbreak, significant fall in iron ore prices and continued border closure which significantly impacted tourism, hospitality and education sectors. The Federal Government has supported the economy by running its largest ever budget deficit in 2020/21 of $134.2 billion and is forecast to post an even larger deficit in 2021/22 of $161 billion and these figures exclude the stimulus from the State Governments. Working hand-in-hand with the government, the RBA has kept interest rates at 0.1% and has purchased $4-$5 billion government bonds a week throughout 2021. So despite the economic challenges, the amount of liquidity being pumped into economy has kept asset prices high. House prices were up 22% in 2021 across Australia according to Corelogic[1]. The stock market also posted another good year with the ASX 200 recording a 13.0% return (excluding dividends) in 2021. Our benchmark STW posted 16% return (inclusive of dividends) for the year. One of the glaring lessons of this pandemic is the economy does not drive stock market returns (in the short run at least).

Fund Activity

2021 was a pretty “boring” year for the fund. We did not purchase any large new positions as demanding valuations made it challenging to identify value in good quality companies. Most of our activity in 2021 was recalibrating existing positions and doing arbitrage trades.

We fully exited our positions in Kangaroo Island Plantations (KPT) and New Zealand Media and Entertainment (NZME). We lost 42.5% and 11.5% respectively on each position. These were both mistakes that I will make from time to time. I have discussed KPT and NZME in past reports here and here.  

We further trimmed our position in Schaffer Corporation, we faired a bit better here making a 95% return over a 4 year holding period. We increased our positions in Bank of South Pacific, Boustead Singapore and Academies Australasia Group. The first two companies I have previously discussed in past reports. Academies Australasia Group (AKG) is an education service provider offering mainly higher education and vocational courses. Australia has been closed to international students for almost two years and this has negatively impacted AKG which relies on a large international student intake. As a result, its share price has fallen 63% from its pre-pandemic high. Management are significant shareholders in the business and they have continued to buy shares in AKG throughout the border closure period. We have a modest position of 4.6% allocated to AKG and I believe that Australia’s attractiveness as an education destination has not diminished despite closing our borders to foreign students. Good quality education, cosmopolitan society, safe environment, proximity to Asia, superb lifestyle will continue to attract foreign students. Our AKG investment is a play on the recovery of international student market and the government has already allowed international students back into the country from 15 Dec 2021. I estimate is that it will take at least 2-3 years before student numbers fully recover to pre-pandemic levels.   

This year we were fortunate enough to be able to spot some good arbitrage opportunities. Arbitrage trading accounted for approximately 7% in returns for 2021. Given the crowding out effect of such activities, it’s probably best not to reveal too much detail other than say were able to profit from discrepancies in share prices of dual listed securities.

Top Holdings

As at 31 Dec 2021, our top 5 holdings accounted for 54% of the overall portfolio value.

Cash and cash equivalents accounted for 9% of the portfolio. I’ve classified companies under a takeover offer that is supported by management to be “cash equivalent”.  

Unregulated monopolies in small markets

When I started this investing journey, my goal was to select investments with the best risk return profiles. Theoretically, this is very appealing but my thinking has slowly shifted over time. I now feel that it is not easy to get a very good handle on risk given there are both known unknowns and unknowns unknowns. One can always handicap for the former but that is not possible with the latter as one is not even aware of the existence of such risk. Coupled with today’s high valuations, this creates a market with many pitfalls.  

So rather than looking for investments with the best risk return profiles, my preference has shifted to looking for investment with low risk. My expectation is that going for the lower risk investment will increase our returns by eliminating the losers in the portfolio. Since inception we have made 29 investments (excluding arbitrage trades) and if we liquidated the portfolio today, 9 investments would be losers. So this current loss rate of 31% is what I aim to further reduce.

There are broadly two major risks in stock market investing: 1) business/ cash flow risk and 2) valuation risk. One way to reduce the business/ cash flow risks is to only select companies with a competitive advantage and a proven track record. This means that we won’t be picking the early Amazons of the world but that’s ok because we also won’t be picking the Amazon “also rans” which probably went to zero. And for every one Amazon there are thousands of “also rans”.

Moving forward, I’ll focus our efforts into searching for companies with a competitive advantage that can compound capital at high returns. Generally, unregulated monopolies exhibit these characteristics and my preference for these investments have grown given the business/ cash flow risk (aside from disruption risk) is extremely low relative to the run-of-mill company operating in a competitive space. But of course the problem is every investor and his dog knows this and valuations are usually bid up to levels where returns become ordinary.

The trick is to find these companies at cheap or reasonable valuations. This will involve patience (waiting for market corrections or temporary trip-ups) and searching for market leaders in less crowded areas (smaller segments of the market or smaller markets overseas).

I plan to populate say 60%-70% of the portfolio with unregulated monopolies (or companies with above characteristics) and this would form the core group in the portfolio. Currently, our top 3 positions fit this category (circa 40% of the portfolio). Over time this may mean that more of our portfolio could be invested overseas (currently, 24% of our portfolio is invested overseas). The remaining balance of the portfolio would be invested in bets that are asymmetrical, i.e. tails I lose $1, heads I win $3.  

Companies with high returns on capital reduce valuation risk either through growth in earnings or payment of dividends. Future valuation in the context of an earnings multiple is difficult to predict. A company being valued at 20x multiple today maybe valued at 10x in the future simply because of external reasons outside the control of management (interest rates, investor sentiment etc). A company with a high return of capital can mitigate this risk. I’ll illustrate an example of this with Bank of South Pacific (BFL), a company that I have previously wrote about here. BFL is a market leader in South Pacific islands and PNG. Its return on equity is around 30% and dividend payout ratio is 60%-70%. The chart below shows the return experience for an investor if he/ she had bought BFL in Dec 2011 (share price K7.53) and held it to Dec 2021 (K12.30).

In Dec 2011, the market valued BFL at a price earnings ratio of 10.2x but over the next decade it fell and it’s currently sitting at 6.4x (37% decline). If earnings didn’t grow, this would be a pretty lousy investment. However, BFL was able to grow it earnings by reinvesting its profits back into the business at high returns of capital (30%). Growing earnings led to higher dividends and both earnings per share and dividends per share rose by 127% and 154% respectively over this period. The increase in dividends offset the compression of the price earnings multiple.   

