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Monthly Report: Australian Fund May 2011

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Australian Fund May Monthly Report

Intelligent Investor Value Fund unit price fell 5.39% for the month of May, substantially more than the All Ordinaries Accumulation Index’s 1.89% fall. The main contributors to the decline were Photon Group and Infigen Energy. First though, to the positive side of the ledger.

RHG Group’s share price rose another 6% before it shed a $0.79 fullyfranked dividend on 12 May. At prices north of $1.30, the trade-off between selling on market and realising discounted capital gains and taking the fully franked dividend became heavily skewed towards the former. We exited our position at an average price of $1.32. RHG was one of the first stocks we bought in the Value Fund and, after realising a return of 169%, has been our most successful investment thus far.

After years of rumours and discussions, Centrebet International announced a formal takeover from UK company Sportingbet PLC. The price offered is $2 per share and, while still subject to some conditions, has the support of the board and majority shareholder Con Kafataris and is likely to go through. In addition to the $2, shareholders also keep the right to 90% of the potential proceeds of a court case Centrebet is pursuing against Australian Tax Office, expected to be heard towards the end of 2011. Including dividends, Centrebet has returned the Fund 36% in the 16 months since our acquisition.

Photon Group’s operational update gave shareholders little reason to cheer. Results for the first four months of 2011 were no better than the results for the six months to December. Year to date revenue is now 6% lower than the previous year, and earnings before interest, tax, depreciation and amortisation (EBITDA) is down 18%.

Two of Photon’s most important businesses, Naked and The Leading Edge, returned to profitability in the first four months of the year but their contributions were offset by ‘lower spending by a small number of large clients’ of the Australian agencies. This was clarified later in the month when Photon agency BWM announced that Telstra, its largest client, would not be renewing its contract after July 2011 and had already slashed its spending with the agency.

Photon’s share price fell 39% for the month and is now 56% below the $0.10 issue price for last year’s rights issue and recapitalisation.

Infigen Energy had a similarly tumultuous month—its security price fell 30% in May and is now below the level at which the Value Fund started buying in March. In contrast, though, there was no news of note and we have no explanation for the volatility in this security price.

We will provide a distribution estimate towards the end of the month but investors should take note that the Fund has realised a number of substantial gains throughout the 2011 financial year. Most of the offsetting losses, mainly relating to Photon Group, remain unrealised. As we must distribute all realised gains and dividends every year, the 2011 distribution and associated taxable income will be a meaningful percentage of your investment.