october 2013 portfolio performance review

Invast Insights

Week Commencing September 30, 2013

www.invast.com.au | 1800 468 278

This week we look at the following topics:

1.0 October portfolio performance review

1.1 Portfolio changes and additions

1.2 Trends in upcoming AGM season

2.0 Gold price in light of Fed meeting

2.1 How we think about gold

3.0 Book review – The 4 Hour Work Week


1.0 October portfolio performance review

September has been a rocky ride for markets as traders focused on the

outcome of money printing in the Unites States and the pace of economic

improvement in Europe. The Chinese economy has been improving, but as we

have written in recent weeks, commodity prices are yet to breakout on the

news, with the exception of gold having the odd overnight bounce. We are

proud to say that the three portfolios we launched in early September –

growth, preservation and drawdown have all delivered positive returns during

the month and have withstood the volatility in certain parts of the market.

When we launched the portfolios we intentionally adopted a conservative

approach, opting for safe options with certainty rather than betting the house

on risk trades. We outlined the rationale and methodology of each portfolio in

Invast Insights published on the 2nd of September. The portfolios have


delivered total returns when including dividends of 1.2%, 1.9% and 1.6%

respectively. This excludes the franking credits of dividends paid which is an

added bonus in Australia, depending on your marginal tax rate. On an

annualised basis, the portfolios have delivered 14.7%, 22.8% and 19.2%

respectively, but keep in mind they have only been running for a month so

this measure is purely a guide only.

The portfolios are also calculated on a conservative measurement approach.

For example, the two CFD positions we have in the growth portfolio, we use

the total face value of exposure as our basis for returns and not the margin

invested. We feel that the total face value of exposure is what matters and not

the amount of cash you are setting aside and so this should be kept in mind

over the coming months. We also exclude financing when two positions in the

same currency denomination cancel each other out (long and short held

together).


The drawdown portfolio – aimed at those looking at generating an income

purely – has performed especially well considering the two corporate bond

exposures we hold are due to pay periodic coupons shortly. This isn’t captured

by the performance over the past month but will flow through once

payments are made. Even the most aggressive portfolio banked a divided

thanks to Tandou (TAN) – which coincidentally was one of our 15 hidden

gems published in the first Invast Insights report on 26th of August - paying

one cent per share.


Performance measurements are provided below (prices as of 25 September

2013):


1.1 Portfolio changes and additions

We don’t intend on making any changes to the portfolios at this stage. Our

CFD positions have generated mild losses in the growth portfolio but we still

feel that US markets are due for a slight pullback and the gold price remains

shrouded by bearish commentaries. We will discuss our thoughts on gold in

the section below. The S&P500 is scaling record high levels and many stocks

are starting to trade on price to earnings ratios well above their long term

averages. The pace of IPO action in United States markets is also a sign that

private equity owners see this as a great time to be selling, hence we maintain

our positions.

Over the next few months we will be looking for more emerging

opportunities for the growth and preservation portfolios. The drawdown

portfolio is unlikely to see any changes for a while, perhaps mid next year

when two of the corporate bonds we hold approach maturity. Until then,


we will wait and see what the RBA does with interest rates. Fully franked

dividends from Woolworths, Telstra and AMP are unlikely to see major

changes and that really is our main focus in this portfolio.

One stock which has caught our eye is Empired (EPD) which sits in the growth

portfolio. The business recently announced a capital raising and acquisition

together with a sizeable contract which will see it increase in scale and size.

We like the business and intend on speaking to management over the next

few weeks if we can get a hold of them at this busy time. There are market

estimates which see Empired generating around 4-5 cents in earnings over

the next few years and in the IT space a 20x earnings multiple for a quality

name is not out of the question, we intend to hold on until it reaches 90 cents

or so before reviewing the holding. There is a strong chance the shares rise

through the one dollar range. We will start buying back if there is any

pullback in the share price (if those who recently got in on the capital raising

start taking profit) below 70 cents per share, but we feel this is unlikely.


One of the worst performing stocks during the month has been Westfield

Group (WDC), which is different to Westfield Retail Trust (WRT). The former

includes Westfield’s international assets, property development and

management arm while the latter is a passive real estate trust housing the

majority of Westfield’s Australian malls. We think Westfield Group will

generate positive dividend growth into the future as the US economy

improves and cheap credit opens up redevelopment opportunities. Despite

the slight slip in shares, we remain firm believers of the story. If it falls further

we will also start adding more money and perhaps taking some profit from

Woolworths in the preservation portfolio.

1.2 Trends in upcoming reporting season

Most companies which reported their June 30 end annual results in August

through to September will hold their annual general meetings (AGM) in

October and November. This is usually a great time to hear management’s

view on:


• The current trading environment

• Impact of a change in government and movements in currency rates to

corporate earnings

• Outlook on the global economy and confidence heading into the new

year

• Growth plans – acquisitions, mergers etc.

Corporate earnings were generally well received by the market in August and

the AGM season is important to maintain that momentum. There will be some

companies which either exceed or disappoint. We basically think the banks

and financials might fall slightly short of estimates – like Macquarie Group

last week – but the areas of the market which are likely to please will be the IT

space and perhaps some mining companies which have been busy cutting

costs. We will be on the lookout for our November portfolio report, looking at

finding new opportunities before Christmas time.


Likely disappointments relative to expectations – Banks, Financial stocks,

Infrastructure, Discretionary Retail (particularly heading into Christmas)

Likely to please relative to expectations – Consumer Staples, Information

Technology & Online, Large Miners

2.0 Gold price in light of Fed meeting

Gold has seen some major fluctuation over the past few weeks particularly in

response to the US Federal Reserve maintaining its money printing stance.