This meant that despite a 37% compression in the price earnings multiple, an investor owning BFL over the last decade would still have enjoyed an annual compound return of 14.9%. To me this is an example of the high returns on capital providing a margin of safety. Despite the market re-rating the price earnings ratio downwards the investor still made a very good return. If we assume a scenario where the price earnings multiple did not fall, the share price would be K19.64 at 31 Dec 21 and the investor’s annual compounded return would have been 18.4%.

Opportunities like this appeal to me because one can sit back and let the high returns of capital do its work over time. All is that is required from the investor is patience and reinvestment of the dividends.

Fund Performance

CV Capital’s return for FY2022 (1 Jul – 31 Dec) is 4.1% and since inception is 14.7% on an annual compounded basis. We are in the midst of migrating to a new website and you can click here to view the complete performance table. In the future, we’ll move all the updates over to the new CV Capital site.

The share price as at 31 December 2021 is $1.52. Details are as follows:

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[1] https://www.corelogic.com.au/news/housing-values-end-year-221-higher-pace-gains-continuing-soften-multi-speed-conditions-emerge

To my fellow shareholders,

In our March 21 update, I spoke about the bubble in the US stock market. Since then the stock markets in US and Australia has strengthened. The ASX 200 hit a high in mid-August before closing Q3 at similar levels to Q2. This is despite numerous economic events which could have affected investor sentiment, i.e. ASX reporting season in August and September, iron ore price falling 50% between July and September.

I came across a very interesting chart in GMO’s Q2 report which reinforces my view of the current bubble in the US stock market. The chart below shows the percentage of US stocks whose market capitalisation is greater than 10x revenue.

There is nothing magical about 10x revenue being a yardstick for a stock market bubble. Just that it was famously quoted in a 2002 interview with Scott McNealy, CEO of Sun Microsystems after the dot.com bubble where he said:

“At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate. Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those basic assumptions are? You don’t need any transparency. You don’t need any footnotes. What were you thinking?”

So what to do?

We pick stocks, we do not bet on macroeconomic events. Whilst I may have a view on the market, I know that 1) there is a significant probability that my view is incorrect and 2) even I’m right, I have no idea when or how the bubble will burst.

The idea that one is able to liquidate his/ her portfolio just prior to the bubble bursting and then pick up stocks at the market lows is a fallacy. Even if one is able to time the peak correctly (which is nearly impossible), I have observed the last two market meltdowns closely and I can say that buying during a market crash when volatility is at its peak is emotionally very hard to do. In a meltdown stock prices are very volatile and falling fast which cause buyers to hesitate as they can’t help but think that the stock may be cheaper tomorrow. So they keep hesitating but once a low is set, the price rebounds can be very strong but buyers are anchored to the previously low prices which cause them to further hesitate. These emotions can cause a cashed up buyer to completely miss out in a market meltdown.  

Whilst we will not materially change course given my views on the elevated stock market levels, we will be more cautious than normal.

• We may sell positions more readily where we believe it’s fully valued or even slightly undervalued by the market. In less bullish times, we may hold on to them until we find another opportunity to redeploy the capital.
  
• We may raise the bar for selecting new investments.
  
• We’re less likely to be 100% invested. However, if a no brainer high quality opportunity emerges, we will not hesitate to put all our capital to work.

In a market meltdown I fully expect our portfolio to fall by 30% or more. For a long term investor without a crystal ball, this is still a better strategy than trying to time the market. The great investor Peter Lynch once said “far more money has been lost by investors preparing for corrections, or  trying to anticipate corrections, than has been lost in corrections themselves”.

Fund Activity

We increased our holdings in BFL, a holding which was previously undisclosed. BFL is the ASX ticker for the Bank of South Pacific, a PNG based financial institution which is the largest bank in the South Pacific Islands. The key reasons we invested are:

1. It is highly profitable
2. Has a dominant market share in its home market
3. Cheap and trading at a lower valuation level than compared to its weaker competitor, Kina Securities (KSL)
4. Earnings growing at approximately 11% p.a.

BFL provides traditional banking services to PNG and other pacific islands. It’s market share in PNG is 65%, dwarfing its main competitor KSL at 13%. The remaining market share is held between ANZ (institutional) and Westpac who are more focused on servicing Australian companies operating in PNG. Competition is light in PNG, as this AFR article quoted “Of the 80-odd bank branches and sub-branches BSP operates across PNG, three quarters face no immediate competition from a rival lender in the town or region”. The lack of competition makes the bank hugely profitable. Over the last decade BFL reported the net interest margin (NIM) of 6% and return on equity (ROE) in the mid to high 20% as compared to Australian banks who typically report NIM of 2% and ROE in the mid to low teens.

A major risk of banking is poor lending standards. In the context of PNG, in my opinion is BFL does not have a risky financial position as:

• Out of the K$27 billion of assets in FY20, loans make up about 49% of total assets. Cash and investment in PNG treasury and central bank bills make up 21% of the total assets.
• It has a high Tier 1 capital ratio of 20%.
• Given the low level of competitive and its market dominance, it does not need to target poor credit customers. The current CEO was previously head of risk management which in my opinion is positive for a bank.
• FY20 bad loan provision of circa 5.8% of total loans is also higher than KSL at 2.1%. This suggests that BFL is more conservative managed.

Over the past decade, the net profit and dividends grew by approximately 11% and 8% per annum respectively.

Comparing the metrics between BFP and KSL, it is obvious that BFL is a much stronger company.

Despite this, KSL trades at a higher price earnings ratio (7.7x) compared to BFL at (6.9x). This makes little sense economically given BFL’s higher return on equity and shares the same risks. It is like akin to investors paying more for a 5% term deposit than compared to a 10% term deposit.

