october 2013 portfolio performance review
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Invast Insights
Week Commencing September 30, 2013
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This week we look at the following topics:
1.0 October portfolio performance review
1.1 Portfolio changes and additions
1.2 Trends in upcoming AGM season
2.0 Gold price in light of Fed meeting
2.1 How we think about gold
3.0 Book review – The 4 Hour Work Week
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www.invast.com.au | 1800 468 278
1.0 October portfolio performance review
September has been a rocky ride for markets as traders focused on the
outcome of money printing in the Unites States and the pace of economic
improvement in Europe. The Chinese economy has been improving, but as we
have written in recent weeks, commodity prices are yet to breakout on the
news, with the exception of gold having the odd overnight bounce. We are
proud to say that the three portfolios we launched in early September –
growth, preservation and drawdown have all delivered positive returns during
the month and have withstood the volatility in certain parts of the market.
When we launched the portfolios we intentionally adopted a conservative
approach, opting for safe options with certainty rather than betting the house
on risk trades. We outlined the rationale and methodology of each portfolio in
Invast Insights published on the 2nd of September. The portfolios have
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delivered total returns when including dividends of 1.2%, 1.9% and 1.6%
respectively. This excludes the franking credits of dividends paid which is an
added bonus in Australia, depending on your marginal tax rate. On an
annualised basis, the portfolios have delivered 14.7%, 22.8% and 19.2%
respectively, but keep in mind they have only been running for a month so
this measure is purely a guide only.
The portfolios are also calculated on a conservative measurement approach.
For example, the two CFD positions we have in the growth portfolio, we use
the total face value of exposure as our basis for returns and not the margin
invested. We feel that the total face value of exposure is what matters and not
the amount of cash you are setting aside and so this should be kept in mind
over the coming months. We also exclude financing when two positions in the
same currency denomination cancel each other out (long and short held
together).
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The drawdown portfolio – aimed at those looking at generating an income
purely – has performed especially well considering the two corporate bond
exposures we hold are due to pay periodic coupons shortly. This isn’t captured
by the performance over the past month but will flow through once
payments are made. Even the most aggressive portfolio banked a divided
thanks to Tandou (TAN) – which coincidentally was one of our 15 hidden
gems published in the first Invast Insights report on 26th of August - paying
one cent per share.
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Performance measurements are provided below (prices as of 25 September
2013):
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www.invast.com.au | 1800 468 278
1.1 Portfolio changes and additions
We don’t intend on making any changes to the portfolios at this stage. Our
CFD positions have generated mild losses in the growth portfolio but we still
feel that US markets are due for a slight pullback and the gold price remains
shrouded by bearish commentaries. We will discuss our thoughts on gold in
the section below. The S&P500 is scaling record high levels and many stocks
are starting to trade on price to earnings ratios well above their long term
averages. The pace of IPO action in United States markets is also a sign that
private equity owners see this as a great time to be selling, hence we maintain
our positions.
Over the next few months we will be looking for more emerging
opportunities for the growth and preservation portfolios. The drawdown
portfolio is unlikely to see any changes for a while, perhaps mid next year
when two of the corporate bonds we hold approach maturity. Until then,
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we will wait and see what the RBA does with interest rates. Fully franked
dividends from Woolworths, Telstra and AMP are unlikely to see major
changes and that really is our main focus in this portfolio.
One stock which has caught our eye is Empired (EPD) which sits in the growth
portfolio. The business recently announced a capital raising and acquisition
together with a sizeable contract which will see it increase in scale and size.
We like the business and intend on speaking to management over the next
few weeks if we can get a hold of them at this busy time. There are market
estimates which see Empired generating around 4-5 cents in earnings over
the next few years and in the IT space a 20x earnings multiple for a quality
name is not out of the question, we intend to hold on until it reaches 90 cents
or so before reviewing the holding. There is a strong chance the shares rise
through the one dollar range. We will start buying back if there is any
pullback in the share price (if those who recently got in on the capital raising
start taking profit) below 70 cents per share, but we feel this is unlikely.
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One of the worst performing stocks during the month has been Westfield
Group (WDC), which is different to Westfield Retail Trust (WRT). The former
includes Westfield’s international assets, property development and
management arm while the latter is a passive real estate trust housing the
majority of Westfield’s Australian malls. We think Westfield Group will
generate positive dividend growth into the future as the US economy
improves and cheap credit opens up redevelopment opportunities. Despite
the slight slip in shares, we remain firm believers of the story. If it falls further
we will also start adding more money and perhaps taking some profit from
Woolworths in the preservation portfolio.
