2010 portfolio summary

2010 performance summary
Our portfolio finished 2010 higher by 8.7% (9.4% without the subtraction of performance fees), outperforming our 6% annual hurdle rate, but underperforming the benchmark Straits Times Index's 13.4% gain. We are less concerned about our portfolio's underperformance over the past one year, but will continue to focus on picking undervalued companies for the portfolio in a prudent manner, without any regard for the Singapore stock market benchmark.

Cash holdings detracted
As of end December 2010, the portfolio held a cash position of 16.2% of portfolio assets, a fairly large percentage which weighed down on performance vis-a-vis the STI. The average cash position the portfolio held in 2010 was about 12%, and while we have no target cash level for the portfolio, our sizable cash holding is indicative of the lack of good investment opportunities we can find under current market conditions. We are also cognizant of the need to keep some powder dry to benefit from distressed market conditions, instead of watching in envy while others scoop up bargain buys. Nevertheless, we are also not terribly confident of timing the market, and will remain largely invested unless the market heads into an extremely euphoric state. We do not see this happening yet though.

Portfolio gains 0.5% in Nov 10, STI up 0.2%

In a largely flat month for the benchmark Straits Times Index, our portfolio gained 0.5% in November 2010, outpacing the 0.2% return for the STI. This comes even as we hold 13.7% of the portfolio's assets in cash, and on a year-to-date basis, the portfolio is up 6.2% (net of accrued performance fees), attaining its 6% annual target one month early.

Noble Group was a strong contributor to the portfolio, gaining 10.2% in November, while Memtech rose 9.5%. Keppel Corp benefitted from renewed interest in the offshore drilling segment, while Tat Hong and Mermaid suffered with declines of 10.7% and 11% respectively. Wells Fargo remains our second-largest holding, and gained 6.6% in the month.

Portfolio rises 1% in October, STI gains 1.5%

The portfolio gained 1% in October, slightly underperforming the STI's 1.5% rise. On a YTD basis, we are up 5.7% (assuming accrual of a 20% performance fee on outperformance of a 6% annual hurdle rate). The STI is 11.2% higher over the same period.

Portfolio Changes

Other than our monthly Sharebuilder additions, we added Gallant Venture to the portfolio, on the basis of low valuations (on a Price to book basis) and the potential for multi-fold gains as the company's Bintan landbank is carried at cost, while land sales have been locked in at prices far higher.

We did not sell any holdings in the month, while Guocoleisure and Cambridge Industrial Trust went ex-dividend in the month of October. CIT's distribution includes an advance distribution due to the Trust's plan to issue new units to existing investors (1 per 25, at $0.531 a unit), as well as via a private placement. We applied for excess units to top up our holdings to 25,000 units.

Performance Discussion

PAN UNITED	14.1%
KEPPELCORP	11.1%
TAT HONG W130802	11.1%
ASCENDAS I-TRUST	4.0%
MERMAID MARITIME	3.4%
GUOCOLEISURE	3.0%
TAT HONG	2.9%
COURAGE MARINE	2.6%
STI ETF	2.2%
WELLS FARGO	2.0%
BEST WORLD	1.7%
WBL Corp	0.2%
CAMBRIDGE	0.0%
MEMTECH	0.0%
K-Green Trust	-0.9%
NOBLE GRP	-1.6%
SPH	-2.4%
FRASER AND NEAVE	-4.0%
Capitaland	-4.2%
BERKSHIRE HATH-B	-5.4%
Best World W130705	-13.3%

Our new addition, Pan United Corp, returned 14.1% in the month of October, while Keppel Corp benefitted from strong oil prices. Capitaland fell amidst widespread weakness in property stocks. Cash is now 14.2% of the portfolio, and will weigh on returns against the benchmark if the market continues to trend up strongly, but we are comfortable with adopting a more cautious stance when asset prices rise too quickly. A pull-back at this juncture may be seen as healthy, and will allow the market to consolidate for further gains.