I believe the reason for this is illiquidity and ignorance. BFL did a compliance listing on the ASX in May 2021 (it was already listed in its home market). As it did not raise any capital, it did not issue shares onto the ASX so trading has been very illiquid. In fact for many weeks after the ASX listing, there were no trades and only recently has a few trades occurred as shareholders transferred their holdings from PNG to ASX. The illiquidity means that many large investors are unable to buy the stock.

At 6.9x price earnings ratio, it is very cheap considering its dominant position, ROE and past growth rates. As a point of comparison, each of the Big 4 banks have lower market share in Australia, are less profitable on a NIM and ROE basis and trade at a price earnings ratio of 16x to 21x.

The key risk for BFL is sovereign credit risk. It has a significant exposure to the PNG government through loans to various government entities. The PNG economy has been struggling for the last few years and the government has been running a fiscal deficit which was made worse by Covid-19. The government debt to GDP is circa 50% and expected to grow in the short term. The good news is the economy is likely to improve next year with the current high LNG prices and progress on Papua LNG, the next mega LNG project in PNG. PNG is also benefitting from renewed Australian assistance (financial and otherwise) to counter China’s growing influence in the Pacific. However, this sovereign credit risk means we have to size our position accordingly.

Fund performance

CV Capital paid a 13.6 cent fully franked dividend in September and all dividends were subsequently reinvested. Including dividends, CV Capital’s share price fell by 3.6% from June 21 to Sept 21. A key reason for the fall is the payment of the performance bonus in September (details disclosed in the FY21 financial statements sent to all shareholders). Our returns (post performance bonus) since inception to 30 September 2021 is 14% p.a.

The chart below shows our returns on $100,000 from inception to 30 September 2021 compared to our benchmark.

Our cash and cash equivalents position are circa 14.8% of the portfolio and the share price as at 30 September 2021 is $1.40 with the subscription price being $1.34. Details are as follows:

Our accountant has finalised our 30 June 2021 accounts and we will be sending out our FY21 financial statement to all shareholders shortly.

We are announcing an inaugural FY21 fully franked dividend of 19.4 cents per share (made up of 5.8 cents in franking credits and 13.6 cents in cash) which will be reinvested (or paid) before 30 September 2021. A dividend statement to all shareholders will also be issued.

The key reason we are issuing a dividend is to pay out our franking credits which have no value to CV Capital. Given our goal of harnessing the effects of compounding capital over a long period of time, our default position will be to reinvest the dividends. I will be reinvesting all of my dividends.

The reinvestment price per share (verified by our accountant) is $1.33, details as follows:

Should you elect not to reinvest your dividends, please inform me before 12 September 2021.

Feel free to contact me if you have any questions.

Illustration of dividend reinvestment
Assuming a shareholder had 100,000 shares then he/she would be entitled to a dividend of $19,400 (19.4 cents x 100,000). Out of this amount, the cash portion is $13,600. Based on a dividend reinvestment price of $1.33, the shareholder would be issued 10,226 shares ($13,600/ $1.33).

To my fellow shareholders,

The ASX 200 has closed the chapter on the pandemic. At the end of June, the index closed at 7,313 points which is higher than its pre-pandemic level.  As I write this, Sydney, Brisbane and Perth are all in some form of lockdown due to outbreaks of Covid’s Delta variant. The difference in market reaction at the start of Covid lockdown last year and the current lockdown is stark notwithstanding the delta variant being twice as transmissible as the original Covid virus. Recently, a friend sent me a chart for the of 10 year Greek government bond yield which I found quite amusing. Back in 2012, markets were worried that Greece would default on its government debt which caused investors to dump Greek debt. Greek debt was then toxic, rating agencies downgraded them to junk and yields shot up to 35%. A default was avoided due to the EU and ECB stepping in to bail out Greece. Fast forward to the present and it appears that Greece is more indebted now than it was in 2012 as the government is running large fiscal deficits to support the economy through Covid (see here). Greece is more indebted than ever yet it’s 10 year government bond is trading at half the yield of Singapore, a creditor nation which is AAA rated. WTF?

Fund Activity

We bought more shares in Boustead Projects, a company I previously discussed here. We also increased our stake in Boustead Singapore, the parent company of Boustead Projects. These two positions combined currently make up 23% of the portfolio.

Boustead Singapore

Boustead Singapore’s history goes back 190 years as a British trading house operating in Singapore and Malaysia. In the 1970s, it separated from the Malaysian side of the business which had most of the tangible assets, leaving it with a smatter of different businesses. By 1996, when the current management took over, the company was a shadow of its former self and had a market capitalisation of only S$14 million.

Today, Boustead Singapore has 3 key divisions; (1) Boustead Projects (real estate) (2) engineering business and (3) geospatial division. They have recently acquired a health division and although the size of this division is currently not material, its growth prospects are reasonable. We made an investment in Boustead Singapore due to the following:

1. Top class management
2. Geospatial division is a gem of a business 
3. On a sum-of-the-parts basis, it was very cheap

Top class management

Boustead Singapore is led by its major shareholder and CEO, Mr Wong Fong Fui. You can read about him here. His track record at Boustead Singapore is excellent, Boustead Singapore has paid a dividend every year since 2003 and compound shareholder returns since 1 January 2000 till today (21.5 years) is approximately 18% p.a. $10,000 invested in 2000 would have turned into roughly $368,000 today.

This performance is truly extraordinary and I would bet Mr. Wong would easily be in the top 0.1% of CEOs globally based on his track record for shareholder returns.

Geospatial division

The geospatial division is the licensed distributor of Esri products in the region (Australia, Singapore, Malaysia, Indonesia, and other smaller markets). Esri is the global leader in geospatial software. Think of it as googlemaps on steroids for commercial customers. Australia is by far the largest market in this division, accounting for nearly 75% of the division’s revenue, which provides us with a partial currency hedge. Traditionally, key customers are government organisations but over past 20 years, more and more corporate customers are using geospatial software. This has translated to strong and steady revenue and profit growth over the past 17 years, as shown in the chart below. FY2021 revenue and profit bump was due to governments using Esri solutions in their fight against the Covid-19 (click here to learn more).