1.2 Trends in upcoming reporting season
Most companies which reported their June 30 end annual results in August
through to September will hold their annual general meetings (AGM) in
October and November. This is usually a great time to hear management’s
view on:
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• The current trading environment
• Impact of a change in government and movements in currency rates to
corporate earnings
• Outlook on the global economy and confidence heading into the new
year
• Growth plans – acquisitions, mergers etc.
Corporate earnings were generally well received by the market in August and
the AGM season is important to maintain that momentum. There will be some
companies which either exceed or disappoint. We basically think the banks
and financials might fall slightly short of estimates – like Macquarie Group
last week – but the areas of the market which are likely to please will be the IT
space and perhaps some mining companies which have been busy cutting
costs. We will be on the lookout for our November portfolio report, looking at
finding new opportunities before Christmas time.
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Likely disappointments relative to expectations – Banks, Financial stocks,
Infrastructure, Discretionary Retail (particularly heading into Christmas)
Likely to please relative to expectations – Consumer Staples, Information
Technology & Online, Large Miners
2.0 Gold price in light of Fed meeting
Gold has seen some major fluctuation over the past few weeks particularly in
response to the US Federal Reserve maintaining its money printing stance.
Over the past two years, the view among many analysts and investment
banks has been a complete reversal in gold estimates – most were betting on
a $2000 per ounce price and now that there has been a mild pullback many
are calling gold back towards the $1100 per ounce level. We like to bet against
consensus and have put gold into our growth portfolio for that very reason.
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Gold will continue to perform well due to several demand factors:
1. The impact of the US Federal Reserve’s money printing exercise since the
financial crisis will still linger for the next decade. Even if quantitative
easing is wound back, interest rates are at record low levels and with bond
yields starting to rise from a ridiculously low base, inflation will be a big
feature of markets in the next decade.
2. It’s not just the US that has been printing money. Japan – the world’s third
largest economy – will continue to pump the system with cash even after
the US Federal Reserve winds back.
3. The new emerging non-OECD economies are still under invested in gold
and so that natural demand by global central banks and governments will
support any significant price pullback.
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All three of these views are medium-long term and in the short term there
might be some more downside for the gold price. Below is a chart showing
where we think support and resistance lies for spot gold – a break below
US$1275 per ounce could see US$1180 tested where we would be buying back
again. There is some short term resistance at around US$1425-85 per ounce.
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Source: Spot gold year to date via Bloomberg
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Chairman of the World Gold Council Randall Oliphant echoes these views. In a
recent interview with Kitco News, Oliphant said “…The growing middle class
in Asian countries - in particular India and China - which make up more than
half of the gold market, will continue to demand the yellow metal…Oliphant
added that he expects to see central banks around the globe continue to buy
gold as a way to diversify their currency reserves. He pointed out that central
banks bought the most gold in history in 2012.”
China's domestic consumption totaled 776.1 tonnes in 2012, compared with
864.2 tonnes in India, according to the Gold Council of China. Zhang Yongtao,
the association’s vice-chairman said consumption jumped more than 36 per
cent to 456.2 tonnes in the four months of this year. There are plenty of other
gold bulls out there and so we don’t really see a point quoting them all but it
is just worthwhile hitting the point that the emerging economies are still
relatively under invested in gold and the mentality of the emerging class in
these economies – namely China and India, is one which values holding
physical wealth storage mechanisms like gold.
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According to the United States Commodity Futures Trading Commission, as of
September 17 the total number of short positions held by physical producers
of gold exceed long positions by around 1.1 million troy ounces. But amongst
money managers, long positions were greater than short positions by around
547 thousand ounces. The chart below puts things into perspective and
shows just how many participants are in each category. Clearly there are some
selling pressures in the market but the views are different amongst the
motivations of each category.
www.invast.com.au | 1800 468 278
www.invast.com.au | 1800 468 278
2.1 How we think about gold
In Invast Insights published 9th September, we wrote “At Invast we tend to
think of commodities in two buckets - first the industrial commodities that are
used in the production of goods and services and secondly the currency
commodities like gold and silver which are held for different reasons, usually
a storage of wealth.” Gold is essentially a currency discussion. Like every
commodity and physical asset on earth, pricing will be dominated by demand
and supply. The above section is generally all a discussion around the demand
for gold. At Invast we equally like to attribute attention to the supply of gold –
something that doesn’t always get the same attention.
One of the best sources of information on gold supply is from gold producers
themselves, often large listed companies who must disclose their business
performance to the stock exchange. In Australia, we are lucky enough to have
one of the largest global gold producers in the world listed on our market –
Newcrest Mining (NCM). If we have a look at the ease at extracting and
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producing an ounce of gold and also the price it costs to conduct this
exercise, we basically can see what the fundamental floor price of bring gold
into the market actually is.
