Partnership performance - July 2012

The Partnership’s performance for July has been posted to the Verster Investment Partnership’s Facebook Group Page (https://www.facebook.com/#!/groups/investment.partnership/)!

 

Partnership performance - June 2012

The Partnership's performance since:

-        Inception (May 2009): -        1 September 2009: -        1 March 2010: -        1 September 2010: -        1 March 2011:             -        1 September 2011: -        1 March 2012:

143.3% 109.2% 94.9% 81.1% 60.4% 40.8% 6.5%

The Partnership returned 2.2% for the month of June. During the past month, the local portfolio once again benefited from a combination of good stock selection and effective hedging. I will continue with the same strategy as long as the market (most shares, in general), trade at levels that do not represent a margin of safety against the significant economic threats to various companies' operating environment. The foreign portfolio’s value increased by 1.8% in US dollar (decreased 3.8% in SA rand). One specific stock has been a significant drag on performance, unfortunately. Where I thought a moat existed (defending the company against competitive threats), there was very little to protect the company against technological change - it has been a timely reminder that change and progress are great for the economy overall, but can be viciously detrimental to an individual company's profitability.

Going forward, I will not be posting the monthly updates to this blog anymore. I have decided to rather use the Verster Investment Partnership's Facebook Group (https://www.facebook.com/#!/groups/investment.partnership/) to distribute updates. The Facebook Group allows me more control in terms of who has access to updates, which is more appropriate than the current situation where anyone from anywhere in the world can see everything that I write. If you would like to continue receiving updates, kindly request to join the Verster Investment Partnership Group via Facebook.

Thank you for your interest in reading this blog over the past 3 years – see you on Facebook!

Partnership performance - May 2012

The Partnership's performance since:

-        Inception (May 2009): -        1 September 2009: -        1 March 2010: -        1 September 2010: -        1 March 2011:             -        1 September 2011: -        1 March 2012:

138.1% 104.7% 90.8% 77.3% 57.0% 37.8% 4.2%

Further to my cautious commentary last month and the hedged position of the local portfolio, the Partnership’s value increased by 4% during a month that the FTSE/JSE All-Share dropped by 3.6%. The offshore portfolio of the Partnership (which represents just over 10% of the Partnership’s capital) also benefited from Rand weakness, even though it was down in Dollar-terms for the month. There are currently attractive investment opportunities in selected offshore shares, but the current Rand/Dollar exchange rates distorts the risk/reward ratio from a South African investor’s perspective. A volatile foreign exchange rate is a reality that needs to be dealt with carefully and, unfortunately, South Africa’s foreign exchange restrictions impairs and frustrates one’s ability to manage it effectively.

I realised once again in the past month that one of the key attributes that a successful investor needs to possess is good calibration. Meaning, one must be in touch with reality and know/understand what is going on around you. It is surprising how many participants in this industry are ‘not in touch’, harbouring inaccurate perceptions of the current state of affairs and unrealistic expectations regarding future developments. Furthermore, one needs to calibrate your probability assessment acumen to know where you stand on the optimistic-pessimistic continuum of expectations versus the probable outcome implied by a share/stock price. If you can’t gauge where you stand relative to the crowd, you will be prone to be swayed by sentiment and will have less conviction in what you believe to be the true in situations where you differ from the widely held consensus view. The perception vs. reality calibration gap is a human condition that is of particular importance in the area of investment.

I received the tax statements for the Partnership during the past week, and I’m currently busy drawing up each individual Partner’s tax statement, which I will be sending out in the next week or so.

Partnership performance - April 2012

The Partnership's performance since:

-        Inception (May 2009): -        1 September 2009: -        1 March 2010: -        1 September 2010: -        1 March 2011:             -        1 September 2011: -        1 March 2012:

128.9% 96.8% 83.4% 70.4% 50.9% 32.4% 0.2%

 

 

The Partnership’s value dropped by 1.8% during April, mostly due to the negative impact of the portfolio hedge during a month that the local equity market moved higher (the hedge detracts from performance if the market goes up, but contributes positively if the market moves lower). A necessary condition of successful long-term investing is to worry about future events which might never come to pass, in order to be correctly positioned if they do. This means that I need to worry regularly about things that might never occur, but would have a material negative impact on the value of our investment if they did. It feels like one of those uncomfortable times at the moment, where I am somewhat worried about future events which might not happen, but have positioned the portfolio to benefit if they do. As things stand now, the portfolio would benefit more from a falling local equity market than from a rising one.