Software businesses are fantastic because their revenues are usually very sticky. Once a client has all their data stored on particular software, it is usually troublesome and risky to migrate to another vendor. Although this division is an exclusive distributor of Esri’s products and doesn’t own the IP, I think the risk of termination is actually pretty low due to these two reasons:

• The relationship between Boustead Singapore and Esri goes back some 3 to 4 decades and the founder of Esri owns close to 12% of the geospatial division.

• Due to the nature of these solutions and especially with government customers, there is typically a long lead time involved for a sale and both consulting and training are important aspects of a sale. So there is symbiotic relationship between Esri and Boustead as Boustead Singapore has the relationships with government which generate sales and can provide consulting and training to the customer.   

I believe demand for geospatial technology will increase as we move deeper into the digital age with further development of virtual reality, autonomous driving, collection of geospatial data from internet of things for big data analysis, smart cities etc.

Besides the real estate division (Boustead Projects), the other big division in Boustead Singapore is the engineering division. The engineering division mainly designs and supplies waste heat recovery units, process control systems for downstream oil & gas companies. This business is global and cyclical as it depends on the capital expenditure cycle of their downstream oil & gas clients. The chart below highlights the cyclicality of its revenue and profits.

Sum-of-parts valuation

I calculate below the sum-of-parts intrinsic value for Boustead Singapore based on its 31 March 2021 financial results.

Our average purchase price was around A$0.78 cents which is significantly lower than my assessed intrinsic value (the A$ and S$ are nearly equal value). The paper gain on this investment is currently 49%.  

In relation to securities sales, I trimmed our positions in Schaffer Corporation and Baby Bunting. The share price for Schaffer was approaching my assessed intrinsic value so I decided to offload some our holdings. At inception Schaffer was the largest position and is currently close to 7% of the fund. Our returns from Schaffer are circa 94% so it has been quite a good ride so far.

I sold 20% of our position in Baby Bunting when the share price hit $6 (our average cost price was $1.45). I trimmed the position because I felt the market was pricing perfection in Baby Bunting future results and I wanted to raise some cash to be a bit prudent in current market conditions. Overall, Baby Bunting is still our joint largest position (the other being Boustead Singapore) in the fund.  

Fund performance

It’s the end of financial year and the accountants are currently preparing our financial statements and taxes. So the numbers presented below may change slightly, mainly due to tax. CV Capital return for FY2021 (1 July – 30 June) is 45.2% and since inception is 15.6% on an annual compounded basis.

The chart below shows our returns on $100,000 from inception to 30 June 2021 compared to our benchmark.

Our cash and cash equivalents position are circa 16.3% of the portfolio and the unit price as at 30 June 2021 is $1.65. I’ll update the table for the subscription and redemption prices once the accountant confirms our tax position. The share price can be broken down into the following:

Dividends

We will be issuing our inaugural dividend this year. The key reason for issuing a dividend is to pay out our franking credits to shareholders. The franking credits have no value in the fund and our shareholders may be able to benefit from it depending on your individual tax position. Given the aim of the fund is to compound capital for the longest period possible, by default I will be reinvesting the cash portion of the dividend into the fund. The unit price for dividend reinvestment will be our unit subscription price at 30 June 2021 as calculated by the accountant. If you do not wish to reinvest the cash portion of the dividend, please advise me accordingly.

To my fellow shareholders,

I know I sound like a broken record when I say that I’m concerned about the strength of the stock market, but in the first quarter of 2021, the market climb has picked up pace. In fact, it’s not only the stock market which has been going up, bond prices are at all time highs,  Australian house prices are rising at fastest pace in 32 years and even prices of 20-30 year old Japanese sports cars (e.g. Honda NSX, Toyota Supra, Nissan Skyline) have gone up 2-3 fold. So is the stock market (US market in particular) in a bubble? Let’s explore this a bit.

It is inherently difficult to identify a bubble before it burst. Most bubbles are only universally acknowledged as bubbles after they burst. But there are a few common features of a bubble, the first is overvaluation. Robert Shiller, the economist who famously picked the top for both the dot com and housing bubble produces the cyclically adjusted price earnings ratio (“Cape ratio”). Annual corporate earnings are unstable, so the Cape ratio uses the average 10 year earnings (inflation adjusted) to smooth out the earnings volatility to produce a more stable long term valuation metric. Although it has its issues, I believe it is still a better valuation yardstick than the simple price earnings ratio.

The chart below shows the Cape ratio for the S&P 500.

The S&P 500 Cape ratio is currently at the second highest level in 140 years. It is only eclipsed by the dot com bubble in 1999/2000. However, you’ll constantly hear punters play this down by arguing that the high stock prices are justified by the low long term government bond yields (long term interest rates). In fact, real long term government bond yields in the US have fallen to the lowest level in 140 years. Interest rates act like gravity on stock prices and when gravity is low, prices rise.  To illustrate this point, the next chart shows the excess Cape yield which is basically the inverse of the Cape (1/Cape ratio) less the long term government bond yields (adjusted for inflation).

After adjusting for the current long term government bond yields, it appears that the excess Cape yield shows a far less extreme situation than just looking at the Cape level. However, that’s a relative way of looking at it and in my opinion, completely missing the forest for the trees. Bond yields are the inverse of their prices, so the reality is that real long term government bond prices in the US are at a 140 year highs and stock prices, relatively speaking are cheaper. It’s like saying a Porsche is cheap when compared to a Ferrari.

Looking at the Cape chart, the current situation looks to be the inverse of the situation in the late 70s/ early 80s, when  prices of both stocks and long term bonds were very low (bond prices inverse of its yield) which was a great time to invest in both classes as prices rose over the subsequently decades.

