Tuesday, January 15, 2008

Mid-January 2008 Portfolio Summary and Review

It has been a rather turbulent half-month from January 2, 2008 till today, with more sub-prime worries plaguing market sentiment and casting doubts on the ability of the USA to stem off a recession. With recession fears looming, the market has been sold down relentlessly by fund managers and house traders who are unwilling to take long-term positions. Of course, the selling of late has also been the result of margin calls, as people who purchased shares three to four days ago in the hopes of a quick contra gain could only watch helplessly as the market plummeted even more. Of the 10 trading days (including today) since January 2, 2008, the Straits Times Index only rose on 2 of those sessions, thus it was closing negative 80% of the time.

In total, since January 2, 2008, the STI has lost 327.72 points, falling from an year opening of 3,482.30 to the current 3,154.58 (a loss of 9.41%). Of course, one could argue that during that time, the components of the STI have been somewhat altered, and thus the index is not directly comparable any longer. For myself, I saw a good chance of buying into a shipping trust at an attractive yield of about 10.8%, and so I made my purchase yesterday of FSL Trust at a price of S$1.17. Such defensive instruments are good during periods of market turbulence as they give consistent yield, and at the same time, I also could not find many bargains for the companies which I was eyeing. Instead of parking my money in the bank earning a measly 1.5% per annum, I decided to stash some cash into this high-yield security.

Below is the summary of my investments and related news as at January 15, 2008 (STI at 3,154.58 points). I have included Year-To-Date (YTD) gain or loss as a way to benchmark each company’s share price performance instead of a total portfolio basis, as I have made changes to my portfolio on January 14, 2008:-

1) Ezra (Vested since October 6, 2005) - Buy Price $0.645 (bonus adjusted), Market Price $2.87, Gain 345%, YTD Loss 13.6%. Ezra released their 1Q 2008 financials on January 11, 2008. I will be doing a review of their results in my next posting, along with their fleet prospects and charter rate review as well. One thing which I am unhappy with (and I have emailed to the Management) is the S$19.1 million provision for staff incentives as a result of the successful listing of EOC Limited on Oslo Bors. Apparently, CLSA also felt that this move was excessive and was not done in favour of minority shareholders. I personally do not expect a special dividend from the divestment of EOC as I know the company may need it for working capital or to expand their fleet; but knowing that S$19.1 million was set aside just for rewarding their staff is a little too much. I shall keep investors updated on Management’s response.

2) Boustead (Vested since September 13, 2006; averaged down November 13, 2006) - Buy Price $1.295 (average), Market Price $2.34, Gain 80.7%, YTD Loss 2.9%. There was no news regarding Boustead for the half-month ended January 15, 2008, and it was not sold down enough during the last 10 trading days for me to consider adding to my position, as the company’s long-term prospects look good. Incidentally, in the first issue of The Edge Singapore for 2008, Boustead was listed as one of the magazine’s Top 10 stock picks for 2008, and it included a short interview with Mr. F.F. Wong on the company’s plans and latest negotiations for contracts.

3) Swiber (Vested since February 14, 2007) - Buy Price $1.01, Market Price $3.05, Gain 202%, YTD Loss 11.1%. There was no news from Swiber for the half-month ended January 15, 2008.

4) Suntec REIT (Vested since December 9, 2004) - Buy Price $1.11, Market Price $1.53, Gain 37.8%, YTD Loss 10.5%. There was no news for Suntec REIT during the half-month ended January 15, 2008.

5) Pacific Andes (Vested since March 29, 2006; Rights Issue July 11, 2007 at S$0.52 per share; averaged down August 17, 2007) - Buy Price $0.655 (rights-adjusted), Market Price $0.51, Loss 22.1%, YTD Loss 19.0%. There was no news from the company during the half-month ended January 15, 2008.

6) China Fishery Group (Vested since November 20, 2007) - Buy Price $1.50 (average), Market Price $1.58, Gain 5.3%, YTD Loss 14.6%. There was no news from the company during the half-month ended January 15, 2008.

7) First Ship Lease Trust (Vested since January 14, 2008) - Buy Price $1.17, Market Price $1.20, Gain 2.6%. There was no news from the shipping trust during the half-month ended January 15, 2008. Their FY 2007 results and dividend announcement are due out on January 16, 2008 (Wednesday) and I will provide a quick review of it.