Portfolio drops 2.9% in August, STI down 0.6%

After a 3% gain in July, the portfolio fell 2.9% in August, more than the 0.6% decline of the STI. The portfolio's "NAV" ended the month of August at $0.999, a 0.1% decline from the start of the year. Wells Fargo was the worst performing stock in the portfolio, on the back of general weakness in US financial stocks in August. We added to the stock in the month as it dived to 52-week lows.

Even after adding shares of Wells Fargo, the portfolio has 20.6% in cash, and we may be looking to bring down our cash holding to 15% with the addition of one or two more attractively valued-companies to the portfolio.

August 2010 Stock Returns:

FRASER AND NEAVE 1.1%

ASCENDAS I-TRUST 1.1%
BERKSHIRE HATH-B 0.5%
CAMBRIDGE 0.0%
TAT HONG W130802 0.0%
SPH -1.2%
Capitaland -1.3%
STI ETF -1.7%
KEPPELCORP -4.2%
MEMTECH -4.5%
GUOCOLEISURE -4.8%
NOBLE GRP -4.8%
COURAGE MARINE -5.1%
K-Green Trust -5.2%
WBL Corp -6.3%
TAT HONG -8.1%
BEST WORLD -10.9%
MERMAID MARITIME -11.6%
Best World W130705 -14.3%
WELLS FARGO -15.3%


Ex-dividend 
Keppel Corp $0.16
Wells Fargo US$0.05
Tat Hong $0.015
STI ETF $0.03
Cambridge $0.0068
 
 

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.

Portfolio drops 8.1% in May, STI down 6.9%

The portfolio fell 8.1% in May (to $0.978 per unit), against a 6.9% drop for the STI (on a total return basis). On a year-to-date basis (at 31 May 2010), the portfolio is 2.2% lower, compared to the STI's 3.6% decline. The month of May was a very poor month for our investments, as Greek debt fears and Korean tensions compounded negative investor sentiment. Most major markets were lower for the month, while small cap stocks suffered huge losses as investors fled riskier assets.

On a month-to-date basis, F&N, WBL, STI ETF and Capitaland were the best performers, falling 0.8%, 3.1%, 4.7% and 4.8% respectively. The worst performers were Mermaid Maritime (-34.9%), Memtech (-25.1%) and Guocoleisure (-18.5%).

We have obviously made very poor investment decisions with our small cap picks, and our investment in Mermaid Maritime looks particular disasterous. The company reported a larger-than-expected quarterly loss, and its unutilised tender rig now appears to be on the market for use as accommodation (day rates of about US$20-30k, rather than drilling activity (US$70k and up). Coupled with the woes in the gulf of Mexico due to the Deepwater Horizon spill, drillers are not having the best of times despite the relatively high price of oil (which appears to be sustained above US$65). While Mermaid's activities are largely in South East Asia, the poor earnings announcement and negativity on offshore drilling at present are weighing down on the stock. We admit our failure to cut losses on the position, but we are very reluctant to sell the stock at a near-40% discount to book (about $0.77 a share). 

Memtech obviously suffers from a lack of liquidity, and has fallen 25.1% in May on relatively low volume. The business appears to be turning around (the company made US$967,000 in 1Q 10, from a $746,000 loss in 1Q 09). The company continued to generate cash in 1Q 10, and its cash balance stood at US$40.32 million at the end of the quarter, before the payment of the annual dividend. 75.1% of the stock's market cap is covered by cash (after the dividend is deducted), and the stock trades at a 56.5% to NAV.    

Portfolio gains 4% in April, but May starts in horrible fashion

The portfolio gained 4% in April, as NAV rose to $1.064. On a total return basis, the benchmark STI gained 3.6%. Year-to-date, the portfolio has risen 6.4% and has outperformed the STI's 3.5% (recall that this is after performance fees of 20% of an outperformance of a 6% annual return).

While we would like to focus on what went well in May, that is rather irrelevant at present as the first few days of May has seen markets reverse their gains. The STI is already 1% lower (YTD, as of 6 May 2010), while our portfolio is marginally positive, up 2.4% over the same period. Instead of moping over the poor performance of our holdings, we have re-examined our investment thesis for each stock and have highlighted lower conviction ideas which we will wish to sell in the near future. At the same time, we have also identified stocks which we may want to increase exposure to if the market presents suitable opportunities. We are relatively pleased with our holdings overall (and view the recent market weakness as a temporary condition).