The second feature of a bubble is euphoria and crazy investor behaviour especially on the part of individuals. Jeremy Grantham of GMO, a veteran market historian says that this is the single most dependable feature of the great bubbles in history (I encourage you to read his latest letter here). Some examples of current euphoric investor behaviours are:   

1. The value of Bitcoin hit A$72,000 and is about the same value as a 1kg gold bar. It seems digital gold is as a good as the real thing.
2. Tesla Inc’s current market capitalisation is worth more than the world’s top 6 car manufacturers combined (Toyota, Volkswagen, Daimler, Ford, General Motors and Honda). In 2020, Tesla made 500,00 vehicles while Toyota alone made 8.8 million vehicles. But Elon is superhuman, no?
3. Coinbase, a Bitcoin exchanged closed on the day of its IPO at a market capitalisation of US$86 billion, making it as valuable as Intercontinental Exchange Inc, the owner of the New York Stock Exchange.
4. The $88 billion IPO boom in special-purpose acquisition companies (SPACs) so far in 2021. SPACs are shell corporations listed with the purpose of acquiring a private company at a future date (within 2 years). These are pure speculative vehicles as how can one possibly invest intelligently when one doesn’t even know what business the SPAC will end up acquiring? The last time we had a SPAC boom was in 2007, a year before the global financial crisis.
5. Explosion in US trading volumes in 2021. The average daily volume in 2019, 2020 and 2021 are 7 billion, 10.9 billion and 14.7 billion trades. The average daily trading volume in 2021 has doubled from 2019. This has coincided with the rise of Robinhood (trading app) and the retail investors who have enthusiastically jumped into the market (speculation frenzy).

The trillion dollar question is how much more can it rise and when will it burst? I’m afraid I have no idea and I don’t think anyone can answer this will a great level of confidence, that’s just the nature of bubbles, they are totally unpredictable. Jeremy Grantham believes the party can last till early summer in the US, we will see. Luckily for us in Australia, the ASX does not seem as overvalued as the US market which is a good thing in my opinion. But on the other hand, when the US market sneezes, everyone else catches the cold. So we will not be immune if the US bubble bursts.

So the next question is, does it matter for a long term value investor like CV Capital? I would say it does but not from trying to prevent our portfolio from going down along with the market. Some stocks we plan to hold for decades so what does it matter if the stock drops by 50% tomorrow? We won’t be selling anyway. So from a paper loss perspective, I don’t think it matters that much.

Where it matters is that if we go into a market meltdown fully invested (i.e. no cash), then we lose the opportunity to invest at bargain prices. So there is an opportunity cost for going into a market meltdown fully invested. One reason why we have outperformed the market is that we put some cash to work when the market crashed in March 2020.

Portfolio management is about balancing the known with the unknown. So we’re proceeding forward with even more caution than usual. Post March, I have been liquidating some of our positions. I’ve been selling positions where I believe the share price has reached or gotten close to its intrinsic value (which we normally do anyway but now I’m being a bit more conservative with my intrinsic value assessments) or selling positions for stocks which have too small portfolio weightings to make a difference to our overall returns (spring cleaning if you like). We will continue to stay invested in positions which we believe to be still undervalued and companies which we believe are long term compounders (companies with comparative advantages who will continue to grow their intrinsic value over time).   

Fund Activity

We have sold down our holdings in New Zealand Media and Entertainment (NZME). Overall, this has been a lousy investment and we lost 11.5% over 3 years. This was part of the group of stocks which I initially transferred into CV Capital at inception. NZME is the leading media company in New Zealand which owns newspapers, radio stations and some websites. My original thesis was that on a sum-of-parts basis it was cheap and although the newspaper part of the business was in decline, it was cutting costs, still had some growth assets (radio and home selling website One Roof) and was going to launch a paywall on its NZ Herald website, all of which could potentially offset the decline in newspaper revenue.

However, over the past 3 years, the radio business has declined rather than grown and both the paywall and OneRoof are starting from a very low base so it will take a long time before their earnings make a material impact on the group. So NZME’s management had to rely on cutting cost to preserve earnings and that is a very tough game as there is only so much fat you can trim. This has been a good lesson for me, that it is much better to buy a more expensive growing company than a cheap declining company.

Fund performance

CV Capital return for FY2021 (1 July – 31 March) is 36.5% and since inception is 14.7% on an annual compounded basis.

The chart below shows our returns on $100,000 from inception to 31 March 2020 compared to our benchmark.

Our cash and cash equivalents position are circa 11.8% of the portfolio and the unit price as at 31 March 2021 is $1.55. The share price can be broken down into the following:

To my fellow shareholders,

A very happy new year to all of you. Personally, I’m relieved 2020 is over and will be happy to forget last year. It has been a devastating year for me personally as I lost someone dear to me in my family. So I do hope 2021 brings better health, happiness and prosperity to everyone. 

Financially, 2020 will be an unforgettable year given the wild roller coaster ride it has been. We started the year strongly with a compound return of 11.9% (since inception) and during the depths of the market falls in March, we basically gave up all the returns within a few weeks. But by the end of 2020 calendar year we more than made up for all of the lost ground and our returns now are greater than they were at the start of the year. Pretty wild ride but you do need a tough stomach to enjoy equity market returns. 

Housekeeping

Firstly, the June and September returns have been adjusted upwards slightly. Two reasons for this, (1) our accountant has calculated the tax position for financial year 2020 so this impacts the share price from the end of FY2020 (2) I mistakenly used a slightly higher share count to calculate the June and September’s share price. The good thing is that because the accountant independently calculates our share price, there is another layer of verification. This is one reason why I insist shareholders looking to exit do it after our financial close so that the share price can be independently verified. Moving forward, I intend to also get a second person to review my quarterly share price calculation to minimise the likelihood of mistakes occurring.

Taken together the share price has marginally increased for June and September as shown below.

I also want to touch a bit on subscriptions and redemptions prices. CV Capital as a company is an inefficient tax vehicle for making investments. However, what it lacks in tax efficiencies, it makes up for in low cost. Compared to a managed investment fund unit trust structure, our operating costs are miniscule. Given these tax ineffiencies, we have to make certain adjustments to our reported share price for subscription and redemption prices for it to be equitable for all shareholders. For example, if we paid a redemption price based on the reported share price (assuming we have unrealised gains) then the outgoing shareholder is potentially leaving capital gains tax on the unrealised portfolio gains for remaining shareholders in the fund to settle. Conversely, if new subscribers paid the reported share price then he/ she may end up having to pay capital gains tax on gains which they did not benefit from, being new shareholders. We calculate subscription and redemption prices as follows:

Subscription price = Share price less any franking credits and estimated capital gains tax from unrealised gains

Redemption price = Share price less estimated capital gains tax from unrealised gains

I will be sending out an information memorandum for the fund in the next few weeks which will provide further details.