The Partnership has now been in existence for a full three years. Over this period, the Partnership’s return since inception of 128.9% compares favourably to the FTSE/JSE All Share Index Total Return of 80.6%. Whilst we have undoubtedly enjoyed our fair share of good luck over the past three years, I would like to think that the outperformance can also somewhat be attributed to investment skill. The investment field (some would say ‘game’) is a deceptively easy endeavour. Daily share prices are quoted for all to see, buying and selling happen at the click of a button, we can all keep up to date with various companies’ recent operating performance through the media and we are in a position to quickly formulate an opinion regarding the immediate prospects for specific companies we know something about.

Beneath the surface, however, there is a lot more to it. There are a vast number of decisions that will lead to loss, but very few that will lead to profit. The multiple constraints of capital, time, knowledge and foresight necessitates the use of assumptions and trade-offs. It is impossible to make the ‘right’ decision every time, and the more one knows, the more you realise what you don’t (and can’t!) know. It should not come as a surprise that studies have shown that the average professional investor underperforms the market. On average, we are all below average. It is a select few, who combine hard work, skill and temperament, that ultimately attain success in this field over the long term. My goal is to be one of those few, and I am working hard to sustain the Partnership’s outperformance far into the future – a difficult task that I passionately enjoy.

Partnership performance - March 2012

The Partnership's performance since:

-        Inception (May 2009): -        1 September 2009: -        1 March 2010: -        1 September 2010: -        1 March 2011:             -        1 September 2011: -        1 March 2012:

133.0% 100.3% 86.7% 73.5% 53.6% 34.8% 2.0%

The Partnership’s value increased by 2.0% during March. This return can be broken down as follows:

Local portfolio               0.35%

Offshore portfolio          0.65%

Hedging trades             1.00%

In comparison, the local market (FTSE/JSE All Share Total Return Index) dropped 1.4% during the month.

10% of the Partnership’s capital has been invested offshore, of which 45% (i.e. 4.5% of the Partnership’s capital) has been utilised to purchase shares in 7 different companies, with 55% still in cash (US dollars). The companies whose shares have been purchased are listed on the following stock exchanges: 3 on the New York Stock Exchange, 1 in Hong Kong, 1 in Frankfurt, 1 in London and 1 in Toronto. Even though the offshore portfolio increased by 6.5% (in Rands) during the month, it is still down 0.9% in Rand terms since capital was first transferred offshore in November 2011. In US Dollar terms, the offshore portfolio increased by 0.7% during March, and is up 1.0% since inception. The difference of -0.9% in Rands and 1.0% in US Dollars is due to Rand/Dollar exchange rate movements.

Of the 90% invested in the local (South African) portfolio, roughly half is held in equities and half is held in cash. The allocation of the Partnership’s capital between shares & cash and local & offshore is a reflection of the specific investment opportunities that I have identified up to now. It does not reflect my views on the valuation of the various asset classes as a whole. I don’t waste my time trying to forecast the return of various asset classes and allocate capital on such a basis (as many others do). My view is that investment returns are driven by security selection, and not asset allocation. My time is spent looking for securities (predominantly shares) of great companies trading at a significant discount to intrinsic value.

Partnership performance - February 2012

The Partnership's performance since:

-        Inception (May 2009): -        1 September 2009: -        1 March 2010: -        1 September 2010: -        1 March 2011: -        1 September 2011:

128.4% 96.4% 83.0% 70.1% 50.6% 32.2%

February 2012 turned out to be the second best month for the Partnership since inception, returning 7.7% for the month and taking the return for the tax year to 50.6%, versus 8.0% for the local market in general. This is an extraordinary annual return, and partners should not expect a similar result anytime soon. All the stars seemingly aligned in our favour during the preceding 12 months. I will send out detailed tax statements within the next 3 months, but preliminarily the return can be broken down as follows:

 

Interest income: Dividend income: Trading income: Realised capital gains: Unrealised capital gains:

0.6% 2.9% 11.4% 4.1% 31.6% 50.6%

The end of February also saw a very successful round of capital raising, with the Partnership’s size almost doubling – thank you for the support. The greater size will allow for a more meaningful allocation to offshore investments, taking advantage of current Rand strength. A warm welcome to our 16 new partners (one partner decided to exit). I strongly recommend that new partners read previous monthly letters on the blog, to ensure that everyone familiarises themselves with my approach to investing and understands the long-term nature of the Partnership.