We call this the marginal cost of producing an ounce of gold. We think that
this will be a good guide as to where the gold price must fall before
producers globally start to close down their mines. Newcrest which produces
over 2 million ounces of gold annually has seen its shares fall by almost 60%
over the past year. It slashed its gold production guidance several times over
the past few months, has shed hundreds of jobs and taken an impairment
write-down of around $6bn (basically a reduction in the value of its assets). If
Newcrest as one of the largest gold producers in the world is struggling so
much with its production and business overall, other smaller producers must
be facing similar challenges.
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Therefore a discussion on gold must take into consideration not just factors like the US Federal Reserve printing money or China and India buying, but also producer’s ability to continue mining at an economic profit. During 2013, Newcrest produced each new ounce of gold at an average cost of US$750 per ounce. This is a cash cost which does not take into consideration things like depreciation which no doubt is very significant when you are investing around $2bn into your production assets each year. The actual all-in sustaining costs per ounce of gold were A$1,283 per ounce or let’s just say around US$1150.
Newcrest is one of the cheapest cost producers of its scale and so we think the average all-in marginal cost of producing an ounce of gold is well above the US$1100 per ounce Newcrest expects to book next year. This means that many gold miners globally are struggling to make money at current prices and will close down or dormant their operations if the gold price falls any further. The US$1180 per ounce technical level we presented on the chart above corresponds very well with the actually supply cost price in the market. When we think about the floor in the gold price, based on information from Newcrest and other miners, we have this figure in the back of our minds.
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Source: Newcrest presentation to the ASX on 12 August 2013
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3.0 Book review – The 4 Hour Work Week
They say you should never judge a book by its cover, the same should go
about its title. While the title of this book might raise some eyebrows it has
caught the attention of many respected investors and traders we know. It is
also a refreshing change from the same old business/finance tiles where you
read about how successful or how fantastic somebody has been in their
business life. The best way we can sum up The 4 Hour Work Week is as a book
which will help you better manage your time, become more effective in your
life overall and hopefully become a better trader and investor as you focus
more on what you want and less on the noise that confuses us in markets.
Most traders enter the market without really knowing what they want. The
most common questions we are asked as analysts is “what do you think of the
market” or “what do you think of this particular currency”. When we start to
question the motivation behind that answer a common recurrence is
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that many traders and investors don’t really know what their goals are and why they are even in the market at all. The 4 Hour Work Week will help you realise this planning process and hopefully allow you to achieve your goals much quicker.
Author Tim Ferriss was nominated as one of Fast Company’s “Most Innovative Business People of 2007”. He has been featured in hundreds of media outlets for his revolutionary and often simplistic thoughts about achieving goals. He speaks six languages, runs a multinational firm from wireless locations worldwide, and has been a popular guest lecturer at Princeton University since 2003, where he presents entrepreneurship as a tool for ideal lifestyle design and world change. He recently wrote The 4 Hour Body so, with summer around the corner, those more interested in their physique than your trading results, might start on the second book and then move on to the first.
The 4 Hour Work Week has a 4.5 star rating on Amazon out of 1,689 reviews. It can be purchased for around US$13 and hopefully pay itself off many times over before you even finish reading it.
Get more information about gold and trading currencies from our resources page.
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4.0 Disclaimer
Please note that you are receiving this report complimentary from Invast
Financial Services Pty Ltd (AFSL 438 283). Invast staff members may from time
to time purchase securities which are included in this or future reports. The
authors of this report may or may not be holding a position in the securities
mentioned. Please note that the information contained in this report and
Invast's website is of a general nature only, and does not take into account
your personal circumstances, financial situation or needs. You are strongly
recommended to seek professional advice before opening an account with us.
General Disclaimer: This newsletter contains confidential information and is
intended only for the person who downloaded it. You should not disseminate,
distribute or copy this newsletter. This newsletter is provided for
informational purposes and should not be construed as a solicitation or offer
to buy or sell any financial product. Invast Financial Services Pty Ltd is
regulated by ASIC (AFSL 438 283 | ABN 48 162 400 035).
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Risk Warning: It's important for you to read and consider the relevant Product
Disclosure Statement, and any other relevant Invast Financial Services Pty Ltd
documents before you decide whether or not to acquire any financial
products listed in this email. Our Financial Services Guide contains details of
our fees and charges. All these documents are available here on our website,
or you can call us on +612 8036 7555. CFDs and Foreign Exchange are
leveraged products and carry a high level of risk and you can lose more than
your initial deposit so you should ensure CFD and Foreign Exchange trading
meets your personal circumstances.
General Advice Warning: Being general advice, this newsletter does not take
account of your objectives, financial situation or needs. Before acting on this
general advice you should therefore consider the appropriateness of the
advice having regard to your situation. We recommend you obtain financial,
legal and taxation advice before making any financial investment decision.
*Distributed with the permission of Invast.com.au
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