Lessons from 2020

One of the key lessons for me in 2020 is to pay greater attention to events which have the potential to cause great economic and market turmoil and to understand these risks from first principles rather than relying on second hand (media) views.

Global stock markets were so optimistic in January 2020 despite Covid-19 raging in China. I suspect even a first year epidemiology student would have understood the grave risks Covid-19 posed to the world, yet the financial markets in developed countries were too busy hitting all time highs to take notice. I believe a key misjudgement was that investors used historical experience to project the future. They assumed that the authorities could get on top Covid-19 just like how Sars and Mers were tamed with little disruption to the economy. They also assumed that the health systems of developed countries were better equipped and organised to tackle the virus more effectively than China (which had to lockdown the entire country). How wrong the markets were on both counts.

Investors outside China had 2-3 months to see how contagious and deadly the virus was. The gravity of the situation was easily recognisable to those who had some knowledge of epidemiology and one had more than enough time to reduce equity exposure or put downside protection in place which a few famous investors actually did. 

Last year also showed that financial markets are purely sentiment driven in the short term. Who would have imagined that despite the worst global economic contraction experienced since World War 2[1], both the US stock market indices (Nasdaq and S&P500) and US Covid-19 daily infection and death rates are currently simultaneously hitting all time highs. It is truly astounding to watch. There is a massive amount of capital riding on the speed of the global vaccine rollout. From my vantage point, the market appears to be pricing in a successful swift vaccination of the population in the developed countries and a quick economic recovery thereafter; lofty expectations perhaps.   

Losers and winners

The biggest loser in the fund as at 31 Dec was Steamships Trading. If we sold the investment today we would cop a 35% loss. However, I do not deem our decision to investing Steamships to be a mistake. Instead, it was the disproportionate amount of capital allocated to this investment given its risk profile as a company based in PNG (a young country with an immature political system) that has hurt our returns. However, I am still optimistic for a recovery as the catalyst for growth (Papua LNG project) is still there albeit delayed by the current government. I have previously covered this in more detail here.

Another loser in 2020 was Kangaroo Plantations. Our thesis for investing in Kangaroo Plantations was that it had mature blue gum plantations on Kangaroo Island which was ready for harvest except that it was waiting for State government approval for construction of a wharf which would enable export of the timber off Kangaroo Island. What I didn’t predict was the intensity of the bush fires in January 2020 which ravaged all of their plantations across the island despite the plantations not being contiguously located. Although Kangaroo Plantations did receive insurance payout for the fire damage, it was significantly less than the market value of the timber destroyed. 

If we sold the investment today we would incur a 37% loss and I regard this as a permanent loss of capital given the destruction of the timber assets. The company is still waiting approval for the wharf and so this loss may narrow once the wharf is approved (as they could potentially charge third parties for the use of the wharf). Fortunately, our allocation to this investment was circa 5% (based on cost) and the overall impact to the long term returns of the fund is currently 0.6%.

The biggest winner in the fund for 2020 calender year was Baby Bunting. As at 31 Dec, this investment makes up 15% of the fund and the total returns (including dividends) is circa 228%. I have discussed this investment in detail in previous reports (see here) so I won’t bore you again suffice to say the dumbest decision I made in 2020 also involved Baby Bunting. After rising to close to $4 pre-Covid it fell to circa $1.50 during the March market panic. I did top up our position by 20% but in hindsight it was such an obvious no brainer that we should have bought bucket loads of it. I understood the business well, it has virtually no brick and mortar competitors of significant size, it is selling essential goods for expecting mothers (so the lockdown affected it far less than other retailers) and it was going to double its store footprint over the next decade. The stock is currently trading close to $5. I deem our biggest winner for 2020 also to be my biggest mistake this year. In this game, mistakes of omission can hurt far more than mistakes of commission.

Another investment which materially helped our returns in 2020 calender year was Seek. We purchased this investment close to the lows in March which I regard as pure luck. Seek is the dominant job board site in Australia, New Zealand, South East Asia (via JobStreet), Mexico, Brazil and China (via Zhaopin). When we bought the stock at $11.75, the market was valuing Seek at $4.1 billion. Its average operating cash flows over the past 3 years was circa $350 million so we were paying about 12 times operating cash flow. Based on these numbers and the period when we bought it, it doesn’t look like an absolute steal. However, when you consider that the ANZ division (close to an unregulated monopoly) changed (Dec 19) its pricing structure to better align ad price to job value, and that its subsidiary Jobstreet will likely follow suit in due course then at $11.75 it’s starting to look like a significant bargain. The ability to charge higher prices for an unregulated monopoly is the ultimate no brainer investment. 

To imagine the possible impact from a price hike, we can look to realestate.com, the leading online real estate advertising company in Australia which is comparable to Seek. In FY2015, realestate.com started its journey to market based pricing for its Australian business which basically meant charging ad prices based on property values (which is essentially the same thing Seek is currently doing). This change in pricing method helped realestate.com to increase revenue from $477 million in FY2015 to $874.9 million in FY2019 (before Covid), an impressive 83% growth for an already mature market leader. Realestate.com didn’t disclose ad volumes growth over the period but it couldn’t have been anywhere close to 83%, it could have even been flat over the period given the slump in property prices for Sydney and Melbourne in the first half of 2019.     

Fund Activity

In the last quarter we purchased a 5% position (based on cost) in Gowings. This investment is basically an asset play. Gowing is primarily an investment holding entity with a majority of its assets tied up in regional shopping malls alongside some equity investments. It owns Coffs Central and Port Central which are shopping malls located in the CBDs of Coffs Harbour and Port Macquarie making them the prime shopping and lifestyle destinations for both regional towns. There is development potential at both locations with approval given for the 7 storey hotel on top of Coffs Central and the potential to develop 12,000 sqm car park in Port Macquarie’s CBD. The managing director owns 39% of the company and has a good long term investment track record. It’s net asset per share was $3.64 as at 31 July 2020 and we purchased the shares at $1.51 after shopping malls lost favour amongst investors due to the Covid-19 social restrictions. As we have a large margin of safety, I see this as a low risk investment.