Thinking about unanticipated (and unwanted!) events is an integral part of building a successful long-term investing track-record. Extending this line of thought, Partners can rest assured that the process of winding up the Partnership in an orderly manner should I, unexpectedly, become ill-disposed has also been formalised to a greater extent – a friend of mine who works at an auditing firm will step in should such an event occur.

Looking ahead to the coming year, I will investigate alternative tax efficient structures for the Partnership in light of the latest SA tax & foreign exchange restriction changes and will look into further utilisation of derivatives for hedging purposes. These initiatives might lead to slight changes of the Partnership Agreement, but I will keep everyone informed as to when & what changes are made, if at all.

Partnership performance - January 2012

The Partnership's performance since:

-        Inception (May 2009): 112.1%
-        1 September 2009: 82.4%
-        1 March 2010: 70.0%
-        1 September 2010:  57.9%
-        1 March 2011:  39.9%
-        1 September 2011: 22.7%

The Partnership has had a positive start to the year, returning more than 5% for the month of January, even though the offshore portfolio was down in Rand terms, due to the strengthening of the currency against the US dollar over the period. This creates an opportunity to increase the offshore allocation of the Partnership's capital, which I will probably do during February.

The local portfolio benefitted from excellent results announced by one of the companies that we own, as well as a jump in the share price of a company that is trading under cautionary (meaning that discussions are underway which could materially effect the share price of that company).

Remember that the end of this month is once again an opportunity for current partners to make additional capital contributions or to withdraw capital, and for new partners (friends & family only) to join the Partnership. Please let me know by the 15th if you want to withdraw. For additional/new capital contributions, please transfer the funds into the Partnership's bank account (details available on request) by the 29th of February.

I'm writing this update from a hotel in the Sacred Inca Valley of Peru. Getting away from the day-to-day gyrations of the stock exchange is important to maintain a long-term perspective, in my opinion. Even though the Partnership has built up an enviable track record since inception, compounding at more than 30%p.a., the challenge is to maintain this performance for many years to come. It won't be easy, and there will surely be periods of disappointment along the way, but I trust that the investment approach that I am following is sound, based on the fact that it makes logical/business sense and has proved to be successful for the many great investors whom I have studied.

Sent via my BlackBerry from Vodacom - let your email find you!

Partnership performance - December 2011

The Partnership's performance since:

-        Inception (May 2009):     101.6%

-        1 September 2009:           73.3%

-        1 March 2010:                  61.5%

-        1 September 2010:           50.1%

-        1 March 2011:                  32.9%

-        1 September 2011:           16.7%

The year ended on a high, with the Partnership returning just under 4% for the month of December. For the calendar year, the Partnership’s performance has been 36.2%, versus the FTSE/JSE All Share Total Return of 2.6%, which is a very pleasing result. Just over 8% (800bps) of the Partnership’s return for 2011 was due to index futures hedging, which, unfortunately, attracts tax at the maximum marginal rate. I will look into more efficient tax structuring options in the coming year. The offshore portfolio of the Partnership (the Distant Star Global Trust), which was seeded with 5% of the Partnership’s capital in early November has returned 0.4% in Rands and 0.9% in US Dollars, against the MSCI World Index return of -1.3% in Rands and -2.9% in US Dollars since 1 November 2011.

The Partnership’s portfolio currently comprises:

82.5% in 14 domestic (locally listed) shares

5% in the offshore portfolio, which currently holds positions in 2 foreign shares and some USD cash

12.5% in domestic cash & cash equivalents

Whilst I am careful not to prognosticate, mindful of the fact that the future is unknowable, I estimate that most domestic shares are now trading much closer to fair value than at any point since the inception of the Partnership. I (still) see a lot more value in shares listed on foreign stock exchanges, especially large cap multinational companies listed on the NYSE (New York Stock Exchange). In light of this, the allocation to the offshore portfolio will probably be increased substantially in 2012.