Overall Portfolio

My overall portfolio has increased by 64.4% from a new cost of S$70K as at January 15, 2008. The market value of my portfolio is S$115.1K. Realized gains remain at S$4.55K.

Comparison against STI

As mentioned, the STI had declined by 9.41% from the start of 2008 till now. Due to the change in the composition of my portfolio, it will not be very comparative to do an adjusted cost, therefore I will report my portfolio results as if I did not make the FSL Trust purchase. Henceforth, I will be reporting in this manner, treating the FSL Trust as a separate company to be evaluated on its own, as I did not purchase it right from the start of the year. If any reader knows of a better way to measure total portfolio performance, please do drop a comment !Without FSL Trust, my portfolio would have declined by 11.3%, mostly as a result of the forced selling of Pacific Andes which exacerbated the unrealized losses. As a result, to date in 2008, my portfolio has under-performed the new benchmark STI by 1.9 percentage points.

My next portfolio review will be on Thursday, January 31, 2008 after market close.

32 comments:

Simon said...

any reason for selling pacific andes?

musicwhiz said...

Hi Simon,

I did not sell Pacific Andes. If you note in my blog. I mentioned unrealized loss, not realized, on Pac Andes.

Regards, Musicwhiz

HH said...

MW,

Its always good to see your portfolio review, never fail to remind me to update mine. (mine is updated last day of each month)
:) Thanks!

Anonymous said...

"Without FSL Trust, my portfolio would have declined by 11.3%, mostly as a result of the forced selling of Pacific Andes which exacerbated the unrealized losses."

Hi MW, you mentioned forced selling of PacAndes. Did you sell? why is it forced selling?

Btw for analysing return, you could treat your portfolio as a unit trust, assign units with a nominal value, eg 1 unit per dollar value. then everytime there is capital input, you adjust based on the price of the units, and similarly adjust for selling when money is taken out.

You would probably need to take the value as at 1 Jan 08 though, instead of when you actually started investing

musicwhiz said...

Hi HH,

Haha no problem. Have a great month !

Regards,
Musicwhiz

musicwhiz said...

Hi Anonymous,

Perhaps I should clarify my sentence. My portfolio comparison takes out FSL Trust as it was purchased during Jan 2008, thus my previous original portfolio had declined by 11.3% since Jan 2, 2008. This was mainly due to the unrealized loss on Pac Andes which negated the gains. I did NOT sell Pac Andes as the criteria for selling it was not triggered.

Thanks for the suggestion on the unit trust conversion for my portfolio. I will consider doing that. :)

Regards, Musicwhiz

Anonymous said...

hi simon, what is your take on pac andes, you like their biz model of vertical integration? if fish continue to sell in prc, they have their readily available source - cfg, and logistics distributions network? any sense of their key risks?

Simon said...

didn't really look much at pac andes. but it has quite a high lvl of debt right? read it somewhere in musicwhiz's blog. haha. and its operations is in peru. any political risk there?

but china stocks have been experiencing price deterioration as a whole due to decreasing risk appetite.

H said...

Hi MW,

A great month indeed.. to pick up lots of great companies at great bargain.

I am especially happy with the Chinese market correction which is very healthy.

Cheers!

MM said...

MW,

Always enjoyed coming to your blog every couple of weeks to read your thoughts on different subjects.

THis correction will seriously test value investors patience, cos' it is not a simple one (over in a mth) like we have seen last year.

I have been in full cash since the start of this year as I forsee this coming from the charts..

So I have beaten the index by more than 10%tage just by doing nothing.

Our strategy is different and there is no right or wrong strategy... as long as one has disciplined to stick to it.

I have always admired your discipline to your strategy.

Good luck and I hope you have a fruitful investing year this year.

Cheers,
MM

TYL said...

hi musicwhiz,

Yes, using units to keep track of the portfolio value will be much better. For my own portfolio, as I strongly encourage long-term investing, so I used both the monetary value and the number of days vested to compute the units. So if an investor has a longer holding period, more units will be allocated to him. I track the portfolio returns on an annual basis, so every year is a new result sheet and the returns will be based on the portfolio value of the last day of the year =)

http://tylequityresearch.blogspot.com/

musicwhiz said...