We sold 25% of our holdings in Schaffer Corporation. We sold the shares at $18 which I deem to be still slightly below its intrinsic value. I sold it to raise some cash as I believe that there are other better opportunities currently in the market which have more upside (and comparable risk) than Schaffer at $18. Our return on the sale of this parcel of shares was approximately 85% over the 3 year holding period.  

Top Holdings

As at 31 Dec, our top 4 holdings and cash accounted for circa 52% of the overall value and are as follows:

Cash and cash equivalents include cash and securities that currently have received a friendly takeover bid which is supported by the company’s board.

Fund performance

CV Capital return for FY2021 (1 July – 31 Dec) is 28% and since inception is 13.5% on an annual compounded basis.

The chart below shows our returns on $100,000 from inception to 31 Dec 2020 compared to our benchmark.

Our cash and cash equivalents position are circa 13.8% of the portfolio and the share price as at 31 December 2020 is $1.46. The share price can be broken down into the following:

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[1] https://www.worldbank.org/en/news/press-release/2020/06/08/covid-19-to-plunge-global-economy-into-worst-recession-since-world-war-ii

To my fellow shareholders,

It appears that the economy is recovering from Covid-19. As I write this, the long talked about Australia-New Zealand travel bubble is finally happening and some state borders are also reopening. NSW has not had a single locally transmitted case in the past 7 days and even Victoria has gotten its local transmissions down to single digits. Relatively speaking, Australia is doing well.   

Earnings season has just ended and overall earnings were pretty good given the backdrop of Covid-19. Based on the reported earnings it appears to me that the worst case predictions for the economy during the lockdown did not materialise. Don’t get me wrong, there are some sectors like travel and hospitality which have been completely decimated and the economy is still very weak but we did not go into a depression and it appears that the worst has passed (unless of course we get another outbreak ala Melbourne).   

The performance of some companies really surprised me despite being in the direct line of fire.  Take for example Motorcycle Holdings (a national motorcycle distributor), Breville Group (manufacturer of small kitchen appliances), JB Hifi (consumer electronics retailer), Adairs (home furnishing retailer), all consumer discretionary companies whom you’d think would have been badly hit from the lockdown but instead reported revenue growth in FY2020. The lockdown has spurred some surprising trends. Even shopping malls were pretty resilient, Scenter Group’s (Westfield) revenue only fell by 16% for the half year despite 3 out of the 6 months being in the most acute phase of the social restrictions. 

No doubt Jobkeeper has played a huge part in keeping employment and spending ticking along in our consumer driven economy. In tourist hotspots like Byron Bay, 67% of all businesses are reliant on Jobkeeper. Whilst I’m sure there are alot of rorting going on, on balance Jobkeeper was the right move by the government which saved many businesses from going under. The alternative could have been a much deeper recession. The next test for the economy would be when we roll off Jobkeeper in April 2021. 

The share market has been more or less flat since June. It’s been a two speed market with the technology companies (Saas, cloud, AI) and “buy now pay later” (BNPL) stocks being the market darlings where no price is too high and other sectors being priced much more modestly. Below are some of my observations which highlight the market exuberance for these stocks:

1. Afterpay is now marginally more valuable than the Coles Group. A company whose revenue is less than half the net profit of Coles and has yet to post a profit in its entire history is more valuable than the Coles Group, a behemoth who services 21 million Australians every week and has a competitive advantage so huge that it’s near impossible to dethrone in my opinion.
   
2. Excluding Afterpay, the next 5 BNPL stocks have a combined worth of $6.3 billion and based on their latest annual reports, reported a combined net loss of $127 million. For $6.3 billion, one could buy all of these Afterpay copycats or a Crown Resort or JB Hi-Fi or Ampol (Caltex) with change to spare.
   
3. Then there is Brainchip. Quoting from their website “Brainchip is a global technology company that is revolutionizing Edge AI applications with our event domain neural processor and comprehensive development environment”. Got it? In its FY2019 annual report, it posted $75k of revenue (that’s right, k for thousand) and on its website lists its product applications as “coming soon!”. In early September, this company was valued by the market at close to $1.2b (that’s right, b for billion).   
   
4. In America, Tesla announced a 5:1 stock split on 11 August which was set to take place on 31 August. Tesla market capitalisation between 11 August and 31 August increased by US$223 billion, (compare this to CSL, the most valuable company on the ASX worth A$130 billion) going from US$275 million to US$498 million. As there were no other major announcements between these dates or just prior to 11 August, the stock split is the most likely catalyst for the valuation uplift. Logically this makes no sense as a stock split only cuts the cake into more slices, it doesn’t add to the overall size of the cake. But more than two CSLs were magically created just by cutting more slices.

I could go on with more examples of market exuberance but let’s move on to the fund’s activity and performance in the last quarter.

Fund activity

We purchased more shares in Boustead Projects (a company I previously discussed here). My thesis has not changed and I think they will unlock the value of their real estate portfolio possibly in the next 12 months as management indicated in the recent annual general meeting (AGM) that they are still pursuing this option. I suspect if not for Covid-19, the monetisation of these real estate assets could have already taken place.

We took some profit from Baby Bunting, we sold the stake we bought during the March sell off. Baby Bunting’s stock price had gone up 2.7 times from the March lows and I wanted to trim the position as it was becoming a very large position in the portfolio. At Baby Bunting’s current price, I believe there are more attractive opportunities in the market. Time will tell whether this was a good decision.

Our Salmat (I previously wrote about here) investment also finally came to a close with a final distribution paid to shareholders in August. I’m quite pleased with this trade as we made a good return without taking much risk. The return we made was purely from cashflows generated by the business and not from selling our shares at a higher price. We made 58% over a 23 month period.       

With regards to our share purchase plan (SPP) side hustle, we have so far participated in 8 share purchase plans capital raisings and got full allocations for 2 SPPs. I believe this low hit rate is somewhat indicative of the high level of liquidity in the system driven by low interest rates and central banks pouring money into the system. I’m certainly not complaining as we have netted close to $14k profit from a cost base of less than $200.