I will still use the local broad market index (The FTE/JSE All Share Total Return Index) as a benchmark for the Partnership as a whole, since it is still the most appropriate measure of an alternative use of long-term investment capital for limited partners. The offshore portfolio will use the ‘MSCI World Index’ as a benchmark, which is the most widely used global equity market index. As a reminder, the Distant Star Global Trust’s portfolio manager (that’s me) will charge a performance fee of 10% of the profits of the offshore portfolio, using the high-watermark principle. Updates concerning the offshore portfolio alone can be found here: http://distant-star-global.blogspot.com/

Partnership performance - November 2011

The Partnership's performance since:

-        Inception (May 2009):      94.7%

-        1 September 2009:           67.4%

-        1 March 2010:                  56.0%

-        1 September 2010:           45.0%

-        1 March 2011:                  28.4%

-        1 September 2011:           12.7%

November turned out to be a very profitable month for the Partnership, which returned 6.6%. At month-end, the portfolio composition consisted of 88% in 15 different local shares (no single position greater than 8%), 72% in a short index future position (giving a net equity exposure of 16%), 7% in local cash and 5% in the Distant Star Global Trust, which currently only holds offshore cash (US dollars). Since 1 March 2011, roughly 5.5% (550 basis points) of the 28.4% return was due to index futures, which attracts tax at the maximum marginal tax rate, unfortunately. There isn’t much I can do about the flow-through tax nature of the Partnership at this stage.

The US dollars were bought at an exchange rate of R8.05. While it is unfortunate that administrative delays prevented me from buying foreign currency at a better exchange rate earlier in the year, I decided to make a start, in light of attractive opportunities in certain shares listed offshore. The offshore portfolio, held in the Distant Star Global Trust, should see its first purchase of equities in the coming month.

My next monthly update will only be in 2012, so I would like to take this opportunity to wish all Partners a peaceful, joyous and blessed Christmas. Thank you for your continued support.

Partnership performance - October 2011

The Partnership's performance since:

-        Inception (May 2009):      82.7%

-        1 September 2009:           57.1%

-        1 March 2010:                  46.4%

-        1 September 2010:           36.0%

-        1 March 2011:                  20.4%

-        1 September 2011:             5.7%

The local portfolio’s increase in value for the month of October of 2.6% was much less than the rise of the local market, which was up 9.3% for the month. This relative underperformance for the month does not concern me at all. As I have conveyed many times before, the intent of the Verster Investment Partnership is to outperform the market over the long-term. I do not know of any fund in South Africa that has delivered a better return than the Verster Investment Partnership over the past 2 years.

Everything is FINALLY in place to buy shares offshore, as I first intended to do a year ago. Interestingly (or rather, frustratingly) 18 out of the top 20 best performing SA unit trusts over the past twelve months are offshore-focussed funds. I was right in my call, but it doesn’t mean much being right if the implementation is absent. I will cautiously allocate a portion of the portfolio to offshore investments in the next few months, depending on the Rand exchange rate.

It will be interesting to see if I can replicate the good performance of the local portfolio in the offshore markets. Successful investing requires a rigorous quantitative framework to determine the current intrinsic value of a company, combined with a comprehensive decision-making process that considers the qualitative aspects of a company (which is the primary determinant of how the intrinsic value of that company could change in future). I am confident that my current quantitative framework is applicable to companies listed elsewhere, but the required qualitative process entails a lot of reading, and I will have to make time to read more about the company itself, competitors, customers, suppliers and market dynamics before buying any shares. This is quite a daunting task, but it is one I look forward to, and one which could reap great benefits if I can prove that I can allocate capital efficiently on a worldwide basis.

Partnership performance - September 2011

The Partnership's performance since:

                                                           VIP                        ALSI
- Inception (May 2009):                   78.1%                    53.0%
- 1 September 2009:                       53.2%                    25.8%
- 1 March 2010:                               42.7%                    16.3%
- 1 September 2010:                       32.6%                    12.7%
- 1 March 2011:                               17.5%                    -5.9%

- 1 September 2011:                         3.1%                    -3.6%

September has been a tumultuous month, with the FTSE/JSE All Share Total Return Index dropping by 3.6%. The good news is that, in comparison, the Partnership’s local portfolio was up by 3.1%. The less good news is that:

1)      earning profits from short sales (as has been the case in the past month) attracts tax at the marginal income tax rate, rather than the capital gains tax rate. I will attempt to alleviate this matter in the next few months. Even so, it is better to earn taxable profits than to incur losses!

