Bristlemouth

A Value Investing Blog

Posted on 13 Dec 2011 by Forager

The Economics of Funds Management

During the past two years I've met a lot of people trying to do what I'm trying to, build a funds management business. With $50m, I'm better off than most, but we're all losing money due to a lack of scale.

That's expected. Most startup businesses lose money in the first few years. From the outside, though, most people view the industry as obscenely profitable. That's true when you look at a Platinum Asset Management, Hunter Hall or a Treasury Group (despite its recent woes). What you don't see is all the businesses that aren't alive any more. The failure rate is high.

A fellow fund manager and I had some back and forth via email today about another friend's decison to shut down his fledgling funds management business. I'll leave this publicity shy fundie's name unstated but he put it better than I could:

Good on them for giving it a good shake.  Another great example of the survivorship bias in action… in a year some aspiring fundie will be attracted to the extreme success and dividend stream of guys like Kerr Neilson and have no appreciation or knowledge of those who have risen and fallen along the way…

So true.

Posted on 23 May 2011 by Forager

Comrades 2011: Give Some of Your RHG to Charity

Three weeks ago I was eating some tapas with a colleague in Victoria Street Darlinghurst, an inner-city suburb of Sydney.

We were chatting about the RHG saga and trying to fathom Chairman John Kinghorn’s motives. Why would you try and short-change shareholders when you are already one of Australia’s richest people? I looked up from the table and thought I was having hallucinations. A massive blue billboard had been erected out the front of a construction site across the road:

The Kinghorn Cancer Centre 2012

Comrades 2011: Give Some of Your RHG to Charity

I googled it straight away and it is indeed the same John Kinghorn and he has indeed funded a large chunk of a new cancer research centre attached to St Vincent’s Hospital. The $100m facility was seeded with a $25m grant from the Kinghorn charitable trust.

I’m no closer to understanding what makes him tick. But I figure the least we can do is put a portion of our profits towards a good cause too.

Which brings us to next week. In six days’ time I’ll be embarking on the biggest race of my life. The 2011 Comrades Marathon starts its 87km journey in Durban on the east coast of South Africa. It winds its way up over running’s version of The Big Five ­– Cowies Hill, Fields Hill, Botha’s Hill, the monster Inchanga and Polly Shorts – and finishes at Petermaritzburg, some 700m above sea level. It’s going to be a long day but I’ve had my best preparation ever, and am ready to give it my all.

Comrades 2011: Give Some of Your RHG to Charity  Comrades 2011: Give Some of Your RHG to Charity

I can’t say I run for charity. I run because I love it. But I do like to use my running to raise awareness of useful causes and my choice of charity this year is Camfed, a US charity dedicated to educating girls in sub-Saharan Africa. I think what they have achieved is incredible.

You can read all about it on the website but, crucially for me, 90% of the money they collect goes directly to where it’s needed (they spend 7% on fundraising and 3% on administration). And what they do works. Their research shows that educated girls:

  • Earn up to 25 percent more and reinvest 90 percent in their families.
  • Are three times less likely to become HIV-positive.
  • Have fewer, healthier children who are 40 percent more likely to live past the age of five.

I want to raise $10,000, which will put 30 girls through a Camfed educational program. It’s no Kinghorn Cancer Centre but it would be great if you could help.

Click here to donate and, if you’d like to follow my progress on Sunday, we’ll be providing updates at www.twitter.com/intinvfunds. My ‘plan’ is to finish in less than 9 hours, which would be 10:30pm on Sunday afternoon, Australian Eastern Standard Time. 

Posted on 20 Jan 2011 by Forager

Looking Back it Was Not So Easy (Video)

I'm posting something a bit different today. Instead of my regular written word, The Intelligent Investor's Greg Hoffman and I have put together a video reviewing my first 14 months of life as a fund manager.

It's about 20 minutes long, so you might need a cup of tea. Any questions or comments, let me know.

Posted on 11 Nov 2010 by Forager

RHG Does Everything Right

It’s no secret that we’ve had our issues with the RHG board over the past few years. The lack of communication, lack of genuine independent representation on the board and an about face on strategy two years ago left us concerned for the welfare of minority shareholders.

Whether our criticism and pressure made a difference or not, I don’t know. But it must now be said that their actions, if not their words, have been exemplary.

Firstly, the company’s asset ­– a $15bn mortgage book in runoff – has been managed to perfection. The cash to shareholders, generated by charging customers an interest rate that keeps them on the books but still makes a profit, has been maximised. With some minor exceptions the funding has been kept in place through the most difficult environment possible. And the company has chosen to invest in its own book where required to keep funding in place. The net result is that the company has accrued a tangible asset balance substantially in excess of what I was expecting three years ago.

Secondly, RHG has bought back more than 16% of its own shares at substantially discounted prices. This has added a further 8-10% to the NTA per share, over and above what would otherwise have accrued to shareholders. I guess you could argue that, if they had communicated effectively with the investment community, shareholders wouldn’t have been selling at a discount to start with but, financially, it added substantially to shareholder value.

