Trident Global Growth Fund – Fund Manager’s Report - 31 December 2011
Trident Global Growth Fund
Fund Manager’s Report
Half Year to 31 December 2011
By Lance Spicer – Fund Manager
European Debt Crisis Weighs Heavily on Markets
The past half-year has been a difficult period to be an investor with high volatility and uncertainty caused by the European Debt Crisis. Markets around the world have been on a roller-coaster ride, as investors have been concerned by the prospects of a second Global Financial Crisis emerging. There have been many predictions made ranging from global depression to slow recovery and a return to growth. Under these circumstances, many investors have sought the perceived safety of bonds and cash until more certainty returns to markets. This movement away from “risk” assets such as equities has been felt most by the investors in “growth” assets such as those held by our fund.
While the fund provided out-performance to the index in the first half of the calendar year, unfortunately it has underperformed in the second half due to it being predominately invested in temporarily unpopular “growth” equities. The fund price being $0.816 as at 31 December 2011. We view this underperformance as very short-term, as many growth equities are now being priced at historical low valuations. Pleasingly, the fund has started well in 2012 at the time of writing (10 January 2012) and there have been substantial gains in a significant number of stocks.
MSCI World Index in US$30 June 2011 / 1331.18
31 December 2011 / 1182.59
Change in the Index / -148.59
Change in the Index as a % / -11.17%
Change in Fund unit price as a % / -17.90%
Difficult Trading Conditions
While the fund showed a very disappointing result, it is understandable when you consider the most popular stocks over the last 6 months have been dividend paying, low-growth companies who can offer some perceived certainty to investors who considered global recession, or worse a real possibility. That was not, and is not our view, and we firmly believe that this imbalance will be rectified in coming quarters, as fears recede and investors’ appetite for growth assets return. Under these circumstances, we expect significant outperformance from many of our fund holdings.
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Trident Global Growth Fund – Fund Manager’s Report - 31 December 2011
Trading conditions were difficult during the period with investors at times almost reacting to news hourly, creating incredible volatility and a “whip-sawing effect” on not only stocks, but also in the foreign exchange markets with the Australian dollar having a wild ride between US$1.10 and US$0.95. This volatility, both in equity and FX markets meant that we thought it prudent to undertake a degree of hedging of the Australian dollar during the period. We expect to unwind these positions as volatility reduces in 2012 and the US$ strengthens and economic fundamentals improve. Trying to pick bottoms and tops in this type of market (or any market for that matter) is difficult to say the least, so we erred to the side of prudence and topped up our holdings when valuations were overly compelling.
While it is always tempting to try to time the market and wait for the bottom to be reached (as if it would be obvious when it arrived), such a strategy has proven over the years to be deeply flawed. Historically, little volume transacts at the bottom or on the way back up and competition from other buyers will be much greater when the markets settle down and the economy begins to recover. In addition, the price recovery from a bottom can be very swift. Therefore, an investor should put money to work amidst the throes of a bear market or downturn, appreciating that things will likely get worse before they get better. However, in time all markets recover including share prices.
Our report, Outlook for 2012 (at the end of this report) covers the likely outcomes for not only the European Debt Crisis but also for the Chinese, Australian and US economies, commodities and corporate earnings.
While markets around the world finished the last week of the year on a slightly more encouraging note, as European legislators made significant inroads to the debt crisis, it wasn’t the whole story.
We saw the US market finish generally flat for the year and down approximately 6% [insert at the bottom disclaimer which market and the amount] for the half as the best performing major market. However, other major markets that that fund is also exposed (directly and indirectly) suffered much worse treatment by investors over the last half year.
Australia lost 12% (down 15% for the year)
UK lost 7%
France lost 22%
Germany lost 21%
China lost 20%
Japan lost 14%
Hong Kong lost 18%
Above are the national stock indices for the calendar year rounded up or down to a whole number.
