Sold two portfolio stalwarts - Berkshire Hathaway and Keppel Corp

We sold our 50 shares in Berkshire Hathaway 'B' on the 25th of January (US$82.65) and our remaining 351 shares in Keppel Corp on 27 January. While these two companies embody many positive things which we look for in a stock (good management, strong business franchise(s) etc) and should be considered portfolio stalwarts, we have eliminated both positions for different reasons.

Berkshire Hathaway - Buffett's stable of businessess are solid companies in most senses of the word, but the growth of these underlying companies are too dependent on the US economy and considering our relatively large exposure to Wells Fargo, a bank which is almost solely dependent on the US economy, we would prefer businesses which generate a bit more revenue from overseas. In addition, growth is likely to be slow for the "lumbering" holding company, where incremental additions of small companies are unlikely to add significant value to the overall stock.

Keppel Corp - The stock has seen strong investor interest given the strong flow of contracts, but it still appears likely that the company has seen peak profitability already - we do not expect future contract wins to match the 2003-2007 cycle. Having run up considerably over the past month or two, the stock does not look attractive if one looks at normalised profits, and we have thus taken profits on our holding.

Portfolio gains 2.1% in June, STI up by 3%

Our portfolio gained 2.1% in a turbulent June (to $0.999 a unit), underperforming the STI's 3% gain. The portfolio is essentially flat (-0.1%) for 1H 2010, while the STI is 0.6% lower on a total return basis. Key contributors to the portfolio's performance were Memtech International (+15.8%), Berkshire Hathaway (+13%) and Best World International (+11.5%), while Wells Fargo (-10.8%) and Noble Group (-5.5%) were key detractors.

Wells Fargo slugged, but Berkshire Hathaway surges

US equities were some of the worst-performing stocks in June, as economic data largely surprised on the downside. Wells Fargo was a key "beneficiary" of the poor sentiment on the sector which had largely stemmed from fears over European debt crisis contagion effects, and the weak US housing market served to dampen sentiment on the stock even further. With financial reform focusing on credit card issuers (and the maximum interest they are allowed to charge), many expect bank bottomlines to feel some form of negative impact. At US$24.88 (on 2 July 2010), the stock trades at just 1.21X book value and we may scoop up more shares on the cheap if a market panic ensues, perhaps sparked by negative newsflow from European bank stress tests.

On the other hand, Berkshire Hathaway gained 13% in June, as Buffett showed his ability to pick football teams as well as he picks companies. His insurance unit reportedly insured Carrefour against losses (the retailer reportedly had a promotion where they would refund customers of flat screen televisions if France won the World Cup), and avoided a $30 million loss as France exited the competition in the first round.

Interesting to note, but obviously, this was not the reason for the run-up in Berkshire stock in June. The stock was added to the Russell 1000 index on 28 June, and made up about 1.1% of the index upon inception. Fund managers and index funds which track the Russell 1000 had to purchase the stock, driving up the stock's price over the course of June, even as the overall US market slumped. While this was obviously a good time to sell, we continue to like the company's philosophy (and of course, its management) and are reluctant to sell out. The stock may experience weakness after fund managers have had their fill, but we continue to hold the stock for its long term potential, rather than try to benefit from its short term fluctuations.

Sold JNJ for WBL

We sold our holdings in Johnson & Johnson (50 shares at $63.40) and purchased another lot of WBL (at $5.05), given our strong conviction on the latter. JNJ probably offers an excellent play on three areas of the healthcare sector - Pharmaceuticals, medical devices and consumer care, but the stock is more fairly valued (at a mid-teen PE and is unlikely to double anytime soon!). Also, the healthy dividend paid each quarter is not extremely attractive to us, especially after being net of tax (30%) and administration fees. We continue to retain some exposure to JNJ via our holding in Buffett's Berkshire Hathaway.

Portfolio flat in February

Our portfolio dipped marginally by 0.3% in February, bringing year-to-date performance (as at end February 2010) to -2.5%. On an NAV basis, the portfolio ended Feb 2010 at $0.975. In comparison, the STI (total return) gained 0.3% in February, but has declined 5% on a year-to-date basis.

Noble Group was the strongest performer, returning 10.1% as sentiment improved on commodity plays while Berkshire Hathaway benefited from the increased liquidity following a 50 for 1 share split. Tat Hong was the worst performer, losing 8.6% as investors discounted a weaker outlook for crane demand and increased costs for the construction sector after announcements of increases in foreign worker levies in the 2010 Singapore budget.

Stock Feb'10 Returns (%) in SGD


NOBLE GRP 10.1%

TAT HONG W130802 9.1%

BERKSHIRE HATH-B 4.8%

CAPITAMALL 4.7%

FRASER AND NEAVE 2.4%

KEPPELCORP 0.5%

SPH 0.3%

JOHNSON & JOHNSON 0.2%

BEST WORLD 0.0%

WBL Corp -0.2%

STI ETF -0.4%

ASCENDAS I-TRUST -0.5%

GUOCOLEISURE -1.6%

Capitaland -2.1%

JARDINE STRATEGIC -3.1%

CAMBRIDGE -3.3%

SGX -3.5%

WELLS FARGO -3.9%

TAT HONG -8.6%

Portfolio down 2.2% in January; commodity price impact on Noble's earnings

Equities generally had a rather poor January, leading to a 2.2% decline in the portfolio for the month. Assuming the portfolio started 2010 at $1.000, each unit ended the month at $0.979. Still, this was significantly better than the 6% decline in the Straits Times Index, or the MSCI World's 4.3% decline.

BERKSHIRE HATH-B	+16.5%
WELLS FARGO	+5.5%
SPH	+3.5%
CAMBRIDGE	+2.2%
KEPPELCORP	+1.7%

CAPITAMALL	-6.1%
TAT HONG	-6.2%
GUOCOLEISURE	-7.9%
CAPITAMALLS ASIA	-8.7%
NOBLE GRP	-11.4%

Berkshire Hathaway was the outstanding performer, jumping 16.5% as investors piled into the stock in anticipation of its addition into the S&P 500 (replacing Burlington Northern). Wells Fargo turned in a respectable performance (+5.5%) while SPH also gained on better-than-expected profits.

Noble Group was the worst performer, falling 11.4% as commodity prices wavered. Noble's dependence on commodity prices is often overestimated by most investors, who choose to lump the company together with other commodity producers who suffer a large hit to earnings when commodity prices decline. Noble's business model involves hedging inventory as it is passed along the supply chain, which involves little exposure to commodity prices. 

Noble's earnings hardly fluttered as commodity prices went from boom to bust in the 2008-2009 crisis, indicating a relatively low dependence on an appreciation in commodity prices. High prices require Noble to post more collateral to hedge, a drain on cash resources, which means that Noble would prefer lower, or at least less volatile commodity prices.

Despite the sharp declines, the stock is not terribly cheap as the market attempts to factor in strong future earnings growth (Richard Elman has been quoted as targeting US$1 billion in profit sometime over the next few years). The company has excellent management and is extremely focused on shareholder value, which has resulted in the stock being the best performer on the STI in 2009. As one of the few companies in the STI with truly strong earnings growth potential, we will want to accumulate more Noble shares, but will wait patiently for a better entry level to add to our existing position.

Initial Portfolio Holdings

On 31 December 2009, we held stocks worth $104,789.07, along with cash of $4,879.03.