And now, finally, they have announced that they will give the money back in the most tax effective manner possible. True, the $0.88 on offer is less than the current NTA and the business will still generate more cash this financial year. Some have suggested that, by only paying $0.88, the board is somehow trying to short-change minority shareholders.

If they can sell the remaining business, including the runoff, for more than the ‘threshold price’ (included in the $0.88 per share), we’ll all get more than $0.88 and Chairman John Kinghorn will take his money with the rest of us. If they don’t achieve that price, the buyback will be optional. That is, if you want the $0.88 now, you can take it. If you think there’s more value in the rump, you can hang around with the existing board.

They currently have approximately $200m of cash and $100m of illiquid assets. If they can’t sell the illiquid assets and remaining business for a satisfactory price, they won’t have enough cash to pay everyone $0.88. So, Kinghorn has said that he won’t participate in the buyback if this situation arises. In short, we have the option to participate if we want. He doesn’t.

I can’t see how anyone can argue with their approach. All up, if you simply judged the board by their actions since late 2007, you couldn’t have asked for a better job.

For me, it’s been my most successful investment ever and there have been some important lessons along the way. The first one is an old one. Patience pays. Most of our frustration was probably related to the fact that we didn’t realise the value as soon as we wanted. But the business kept generating cash and, by keeping that cash, they were able to support warehouses and keep bank funding that they otherwise might have lost. For those who were prepared to wait, it probably generated more value than it otherwise would have had they paid the cash out along the way.

The second lesson didn’t apply directly to me but I know a lot of people that couldn’t buy a stock that had already increased fourfold. When the RHG share price was $0.10, there were a lot of risks. In particular, it seemed highly likely that they would lose all their warehouse funding.

At $0.40, most of the risks had dissipated and it was obviously worth at least $0.80 (see RHG’s atomic value). It was still a steal, but a trade very difficult to execute for most of us contrarians given we had already seen the price at less than 10 cents.

And the last lesson relates to management. We’ve had this conversation on Bristlemouth before but it’s my personal view that the market for well-managed, wonderful businesses is a crowded space. Management is also an inherently difficult thing to assess. If you think you’re buying in to wonderful management and pay a high price as a result, there’s every chance you’ll be disappointed.

Assume the worst, on the other hand, pay a price that compensates and you might just be pleasantly surprised.

Lastly, I’d like to thank all those that supported me in last year’s RHG board tilt and, more importantly, continued to support The Intelligent Investor through what was a very difficult time in late 2007 and throughout 2008. With Timbercorp in all sorts of trouble and RHG trading as low as 5 cents, many people were (understandably) questioning whether I had any idea what I was talking about.

For those that managed to stay the course, I hope you have been justly rewarded.

Posted on 01 Jun 2010 by Forager

Brutal Comrades: A Personal Story

**Please note that this blog post explains my whereabouts for the past week or so but has nothing to do with economics or investing. It’s a personal story about my experience in the ‘ultimate human race’ last weekend – if that’s not something that interests you, I’ve already wasted too much of your time**

At 3:10pm on Sunday, 30 May, I hobbled onto Kingsmead stadium in Durban. I had one lap to run of this famous South African cricket ground to run in order to complete the Comrades Marathon. For the record, I crossed the finish line 9hrs 40 mins after I’d started, but by then all thoughts of pacing myself, achieving a certain time or flying across the line with arms raised had long gone out the window. I just wanted it over with.

We began the day at 4am in Pietermaritzburg, the starting city for Comrades every second year. This is the 85th running of the event, and the 43rd time runners have started in Pietermaritzburg and run to Durban, 89km away. The other 42 times, they’ve run the other way. (This year’s race was a ‘down’ year, evoking in my mind images of a leisurely downhill stroll. As we drove the course on the Thursday before race day, it quickly dawned on us that this is one very cruel misnomer. Yes, it’s net 600m down, but there’s 1400m of up and 2000m of down, most of it at the end where jarring downhill running is the last thing you need.)

After a year of training and preparation, we weren’t taking any risks on race day. Clothes were already laid out, timing chips attached and breakfast already prepared. Of course, the taxi didn’t turn up (this is Africa after all). After waiting 15 mins we had to wake the house keeper where we were staying and sheepishly ask for a lift to town.

The city centre was chaotic. After running more than a kilometre to find the baggage trucks we were confronted with a melee at least 500 people deep. There was no chance of making it to the front of the queue in time for race start. In the chaos I lost my running mate Thomas and, after a year of training together almost every weekend, this was the last we’d see of each other before Durban.

I certainly wasn’t going to run the race with a 7kg backpack, so I found some random guy who looked like he wasn’t racing and asked him if he was going to the finish. ‘Sure’ he said, ‘why?’ ‘Would you mind taking my bag, I’ll get it off you at the end’. Shane looked at me like I was deranged but said yes and gave me a number that I could only hope was real. I removed money and my phone and handed over the bag – this is going to sound strange but I knew I’d get it back (Shane dropped my bag off to me on his way back to Swaziland the next day, having spent hours looking for me at the finish line after his phone went dead).