2)      due to continued delays on the side of Sanlam Private Clients, I did not manage to convert a portion of the cash in the portfolio into foreign currency, as intended, so we did not benefit from the sharp deterioration in the value of the Rand versus most other currencies. This is particularly frustrating to me, since I initiated the process months ago, when the Rand was substantially stronger. I have decided to wait a bit and see where the Rand settles, after the recent sharp move, before continuing with the seeding of the foreign portfolio.

Keeping in mind that the Partnership is managed with a long-term view, I also include the FTSE/JSE All Share Total Return figures for the comparison periods above, after receiving queries from some Partners about how we are faring relative to the market in general. Note that I do not fixate on this relative performance in the short term, and neither should you – the importance of outperforming the market is obvious, but it only manifests itself over longer time periods (three years would probably be the minimum period to discern between skill and luck). Even so, I am pleased to show that we have outperformed the market by 25.1% since inception.

Partnership Agreement (updated August 2011)

Description:
A pooling of financial interests for long-term investment purposes.

The only General Partner is Jean Pierre Verster, who is solely responsible for the management of the partners' pooled financial interests. The partners, other than the General Partner, are 'partners en commandite', as it is known in common law, meaning that they are only liable to the partnership to the extent of their financial interest in the partnership (i.e. the sum of their contributions and undistributed profits/losses). Due to their non-involvement in management, the partners en commandite have no contractual common law relationship with third parties, but only have a contractual common law relationship with the General Partner. As per common law, the General Partner is liable in terms of those liabilities of the partnership that exceed the financial interests of the partners en commandite. Partners en commandite are not exposed to liabilities of the General Partner that have been incurred in his personal capacity (liabilities outside of the partnership) - i.e., creditors of Jean Pierre Verster in his personal capacity have no recourse to the financial interests of the partners en commandite.

Specific terms:
- The MINIMUM initial contribution per partner en commandite is R10,000 (ten thousand rand). ¹

- The MAXIMUM initial contribution per partner en commandite is R1,000,000 (one million rand), while the General Partner is employed by his current employer.¹

- NO FEES are charged by the General Partner for the management of the local portfolio held by the partnership. ¹

- The General Partner shall make MONTHLY DISCLOSURE of performance, in order to ensure that partners are informed regularly as to the value of their financial interest.

- PROFITS AND LOSSES are shared pro rata by partners i.e. calculated on a daily basis according to the individual partners' financial interests relative to the pooled total.

- WITHDRAWALS & ADDITIONAL CONTRIBUTIONS can be made on 1 March and 1 September of every year, with no fees charged for withdrawal. At least two weeks' notice is required for such withdrawals. If withdrawals are made at any other time, a 5% administration fee will be charged by the General Partner on the value of that partner's share which is to be withdrawn. This is to ensure that partners do not make short-term decisions regarding their involvement in the Partnership – it is, after all, a long-term venture. Contributions may also be made at other times as determined and announced by the General Partner.

- TAX CONSEQUENCES of the activities of the Partnership will be borne by the partners individually, in relation to each partner's financial interest in the capital and profits of the Partnership. The Partnership itself is not a taxable entity. The General Partner will furnish every partner with an annual statement reflecting the tax gains and/or losses of such partner arising from the activities of the partnership, within 3 months after the tax year-end.

- A RECORD of every partner’s percentage interest in the Partnership is kept electronically by the General Partner. This record is saved on the General Partner's laptop and is also backed up on the General Partner's external hard drive. Additionally, the updated record shall be sent to a nominee every six months, or when the percentages change, to ensure that a 3^rd party has the information in case the General Partner is ill-disposed.

- If the General Partner should be UNABLE TO CONTINUE acting as General Partner, for reasons including death or mental disability, the partnership will dissolve, and partners will receive their pro rata financial interest in the Partnership as per the updated record of partners' interests.

¹These terms are to avoid a conflict of interest with the General Partner's current employer, which renders investment management services in the South African investment markets. These terms could change when the General Partner changes employment. If so, the Partnership Agreement shall be redrafted, setting out the change in terms, and all partners shall have the opportunity to reconsider their involvement in the Partnership from that point onwards, with no penalty.

Mandate:
- The General Partner may invest the pooled financial interests into:

1.      Financial instruments listed on exchanges that are members or affiliates of the World Federation of Exchanges (WFE), inclusive of equity, non-equity and derivative instruments;

2.     Fixed-income, money market and currency instruments, inclusive of all maturities;

3.   Entities whose sole assets comprise those above (1. & 2.);

  with no exposure restrictions per instrument.