No markets were spared the selloff. To further illustrate what a difficult year it was, it is interesting to look at the return of other fund managers who invest in similar equity markets to our own fund. I have selected managers who are widely regarded internationally as the best fund managers in the business, many often referred to as “investing legends” and many who have in recent years been awarded “Investment Manager of the Year” or in the case of Bruce Berkowitz, “Investment Manager of the Decade”. Many you will have heard of, such as Australia’s own investing legend, Kerr Nielsen and perma-bear, Jeremy Grantham, as well as American billionaire, John Paulson – the man credited with picking the GFC and making billions from it.
Investment Manager / Fund / Loss for 2011Jeremy Grantham / GMO Intrinsic Value Fund / -20%
Ken Heebner / CGM Focus Fund / -21%
Bruce Berkowitz / Fairholme Fund / -29%
Carl Icahn / Icahn Investments / -18%
Martin Whitman / Third Avenue Value Fund / -23%
John Paulson / Advantage Fund / -45%
Bill Nygren / Oak Mark Fund / -8%
Ken Fisher / Fisher Purisima Fund / -14%
Kerr Nielsen / Platinum International Fund / -14%
Mario Gabelli / GAMCO Asset Fund / -11%
Charles Royce / Royce Premier Fund / -18%
Mason Hawkins / Longleaf Partners / -16%
Average Return / -20%
To round off this list, there is one investing legend missing, Warren Buffett, who is not really a fund manager, but an investment guru who also lost money in 2011, down 5%. On this list, I would have to say having followed all these managers for years, there is not one that over the long-term I wouldn’t trust with my money – 2011 was that kind of year. The managers listed here without exception have enviable records of long-term outperformance and I have no doubt that the last 6 months was simply an aberration soon to be reversed in the short to medium-term.
While the US market may have finished flat for the year, it doesn’t reflect the true picture, as “growth” stocks were sold down and dividend paying “value” stocks were bid up leaving markets looking relatively unchanged but movements in the underlying stocks being, in some cases, quite dramatic.
However, we look forward to 2012 (see our Outlook for 2012 at the end of this report) with a much higher degree of confidence that our holdings will perform as expected. From our forecasts, the holdings of the fund are estimated, on average, to increase sales and earnings by 20% or more in 2012 and all have a history of beating estimates handsomely.
Portfolio Changes in the last 6 months
Over the last half year we have made several changes to the portfolio in accordance with a ‘weighting lower-risk, earnings “certain” stocks higher strategy’ and removing some stocks to be replaced with others that provide greater return potential as per our top down investment theme strategy.
Increased Investment
During the period we added to our investments in Apple, Intuitive Surgical, IBM, MasterCard, Google, Jazz Pharmaceuticals, Qualcomm, 3D Systems, Hexcel, Titan International, Polaris Industries and several others.
Decreased Investment
During the period we took profits or reduced our weightings in major holdings such as Intel, Caterpillar, McMillan Shakespeare and Oracle.
Ceased Investment
During the period we sold our holdings in Altera, BHP Billiton, Parker Hannifin, TRW Automotive, Ezchip Semiconductor, Sun Hydraulics, Arrow Electronics and Teva Pharmaceuticals. In the case of the technology stocks, this was because of the Thailand floods and the reduced medium-term guidance as a result and in the case of the others, due to a fall in our ratings of fundamental value and prospects for the longer-term.
We have reduced our exposure to Australian equities, as our outlook for the Australian economy has diminished due to our concerns over commodity prices, terms of trade, wider corporate earnings and the Carbon Tax.
Initiated New Investment
During the period we initiated new investments in the world’s largest electronic medical records company, Cerner; entertainment giant, Walt Disney; fertiliser maker, CF Industries; Australian mining engineer, Worley Parsons; leading mobile communications semiconductor maker and major Apple supplier, Broadcom; marine and general engineer and manufacturer, TwinDisc; online travel company, Priceline; and technology leading oil and gas engineer, Newpark Resources and several other smaller positions.
Fund Portfolio
All up, we have 42 positions made up of 41 long and 1 short position.
