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Intelligent InvestorEquity Growth Portfolio

Quarterly Report30 Jun 2020

Jun 2020 Quarter Highlights

• Excellent quarterly performance

• Not many portfolio changes

• Small cap names most undervalued

1300 880 160Intelligentinvestor.com.au

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Q U A R T E R L Y R E P O R T 3 0 J U N E 2 0 2 0About UsWith a 20-year track record of beating the market, clear and straightforward language, and an ‘open book’ approach to stock research and analysis, Intelligent Investor offers actionable, reliable recommendations on ASX-listed stocks.

In 2014, Intelligent Investor became a part of the InvestSMART family, extending our expertise to even more Australian investors seeking quality analysis and advice.

Portfolio overviewThe Intelligent Investor Equity Growth Portfolio is a concentrated portfolio of 10 - 35 Australian-listed stocks. The Portfolio invests in a mix of large, mid and small cap stocks, focusing on highly profitable industry leaders that have long-term opportunities to reinvest profits at high rates of return.

As contrarian value investors, producing safe and attractive returns in the stock market means sticking to a disciplined and repeatable process. We do this by patiently waiting for overreactions in share prices, so we can buy at a large discount to our estimate of intrinsic value.

Investment objectiveTo achieve a return of 1% above the S&P/ASX 200 Accumulation Index per annum over five year rolling periods by investing in a diverse mix of Australian equities and cash.

Who manages the investment?Nathan Bell, has over 20 years of experience in portfolio management and research and is supported by our Investment Committee, chaired by Paul Clitheroe. Nathan returned to Intelligent Investor in 2018 as Portfolio Manager, having previously been with Intelligent Investor for nine years, spending five of those as Research Director. Nathan has a Bachelor of Economics and subsequently completed a Graduate Diploma of Applied Investment and Management. Nathan is a CFA Charterholder.

Key Fund Details

INVESTMENT CATEGORY

A portfolio of individually-selected Australian Equities

INVESTMENT STYLE

Active Stock Selection, Value Investing Approach

BENCHMARK

S&P/ASX 200 Accumulation Index

INCEPTION DATE

1 July 2015

SUGGESTED INVESTMENT TIMEFRAME

5+ years

NUMBER OF STOCKS

10 - 35

INVESTMENT FEE

0.60% - 0.97% p.a.

PERFORMANCE FEE

N/A

MINIMUM INITIAL INVESTMENT

$25,000

STRUCTURE

Professionally Managed Account (PMA)

SUITABILITY

Suitable for investors who are seeking domestic equity exposure with a growing stream of dividends to offset inflation

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Performance - $10k since inceptionPortfolio Benchmark Peers

Intelligent Investor Equity Growth Portfolio S&P ASX 200 Accumulation IndexPeers

Performance (after fees)

1 mth 3 mths 6 mths 1 yr 2 yrs 3 yrs 4 yrs 5 yrs S.I. (p.a)

II Equity Growth Portfolio –0.8% 24.0% –6.3% –0.5% 1.3% 3.8% 6.0% 7.2% 7.2%

S&P ASX 200 Accumulation Index 2.6% 16.5% –10.4% –7.7% 1.5% 5.2% 7.3% 6.0% 5.9%

Excess to Benchmark –3.4% 7.5% 4.2% 7.2% –0.2% –1.4% –1.4% 1.2% 1.2%

Peers 1.3% 15.6% –14.3% –12.3% –4.1% –0.1% N/A 2.0% N/A

Excess to Peers –2.1% 8.3% 8.1% 11.8% 5.4% 3.8% N/A 5.2% N/A

Asset allocation

Consumer Discretionary 22.2%

Information Technology 20.2%

Communication Services 18.0%

Cash 10.3%

Real Estate 7.4%

Industrials 7.0%

Health Care 5.4%

Financials 4.8%

Materials 3.5%

Energy 1.2%

Top 5 holdings

Frontier Digital Ventures (FDV) 7.8%

RPMGlobal Holdings (RUL) 5.6%

Seek (SEK) 5.4%

ResMed (RMD) 5.3%

Crown Resorts (CWN) 5.0%

Performance of $10,000 since inception

As at 30 June 2020

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its share price was almost chopped in half due to the

covid-19 outbreak.

EML Payments was also up 45% after renegotiating

an acquisition that left it in a far better financial

position than the original deal would’ve at a critical

time.

Crown Resorts ’ share price was buoyed by news

that US titanic investment manager Blackstone had

purchased Lawrence Ho’s 10% stake. Blackstone is

expected to push for a breakup of Crown’s operating

businesses and its property by creating a new A-REIT.

During the quarter we sold Chorus, the operator

of New Zealand’s equivalent of the NBN, as it has

performed admirably in a tough market. We also sold

NextDC and A2M on valuation grounds, which made

room for James Hardie Industries and pub owner

ALE Property.

The share price of new inclusion James Hardie

Industries increased almost 40% leaving us wishing

we’d made it a larger position. The board members

and executives responsible for the company’s

disgusting behaviour in response to asbestos

claims are gone, and we’re confident the repugnant

culture of the past will not return under new chief

executive Jack Truong.

ALE owns many properties that are rented at below-

market rates and ripe for development over the

next decade, which should ensure steady growth in

distributions and handy capital gains as pubs reopen.

The portfolio currently has around 10% in cash,

which we look forward to investing as an increasingly

speculative market collides with a weak economy.