To fit the phone and money in my pocket, however, I had to ditch the gels and energy bars I was carrying. Thinking that there’ll be plenty at the drink stations was something I would come to regret.

The race start was seeded and my qualifying time got me in group C, which placed me in the first five thousand or so, but the seeding pens were closed by the time I arrived. For once discarding my proclivity to wait patiently at the back of queues, I followed some fellow runners and jumped the fence with a security guard trying to grab me by the ankle. With five minutes to spare, it was time to soak up the atmosphere.

The second you set foot in this country you can feel history unfolding around you. You’re in the middle of an experiment, a country that’s changing on a daily basis. And one that’s going to be very different in 20 years’ time. Hopefully for the better, perhaps for the worse, but it’s going to be different (the only other time I’ve felt this feeling of history unfolding was when I visited my brother in Berlin in 2003, and there’s no doubt I was there a decade late).

I wanted the national anthems to last longer than they did. As 18,000 people of all colours, shapes and sizes stood in the dark and sang multiple national anthems with pride, the 24% unemployment rate, rampant corruption and bitter political infighting seemed like easily surmountable problems. Before I knew it, though, the gun fired and, a minute later I crossed the start line and shuffled down the road, with very little idea of what was ahead of me.

There is no limit to how long or how difficult you can make an ultra-marathon. There is a race in Australia from Bega to the top of Mt Kosciusko (more than 200km). Although it’s long and ridiculously hilly, Comrades is not special because of the specifications. It’s special because of the occasion. For 89km there wasn’t one bit of road without supporters on it. In the towns and junctions and on the big hills, the crowds were three and four people deep. All urging you on (every race number has a name on it, so they’re actually yelling go Steven, which would have impressed my mum but I do prefer Steve), singing, dancing and playing pop music through specially improvised DJ desks.

The 44km mark is half way. As if we weren’t all aware of the fact, there’s a big sign over the road saying ‘you’re half way’. Personally, that didn’t fill me with confidence. I had already felt the first cramp twinge in my dodgy left calf. And as the DJ announced that the leader was only 15km from the finish line, I really wished I could swap places. I had passed through about 20 aid stations by this time and had given up on gels or energy bars. Comrades has a tradition of boiled potatoes and salt, and that’s what you get (oh if I had just carried the power bar with me!). Every race I’ve completed, whether it’s 10km or 89km, there’s a time where you hurt. But hurting when you’ve still got more than a marathon to run does play a little on your mind.

From that point on, full of salt tablets and pain killers, I didn’t run up a hill. My calf was fine downhill but the second I reached the slightest of inclines a cramp would hit me like I’d been shot with an air gun. Before the race everyone was telling me about the Comrades camaraderie. The night before, one experienced runner told me that he was about to pull out of his first Comrades when a bus (a large group of runners sticking together) came past singing. Singing! He couldn’t help but pick himself up and join the ride to Durban.

There were no buses where I was and no one was saying a word. Everyone was running or walking his or her own race and shuffling their way towards the distant ocean.

I knew I was going to make it. Most ultra-marathons are run by ultra-marathon runners. Comrades is run by ordinary people. Hundreds of thousands of them have finished the race before and I knew I would be no different. I thought about walking the last 20km. A massive blister had developed on the ball of my right foot and now I couldn’t even run on the flat. I calculated that I’d be on the road for another 3hrs 20 if I walked the whole way, though, and couldn’t bear the thought of it. So on I plodded, passing people down the hills and watching them pass me up the other side.

No matter how many people yelled ‘c’mon SteveN, it’s just around the corner’, I couldn’t run the last few kilometres. I made an attempt to look like I was running once inside the stadium but doubt it fooled anyone. I also tried to pretend I was elated with my arms raised over the line but that, too, was a charade. There was nothing but relief at having finally made it.

I slumped down in the recovery area next to a guy I’d seen around me throughout the day.

‘How you feelin’ man?’, he asked me.
‘Not the best mate, that was tough’.
‘So you comin’ back next year then?’.
‘I don’t think so mate, that’s just too far for this 85kg frame’.
‘Ach c’mon man, you haven’t really done Comrades until you’ve done a down AND an up year!’

I doubt it, but we’ll see. One thing for sure is that I’ll remember my first forever.

**If you’re feeling inspired by this little story, you can do your bit by contributing to the charity I supported as part of my run. The Shepherd Centre is a wonderful Sydney based not-for-profit that teaches deaf children to speak. I could spruik the amazing job the staff at the Shepherd Centre do but if a picture paints a thousand words, a video records 10,000. Take a couple of minutes to watch these videos and you’ll understand why it’s a cause worth running 89km for. They’re so good at their job that enrolments have increased by 145% in the past 10 years. Unfortunately, government funding for the Early Intervention Program has only increased by 37%, and that’s why they need our help. Support my run and the Shepherd Centre by donating through the Everyday Hero website.**

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