10 Largest Holdings / What They Do / Percentage of FundIntuitive Surgical / Global Surgical Robot monopoly / 7.10%
Oracle / Computers, Software & Cloud computing / 6.90%
MasterCard / Global credit card issuer and payments processor / 4.40%
Google. / Internet advertiser, world’s largest Internet search engine and diversified online company / 4.20%
Jazz Pharmaceuticals / Specialty pharmaceuticals for anxiety and sleep disorders / 3.80%
Qualcomm Inc / World’s largest maker of wireless telecommunications products and services / 3.80%
IBM / World’s largest global technology company / 3.70%
Hexcel / Composite manufacturer to the aerospace industry. Major supplier to Airbus and Boeing / 3.50%
VeriFone Systems / Global duopoly providing electronic and POS payment systems / 3.50%
Caterpillar / World’s largest maker of mining and construction machinery / 3.40%
Top 10 Holdings / 44.30%
Sector Weightings / Percentage of the Fund
Cash and Cash Equivalent / 15%
Basic Materials / 4%
Technology / 26%
Industrials / 17%
Communications / 8%
Consumer Cyclicals / 6%
Consumer Non-Cyclicals / 12%
Financials / 2%
Energy and Other / 10%
In addition to our equity holdings, we have also invested around 13% of the fund into AUD$ Senior Preferred Floating Rate Securities paying 3% above the cash rate, which is currently yielding the fund 7.25%. These funds remain available to the fund to invest in stocks if we wish to do so.
Understanding Long-term Investing
Most investors would want to be just like Warren Buffett, but few, when given the chance will invest like him. Most invest in exactly the opposite way – they then lose money and constitute the majority of investors who rarely do overly well in stocks. Investing just like Warren Buffett is easy, but very few people can do it. They lack one vital thing – patience.
The average investor is not an investor at all – they are “speculators”. They judge their investments based on daily, weekly or monthly movements. They make decisions to buy or sell based not on the long-term outlook of a business, but what happened yesterday, or become caught up in the fear of what might happen tomorrow – this is speculation, not investing. Most investors are guilty of it and due to the pressure of quick returns, investment professionals (who should know better) also get caught up with it, as they feel that if they don’t follow the bad habits of their customers they will be subject of criticism or redemptions if the results aren’t there in the short-term. This is a major mistake and one that many fund managers make today. It turns most fund managers into “mediocrity-seeking, index-huggers” that would rather be wrong and average, rather than be right and above average because the time frame of the average investor is so short that wrong and average is “safer”.
It’s best to illustrate this by looking at a Warren Buffett favourite – Coca Cola. As we well know, Warren is famous for saying his holding period of a stock is forever and nothing shows and explains his success and the failure of the average investor better than this chart.
Warren and average investors both invested in exactly the same stock and at similar entry points, and even if Warren had bought when everyone else did, he still would be up 34%. The difference was the holding period. The average investor sold a perfectly good company – ignoring all fundamentals, exactly the same fundamentals they relied on so much to buy the stock in the first place – and sold at 19% loss. This is the story of their investment lives. Warren on the other hand is up 54% in exactly the same stock. It’s pointless doing all the research and finding a great investment for the long-term, if at the first sign of trouble, you dump the lot, take a loss and go to cash. It seems to me that most investors forget what they have invested in and have disregarded common sense totally.
Let me give you one more example of less than sensible behaviour. Just say you own a coffee shop, it’s profitable, it has it’s bad days and good days – but over a given period, the business is good. Now, you buy the newspaper and you read that economic conditions could get worse next year, do you immediately put up a for sale sign? Only to take it down a week later when you realise the journalist overstated the issue. No, of course you don’t – so why do it with the other businesses you own - your shares?
Stock in Focus - Qualcomm
Morgan Stanley predicts Smartphones sales will outpace PC and laptop sales in 2012. By 2013, an estimated 650 million Smartphones will be sold. And over 1 billion Smartphones will be sold annually by 2016, according to IMS Research.
Obviously, the big winners are Apple's iPhone and phones running Google's Android platform. Both are major shareholdings of the fund.