Fund performance

CV Capital return for FY2021 (30 Jun – 30 Sept) is 9.5%. A big driver of this return was Baby Buntings and Schaffer Corporation, two of the biggest positions in our fund. Baby Bunting reported an excellent result for FY2020 which showed continued revenue growth from new stores and same store sales and the market reacted with a 40% increase in share price from June. Schaffer showed a pretty resilient result despite their key European customers shutting operations from March to May.

Since inception our return is 7.4% on an annual compounded basis (21.4% on a non-compounded basis) and so far we have outperformed our benchmark by 4.0% p.a. Our cash and cash equivalents position are circa 10% of the portfolio and the unit price (including franking credits) as at 30 September 2020 is $1.21.

To my fellow shareholders,

Since my last report, the market has staged a remarkable rebound from the March lows. At the end of June the ASX 200 is up close to 30% from the low set on 23 March 2020. It is fascinating to watch optimism return so quickly in spite of:

• RBA projecting GDP to fall by 10% in the first half of 2020[1];
• RBA estimating unemployment rate to rise to 10% by June 2020[2];
• In 2019, 8.7 million international tourists visited Australia and spent $45 billion. It is now down to zero with no firm date for reopening of borders[3]. It is same with international student education which in 2018/19 contributing $37.6 billion to the economy[4].

The chart below shows the ASX 200 index (market) and its price earnings ratio (P/E ratio). The P/E ratio is calculated by using the market capitalisation and divided by earnings.

At the end of June 2020, the market’s P/E ratio was 19.5x, which is roughly 8% lower than where it was at the end of January 2020 before Covid-19 hit Australia. I find it remarkable that the market is just 8% lower despite the unprecedented economic headwinds we are currently facing. On a forward P/E basis (taking current market capitalisation and divided by future earnings), the market is likely to be trading on higher levels now compared to pre-Covid 19 as corporate earnings (denominator in the P/E calculation) are very likely to fall more than 8% in FY2020 and possibly into FY2021 in comparison to earnings in FY2019.

It appears to me that the market is pricing in a “V” shape economic recovery and corporate earnings to return to pre-Covid 19 levels relatively quickly. A major hurdle to this is of course the trajectory of the pandemic and humanity’s efforts to develop a vaccine. I am neither an epidemiologist nor vaccine expert but I’ve read enough to know that the besides the technical challenges in developing a vaccine, it must also be produced in large enough numbers (billions of doses) and at a low enough cost to be able to provide herd immunity for the human species. Even if a vaccine was rolled out today, there is still an economic anchor of a high unemployment rate (7.4% in June 2020) and risk that it may go higher once the Jobkeeper and other government assistance programs end. Of all the possible future scenarios, a quick recovery in corporate earnings feels quite optimistic to me.

In the short term the stock market is an unpredictable animal and over the long term it usually goes up. So even if corporate earnings turn out to be dismal it does not automatically mean that the stock market will fall. From my vantage point, there are many powerful forces driving the market higher such as the historically low cash rate and very low bond yields (for e.g. the 3 year Australian government bond yield is at 0.29% and 3 year A rated corporate bond yield is at 1.32%) which forces investors searching for yield (cashflow) into the stock market due to the higher dividend yields.

This is my long winded way of saying I think the market has run ahead of itself and I believe the probability of a correction is elevated. However, since I can’t predict market movements, my strategy is to move forward with caution. We will stay invested in good quality companies but keep a prudent amount of cash to take advantage of potential market falls.      

Fund activity

We sold our position in Capral (3.5% position in March). Overall we made a 7.5% loss (inclusive of dividends and franking credits) on this investment. Whilst I still believe that Capral is trading below its intrinsic value, I decided to sell for the following reasons:

1. It was not a high quality business and I felt that there are currently better opportunities in the market and if the market does fall there will be even better opportunities then.
2. Capral is a building products supplier and the demand for housing in the short to medium term looked pretty lacklustre given the near close to zero immigration and international students arrivals coupled with a 20 year high in unemployment. Cheap import competition has negatively affected Capral’s earnings for the last decade and coupled with the housing downturn, I believe the the outlook for earnings is poor.   

We participated in 4 share purchase plans (SPP) as part of the strategy laid out in the March 2020 report. These were very profitable trades from a percentage return point of view. So far we have made about $9.5k from a cost base of $100. These are very low cost trades with potential to earn an outside return but there is some luck involved as a few ducks must line up. Therefore, due to the “long shot” risks associated with this strategy, it only makes sense to put a small amount of capital to this strategy. It’s more of a side hustle than anything else.

We raised some capital in May 2020 at $1.031 per share.

Fund performance

I have decided to change the financial year for the fund to align to the Australian tax year. This will reduced our accounting fees moving forward. Given this change, 30 June 2020 will be the end of the new 2019/20 financial year (roughly 6 months) and 1 July 2020 will be the start of the 2020/21 financial year. 

CV Capital return for FY2020 (14 Jan – 30 Jun) is (11.3%) and since inception is 4.4% on an annual compounded basis. Our cash and cash equivalent positions are circa 18% of the portfolio and the unit price (including franking credits) as at 30 June 2020 is $1.11.

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[1] https://www.rba.gov.au/publications/smp/2020/may/economic-outlook.html

[2] https://www.rba.gov.au/speeches/2020/sp-gov-2020-04-21.html

[3] https://www.tra.gov.au/International/International-tourism-results/overview#:~:text=Australia%20saw%20record%20numbers%20of,reached%20a%20record%20%2445.4%20billion

[4]https://ministers.dese.gov.au/tehan/international-education-makes-significant-economic-contribution?utm_source=miragenews&utm_medium=miragenews&utm_campaign=news

To my fellow shareholders,

The world has been turned upside down from a microscopic parasite since my last update so there is plenty to discuss and I will break down this report into the following sections; coronavirus epidemic, market reaction, portfolio performance, fund activity and near term strategy.

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 2^nd 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).