Hello h,

Yes, indeed. Valuations are now reasonable, not excessive anymore. Still, one must be careful to research first before buying, though most companies look tempting now.

Cheers, Musicwhiz

musicwhiz said...

Hi MM,

It is a pleasure to share opinions and insights with you, even though our methods are vastly different.

I agree with you that the current correction is far from being simple and will be a more prolonged one which will test everyone's patience. The USA and rest of the world may take about 3-4 years to recover, and it will be a slow healing process.

Wishing you a fruitful year as well !

Regards, Musicwhiz

Anonymous said...

I suppose you will only sell your stocks if there is a fundamental change in the prospects of your companies you own.

So if this market correction takes your stocks down back to your original purchase price, you will not sell at a certain point to lock in your gains so long as you feel that the fundamentals are unchanged right?

musicwhiz said...

Hi TYL,

I will explore this idea of conversion of my portfolio into units as if it were a fund, as thus far I have not done so. I had seen it done on some bloggers' websites before but have since forgotten about it.

Thanks for the tip !

Regards, Musicwhiz

musicwhiz said...

Hi Anonymous,

Yes that's right. In fact, I see a correction as a good time to load up more on the companies that I am eyeing. This may also include companies I already own.

Regards, Musicwhiz

jf said...

By being prepared to let your stocks fall back to your original purchase price is to me a very risky approach.

What if there is indeed something wrong with the company that is not apparent to you right now?

musicwhiz said...

Hi jf,

That's where margin of safety comes in. Objective and thorough research are also necessary.

If there is indeed something wrong which Management is attemping to hide, then no amount of detective work can uncover it. In this case, we have to rely on margin of safety.

Regards, Musicwhiz

jf said...

By not having a point whereby you protect your hard earned profits, the margin of safety is irrevelant.

Suppose you buy a stock and it goes up by 100% from your cost. Clearly it has been rerated from your cost. Even if you think that stock should double again based on your estimate of intrinsic value, the fact that if one lets it fall all the way back to your cost is certainly not proper money management. So you can be right but did not take off your profits off the table and now have to wait for the market to rerate the stock again. This seems to be counter productive.

musicwhiz said...

Hi jf,

The idea is to buy with a long-term view and to ignore price fluctuations. I am unable to assess Mr. Market's mood swings and will not be able to predict if the price will indeed fall back to my original cost. My idea of buying into a company is to see the business grow; and the value of the company will grow along with the business. It will take at least 3-5 years on average for value to be recognized, thus this is my time horizon.

What you suggest is to take profits first and perhaps buy back later ? Problem is that the price may never go back to the original attractive price you bought at. Correct me if I am wrong but it would have been so if I had sold Ezra and Swiber.

Thanks for your comments though, and keep them coming !

Regards, Musicwhiz

Anonymous said...

Sine Pac Andes drop the most in your portfolio, will you be buying more lots to average down the cost?

Anonymous said...

Musicwhiz,

U mentioned that unless the "trigger condition is met, u will not sell" (something like that). May I ask what would be the trigger condition for Pac Andes? e.g. if debt level went up even higher.

I'm vested and seriously considering averaging down. To me the fall in px is really irrational.

sj reader

musicwhiz said...

Hi Anonymous,

I do not intend to average down further till I review the next set of quarterly results (3Q 2008) as I want to be assured of healthy margin and earnings growth. Due to the rights issue to acquire 63.9% of CFG, I am still waiting for the numbers to "stabilize".

Regards, Musicwhiz

musicwhiz said...

Hi SJ Reader,

The trigger conditions will be as I mentioned in my post on "Knowing When To Sell". Some examples include losing market share, declining margins and declining earnings for several quarters. If debt levels went much higher, it would be a sign that they needed to fund further growth solely through debt and not FCF, which is also not healthy. As it is, every business is different so we have to assess each on its own merits, and this can be pretty subjective too.

I also feel that many China companies' sell-down was irrational. But one must still do sufficient research to pick the long-term winners, and not just those on technical rebound.

Regards, Musicwhiz

ThinkNotLeft said...

Hi Musicwhiz,

What do you think of the high leverage employed by China Fish? Or rather, does high operating leverage affect your choice of shares/companies?

