Portfolio Performance

The aim of this post is to present the performance of the fund and discuss why some of the stocks in the portfolio have added or detracted from fund performance. I hope not to bore you with the details so I try and limit the discussion and analysis to a relatively minimal level given the purposes here. It is very important to understand that the quoted fund returns do not account for cash that is invested elsewhere - in term deposits for example. This overestimates the returns. If the cash return was factored in, the returns quoted below would be lower. I hope you enjoy it.

The preceding five months ending 22-7-16 have been interesting to say the least from a portfolio perspective. Stock specific news, market volatility and portfolio movements have led to a somewhat distinct result. Pleasingly, the portfolio added +19.46% in the five month period net of all fees and transaction costs but before taxes, representing an annualised return of +53.24%. If this theoretical annualised return were to eventuate, it would take the portfolio’s annualised return since inception (a 3 year period) to +25.97% per annum or a total return of +99.89%, net of all transaction costs and fees but before taxes.The actual return since inception to date (i.e. ~2.4 years) is +20.12% per annum, net of all transaction costs and fees but before taxes.

As usual, we will discuss the positions and actions which detracted value from the portfolio first. The biggest detractor from performance was selling out of Mineral Resources (ASX:MIN) too early. Despite it adding significantly to the performance, the detraction is derived from the fact that since selling out the price has risen substantially and so this represents an indirect cost. Unfortunately, the position got exited before the major rush of investor optimism toward the current fad, Lithium. While I believe the business is still undervalued, I made the mistake by giving into pressure and not controlling my temperament, costing the fund approximately 8% of gains (to the 22-7-16) on top of the aforementioned 19.46%. It’s important to reflect on mistakes in order to progress. The proceeds have been invested in a business which I believe offers significant risk-adjusted returns over the next three years. Despite this, it was a choice with which there is a high degree of discontent.

The other major detractor was Sirtex Medical (ASX:SRX). Earlier in the year, Sirtex made an announcement stating that it expects its dose sales growth to not remain at the near 5 year historical growth rate of ~19.7% but rather slow to 15-17% on the back of weakness in Europe and Asia despite strength in the US, which represents ~70% of its dose sales. EU and Asia experienced weakness as reimbursement funding was delayed. Subsequent to this market release, Sirtex confirmed actual dose sales growth of 16.4% for FY16.

I am still a believer in the long-term proposition of Sirtex, however, investing is expectations based and understanding why a stock trades at certain levels plays a role. Sirtex is a great business but it’s essentially a play on market opportunity, backed by outstanding management who continue to deliver. Sirtex has penetrated less than 5% of the salvage market which is continuing to grow. The business, however, does come with its fair share of risks. For example, a key risk I believe shorter-term, is the upcoming trial results which may see SIR-Spheres being used as a first-line treatment (or lack of) and thus lead to a quantum leap in market opportunity. Another risk is the fact that it’s a business with (currently) one product so obsolesce combined with a lack of product diversification is a real threat but one which I believe is not an issue just yet given the aforementioned market opportunity.

On the other hand, all other positions in the portfolio contributed to the positive performance. Key contributors were Enero Group (ASX:EGG), Mynetfone (ASX:MNF) and RCG Corp (ASX:RCG). EGG’s FY16 result will be of paramount importance to how it performs in the ensuing months and possibly, much longer term. The key for this one will be margin expansion driven by a reduction in the operating cost ratio and staff costs and strength from all regions. In my opinion, EGG remains priced for the direst of outcomes on a long-term view. I strongly believe the risk-reward for this stock is very favourable. The latter two stocks we’ll leave for another time.

Thank you for reading and the best of luck.

Yours faithfully,

Chadd Knights

Please note that this post may contain general financial advice that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking advice from a financial advisor if necessary. Moreover, the firm I work for and I personally have financial interests in at least some of the companies discussed.