With the 2020 Berkshire Hathaway annual meeting

being held recently, we thought we’d include some

key points from a talk Charlie Munger gave at the

USC Business School in 1994 that explains some key

principles of our investing approach.

… we’re way less diversified. And I think our system is

miles better. However, in all fairness, I don’t think a lot

of money managers could successfully sell their services

if they used our system.

Intelligent Investor Equity Growth Portfolio

‘Only liars buy right at the bottom!’

– Jesse Livermore

‘History never repeats itself; man always does.’

– Voltaire

‘We use a lab experiment to capture participants’

news selection biases, alongside a survey capturing

their stated news preferences… regardless of what

participants say, they exhibit a preference for

negative news content.’

– Marc Trussler & Stuart Soroka

The fund fell 0.5% for the financial year, compared

to the index’s 7.7% loss. Showing how volatile the

market has been since covid-19 infected markets, for

the quarter ending 30 June the fund increased 24.0%,

compared to the market’s 16.5% return.

The market bounced back strongly from the panic in

March, with the portfolio increasing 20.7% compared

to the market’s 8.8% increase in April alone. More

importantly, the fund is close to beating the index by

2% per annum in 2015, which is appropriate given the

advantages of managing a small fund.

No stocks produced a material loss during the

quarter. Coincidentally, it was our three online

classifieds stocks that performed the best.

Frontier Digital Ventures ’ (FDV) share price

increased 58% and received some good news. FDV’s

crown jewel is its 30% stake in Pakistan’s version of

realestate.com.au. Based on a recent transaction

involving the other 70% shareholder, Zameen alone

could be worth much more than FDV’s current

market value, which would mean you’re getting its

other dozen investments for free.

Carsales.com recovered 50% after reporting

resilient results despite a massive fall in new car

sales. Seek was close behind, recovering 47% after

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Conversely, if a business earns 18% on capital over 20

or 30 years, even if you pay an expensive looking price,

you’ll end up with a fine result. So the trick is getting

into better businesses. And that involves all of these

advantages of scale that you could consider momentum

effects.

How do you get into these great companies? One method

is what I’d call the method of finding them small get ‘em

when they’re little. For example, buy Wal-Mart when

Sam Walton first goes public and so forth. And a lot of

people try to do just that. And it ’s a very beguiling idea.

If I were a young man, I might actually go into it.

If you have any questions, as always, please call us on

1300 880 160 or email us at info@intelligentinvestor.

com.au.

But if you’re investing for 40 years in some pension fund,

what difference does it make if the path from start to

finish is a little more bumpy or a little different than

everybody else’s so long as it ’s all going to work out well

in the end? So what if there’s a little extra volatility?

In investment management today, everybody wants

not only to win, but to have a yearly outcome path

that never diverges very much from a standard path

except on the upside. Well, that is a very artificial, crazy

construct.

That’s the equivalent in investment management to the

custom of binding the feet of Chinese women. It ’s the

equivalent of what Nietzsche meant when he criticized

the man who had a lame leg and was proud of it. That is

really hobbling yourself.

Now, investment managers would say, “We have to

be that way. That’s how we’re measured.” And they

may be right in terms of the way the business is now

constructed. But from the viewpoint of a rational

consumer, the whole system’s “bonkers” and draws a lot

of talented people into socially useless activity.

We’ve really made the money out of high quality

businesses. In some cases, we bought the whole

business. And in some cases, we just bought a big block

of stock. But when you analyze what happened, the big

money’s been made in the high quality businesses. And

most of the other people who’ve made a lot of money

have done so in high quality businesses.

Over the long term, it ’s hard for a stock to earn a much

better return than the business which underlies it earns.

If the business earns 6% on capital over 40 years and

you hold it for that 40 years, you’re not going to make

much different than a 6% return even if you originally

buy it at a huge discount.

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Important informationThis document has been prepared by InvestSMART Funds Management Limited (ABN 62 067 751 759, AFSL 246441) (InvestSMART), the responsible entity of the [Intelligent Investor Equity Growth Portfolio] (Fund) and issuer of units in the Fund.

While every care has been taken in the preparation of this document, InvestSMART makes no representations or warranties as to the accuracy or completeness of any statement in it. To the maximum extent permitted by law, neither InvestSMART, its directors, employees or agents accept any liability for any loss arising in relation to this document.

This document is not an endorsement that this portfolio is appropriate for you and should not be relied upon in making a decision to invest in this product. You should always consider the relevant disclosure document (including Product Disclosure Statement, Investment Menu, and Financial Services Guide along with any accompanying materials) and/or seek professional advice before making any investment decision. Disclosure documents for financial products offered by InvestSMART can be downloaded from the InvestSMART website or obtained by contacting 1300 880 160.

The document provides general financial information only. InvestSMART has NOT considered your personal objectives, financial situation and needs when preparing this document. You should consider your individual objectives, financial situation and needs and seek professional advice where necessary before making any investment decision.

Past performance is not a reliable indicator of future performance. InvestSMART does not assure nor guarantee the performance of any financial products offered.

InvestSMART, its associates and their respective directors and other staff each declare that they may, from time to time, hold interests in securities that are contained in this investment product.

Intelligent Investorsupport@investsmart.com.au

www.intelligentinvestor.com.auPO Box 744, QVB NSW 1230

1300 880 160