I was intially tempted to buy China Fish until I observe the high debts or senior notes in its balance sheet.

Regards
Thinknotleft

musicwhiz said...

Hello thinknotleft,

A very good question which you have raised. China Fish is indeed highly leveraged, as they have just issued some senior notes due 2013.

As a rule of thumb, WB advocates avoiding companies with high gearing as interest expenses will eat up cash and also affect bottom line. For China Fishery, I perceived their business to be capital intensive in order to grow, as they have to acquire VOA, fishing vessels and supertrawlers as well as fishmeal processing plants. The industry itself is closed with only a few large players and China Fishery can gain an advantage by acquiring because it is a closed industry (high barriers to entry). Thus, I saw the debt raising as necessary for it to continue their expansion and to capture more market share. Now that the company is moving into fishmeal and higher-end Chilean Mackeral, they would also need to increase their purse seine vessel fleet and upgrade their supertrawlers. All these require funds, and they chose debt financing instead of equity financing.

Thus, you can say that I weighed the pros and cons for China Fishery, and went ahead to buy some because I feel it has:

1) Sustainable competitive advantage
2) Industry has high barriers to entry
3) Decent gross and net margins
4) Steady dividend yield (around 5% at $1.50)
5) Earnings visibility and growth potential due to upgrading of supertrawlers, quota review for Russian waters and completion of Qingdao processing plant

Feel free to engage me on other aspects of China Fishery should you wish to do so. Thanks !

Regards, Musicwhiz

HH said...

I am with Musicwhiz,

For a company which I purchase with huge margin of safety, enjoy economic moat and excellent management. The time to sell is "never" unless there is fundamental changes of the company. I am looking at compounding money over 20-30 years, I guess MW's horizon could even be longer. :)



Today market sell off is excellent as a company I have been eyeing for a year, (18% returns for past 20 years) is being thrown out by Mr. Market. :)

musicwhiz said...

Hello HH,

First of all, thanks for visiting I appreciate it. :)

My time horizon is almost similar (i.e 10-20 years) but I am also aware that external factors may impact the companies we own and we have to be alert always of changes in the business world which may impact our companies. Hence, the time to sell is "never" unless factors come into play which call for a "sell".

The market sell-off has created opportunities for me to buy more of what I wish to buy, and I am very happy with that. :D

Regards, Musicwhiz

HH said...

Thanks for your generous sharing MW.

I have core as well as non-core holding.

I buy companies base on valuation and catalyst. Once non-core is grossly over-valued and I find a more undervalue one, I will make a switch. Profit made from non-core will add on to buy core.

(My core is held at a % enough for my retirement base on dividend income -- its something I will only add and not substract)

This is how my mentor build his core holdings and I am learning from him.

This method suits me. I used to gamble last time, what I used to do when I was winning money was to stash aside my cost and some amount bit by bit so that I protect the nest. :)

Cheers to bargain hunting.

ThinkNotLeft said...

Hi Musicwhiz

Thank you for your explanation.

Regards
Thinknotleft

musicwhiz said...

Hello HH,

Good idea of yours to separate your holdings into core and non-core, so that in a way, you know which ones to get rid of first in an over-valued situation in order to take advantage (channel funds to) an under-valued company with stronger growth potential. I think it will take some time for me to be able to segregate my companies as such, but it is a good idea and thanks for suggesting it. :)

You are also right about the dividend income part. Currently, my estimated dividends make up about S$3K+ per annum which is about S$250 per month, hardly enough to pay off most expenses. But at present, since me and my wife have jobs, it acts as supplemental income for us to build our nest egg and hopefully, the dividend stream can increase in years to come to form our retirement income as well. This is a good form of passive steady and recurrent revenue flow.

Your mentor is indeed wise and I am sure both of us can continue to learn from him. I am grateful that you choose to share as well. :)

Regards, Musicwhiz

musicwhiz said...

Hi thinknotleft,

You are most welcome. I am waiting for China Fishery's FY 2007 announcement as well as latest update on their business to see how it is doing. There was an analyst report saying that CFG may have problems raising debt or funds to acquire more vessels and fishmeal plants. This will be a good question to ask of Management during the forthcoming AGM in April 2008.

Regards, Musicwhiz