Thus far, our key low-conviction idea is SGX. We dislike the high valuations and the company's growth potential is likely overrated. Latest earnings have been slightly disappointing, and we think that the Exchange is not likely to be successful in the futures market (traders prefer anonymity). Other products like ETFs have shown a bit of promise - volumes have been rising but are a far cry from being a stable source of revenue. Overall, the breadth of products has been expanding, but the actual impact on revenue has not fared quite as well. 

On the other hand, SGX still maintains its monopoly status as a clearing house in Singapore, and a wildly exuberant market could send the stock heading much higher, as market turnover rises. It will likely take more than normalised trading volumes to provide an upward lift to the stock price, something we are not comfortable "speculating" on.

At the same time, Chinese property stocks have displayed considerable weakness as the Chinese government implemented new regulations to cool the property market, and several stocks have been beaten down considerably (names like Yanlord Land spring to mind). We purchased another 1000 shares of Capitaland at $3.57 today (6 May 2010), amid the weak market conditions. The stock trades at just a slight premium to book value (about 1.13X), a far cry from the 2.75X seen in the 2007 bull market. Capitaland has been sold down on concerns over its Chinese property exposure (about 35% of assets), and we think the recent correction provides a good entry point to double our exposure in the stock.  

[on a less fundamental note, the 38.2% retracement from the Apr 2007 decline to the 9 Mar 2009 bottom is $3.55 (adjusted for rights)]

Strong rebound in March 2010

The portfolio rebounded strongly in March, gaining 4.9% (net of an accrued performance fee of 20% based on a 6% annual targeted return), bringing NAV to $1.023, up 2.3% YTD. In comparison, the STI on a total return basis gained 5.2% in March, and is essentially flat YTD.

On a percentage basis, Best World was the strongest performer, with a 36.2% monthly return. The announcement of expansionary plans in the Phillipines was enough to incite trading in the stock. Renewed investor interest in Jardine Strategic Holdings sent the stock rising 21% for the month, a huge boost to the overall portfolio (JSH is our largest single position in the portfolio). As previously mentioned, we view the underlying businesses as highly attractive in their own right, and the parent holding company simply offers the opportunity to purchase the whole basket at a substantial discount to market value. Another notable performer was Wells Fargo, which gained 14% for the month (also a substantial holding for us). Worries over financial reform in the US appear to have subsided for the moment, and investors are beginning to focus on P/E multiples for bank valuations, instead of book value. Wells Fargo currently trades at a forward PE of 11.3X, which leaves much upside potential based on a PE multiple re-rating alone.

Noble was the chief laggard in the portfolio, as concerns over a director's share sale and uncertainty over the merger of subsidiary Gloucester Coal and Macarthur Coal weighed on stock performance. US coal giant Peabody recently made a takeover offer for Macarthur Coal on the condition that its proposed merger with Gloucester Coal does not go through. At stake for Noble is a near 25% stake in the consolidated Macarthur, which is poised to benefit from steel production in China. While uncertainty still lingers, a second refuted bid by Peabody suggests that Noble has the upper hand, but we will be watching developments closely over the next week or so (Macarthur shareholders vote for the Gloucester-Macarthur merger on 12 April).    

BEST WORLD 36.2%

JARDINE STRATEGIC 21.0%

Hotung Investment Holdings 18.3%

FRASER AND NEAVE 16.9%

WELLS FARGO 14.0%

KEPPELCORP 12.2%

GUOCOLEISURE 8.7%

Capitaland 6.9%

STI ETF 6.1%

CAMBRIDGE 4.5%

SPH 3.0%

CAPITAMALL 1.7%

BERKSHIRE HATH-B 1.3%

ASCENDAS I-TRUST 1.0%

SGX 0.3%

WBL Corp -2.8%

TAT HONG -3.3%

NOBLE GRP -3.5%


$6,000 of new money was added into the portfolio, resulting in the creation of 5865.10 new units on 31 March 2010.

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.