Investment update for First Samuel clients: it's all okay
The markets have continued to drop-off, which I sense may cause a degree of anxiety out there. The Australian share-market, including dividends, has returned -4.6% so far this FY.
The disappointment appears to be flowing from the lack of a hoped for 'Christmas rally' and the appearance of despair in the commodity world (oil & OPEC led, particularly – but across most commodity areas).
The reality is that you, First Samuel clients, are okay. And in fact, the average share portion of clients portfolio has, before fees, returned +1.5% this FY.
Stocks media people watch
If your sole focus is the few positions that we hold in the mining world then our exposure to BHP or South32, or worse, the devilish Emeco or Ausenco, would make things seem particularly bleak. The best performer of these this quarter is BHP, which is only down 21%!
As we have been at pains to explain, however, these are relatively small parts of the portfolio (at 7.9%) for these four positions (plus add 3.8% for Origin, and 2.1% for Cardno if you wish which equals 13.8% in total). The point is, these are not “the portfolio”, merely a small part (or in fact the smallest part).
It is for this reason that you have a positive performance this FY, in a strongly negative market.
Our eight largest positions (which make up 56.2% of the portfolio) are: Cash 21.1%, 360 Capital Group (which at 7.1% has almost the same weight as the total of the above 4 companies!), 360 Industrial Group (7.0%), Aveo (5.4%), Pacific Brands (5.4%), Challenger (5.1%) and Southern Cross Media (5.1%).
The reason that we own the four small mining weights is that we see them as key to our ability to grow our portfolios value in coming years (remember every day we get up we think about how we will grow our investments in the coming three years). As a result, whilst small in weight, they are highly important to our future returns. Whilst we are in no particular rush to add to our positions currently, we do think that at some stage (subject to the right deals) we will wish to grow our exposure. Patience is required.
A share price fall doesn't mean a mistake
Whilst it is important for us to remain, as always, humble, it is important to note that a fall (or even significant fall) in share price of our investments does not make the investment a mistake. It is easy to say that it is, but it is also alluding to more control over the market than we have. We don’t control the marginal buyers and sellers in any market that ultimately dictate market prices on any given day.
Therefore, what makes an investment a mistake is (a) if we don’t take advantage of the market to improve our portfolio position if the market allows us to (subject to the other opportunities we have), or (b) if the investment suffers a permanent impairment in value (we always think about a 50% decline in actual value of a business as the downside risk we will accept – this is very different to a 50% decline in the market's opinion of its value).
As I have noted previously, if share price declines are the litmus test of failure then Energy Developments (ENE, a stock we recently sold out of), was a mistake for 3.5 years. After three years we should have sold it. Of course we didn’t and actually reinvested in ENE as it fell, which was ultimately why we achieved such good returns (20% p.a. for 8 years) from it.
The point being, we run a portfolio, not one or two companies, and we run it for medium-term returns. At times, some companies will delight us, and some disappoint us, but we will make sure we are positioned to maximise that medium-term return, whatever side of that equation any one of them is on, at any particular time.
As a result we remain pretty happy with the current environment.
The more panic and damage that we see, the bigger we would expect our future returns to be, given our positioning and ability to benefit. I would encourage you to think the same way!