Over the past two years, the view among many analysts and investment

banks has been a complete reversal in gold estimates – most were betting on

a $2000 per ounce price and now that there has been a mild pullback many

are calling gold back towards the $1100 per ounce level. We like to bet against

consensus and have put gold into our growth portfolio for that very reason.


Gold will continue to perform well due to several demand factors:

1. The impact of the US Federal Reserve’s money printing exercise since the

financial crisis will still linger for the next decade. Even if quantitative

easing is wound back, interest rates are at record low levels and with bond

yields starting to rise from a ridiculously low base, inflation will be a big

feature of markets in the next decade.

2. It’s not just the US that has been printing money. Japan – the world’s third

largest economy – will continue to pump the system with cash even after

the US Federal Reserve winds back.

3. The new emerging non-OECD economies are still under invested in gold

and so that natural demand by global central banks and governments will

support any significant price pullback.


All three of these views are medium-long term and in the short term there

might be some more downside for the gold price. Below is a chart showing

where we think support and resistance lies for spot gold – a break below

US$1275 per ounce could see US$1180 tested where we would be buying back

again. There is some short term resistance at around US$1425-85 per ounce.


Source: Spot gold year to date via Bloomberg


Chairman of the World Gold Council Randall Oliphant echoes these views. In a

recent interview with Kitco News, Oliphant said “…The growing middle class

in Asian countries - in particular India and China - which make up more than

half of the gold market, will continue to demand the yellow metal…Oliphant

added that he expects to see central banks around the globe continue to buy

gold as a way to diversify their currency reserves. He pointed out that central

banks bought the most gold in history in 2012.”

China's domestic consumption totaled 776.1 tonnes in 2012, compared with

864.2 tonnes in India, according to the Gold Council of China. Zhang Yongtao,

the association’s vice-chairman said consumption jumped more than 36 per

cent to 456.2 tonnes in the four months of this year. There are plenty of other

gold bulls out there and so we don’t really see a point quoting them all but it

is just worthwhile hitting the point that the emerging economies are still

relatively under invested in gold and the mentality of the emerging class in

these economies – namely China and India, is one which values holding

physical wealth storage mechanisms like gold.


According to the United States Commodity Futures Trading Commission, as of

September 17 the total number of short positions held by physical producers

of gold exceed long positions by around 1.1 million troy ounces. But amongst

money managers, long positions were greater than short positions by around

547 thousand ounces. The chart below puts things into perspective and

shows just how many participants are in each category. Clearly there are some

selling pressures in the market but the views are different amongst the

motivations of each category.


2.1 How we think about gold

In Invast Insights published 9th September, we wrote “At Invast we tend to

think of commodities in two buckets - first the industrial commodities that are

used in the production of goods and services and secondly the currency

commodities like gold and silver which are held for different reasons, usually

a storage of wealth.” Gold is essentially a currency discussion. Like every

commodity and physical asset on earth, pricing will be dominated by demand

and supply. The above section is generally all a discussion around the demand

for gold. At Invast we equally like to attribute attention to the supply of gold –

something that doesn’t always get the same attention.

One of the best sources of information on gold supply is from gold producers

themselves, often large listed companies who must disclose their business

performance to the stock exchange. In Australia, we are lucky enough to have

one of the largest global gold producers in the world listed on our market –

Newcrest Mining (NCM). If we have a look at the ease at extracting and


producing an ounce of gold and also the price it costs to conduct this

exercise, we basically can see what the fundamental floor price of bring gold

into the market actually is.

We call this the marginal cost of producing an ounce of gold. We think that

this will be a good guide as to where the gold price must fall before

producers globally start to close down their mines. Newcrest which produces

over 2 million ounces of gold annually has seen its shares fall by almost 60%

over the past year. It slashed its gold production guidance several times over

the past few months, has shed hundreds of jobs and taken an impairment

write-down of around $6bn (basically a reduction in the value of its assets). If

Newcrest as one of the largest gold producers in the world is struggling so

much with its production and business overall, other smaller producers must

be facing similar challenges.


Therefore a discussion on gold must take into consideration not just factors like the US Federal Reserve printing money or China and India buying, but also producer’s ability to continue mining at an economic profit. During 2013, Newcrest produced each new ounce of gold at an average cost of US$750 per ounce. This is a cash cost which does not take into consideration things like depreciation which no doubt is very significant when you are investing around $2bn into your production assets each year. The actual all-in sustaining costs per ounce of gold were A$1,283 per ounce or let’s just say around US$1150.

Newcrest is one of the cheapest cost producers of its scale and so we think the average all-in marginal cost of producing an ounce of gold is well above the US$1100 per ounce Newcrest expects to book next year. This means that many gold miners globally are struggling to make money at current prices and will close down or dormant their operations if the gold price falls any further. The US$1180 per ounce technical level we presented on the chart above corresponds very well with the actually supply cost price in the market. When we think about the floor in the gold price, based on information from Newcrest and other miners, we have this figure in the back of our minds.


Source: Newcrest presentation to the ASX on 12 August 2013


3.0 Book review – The 4 Hour Work Week

They say you should never judge a book by its cover, the same should go

about its title. While the title of this book might raise some eyebrows it has

caught the attention of many respected investors and traders we know. It is

also a refreshing change from the same old business/finance tiles where you

read about how successful or how fantastic somebody has been in their

business life. The best way we can sum up The 4 Hour Work Week is as a book

which will help you better manage your time, become more effective in your

life overall and hopefully become a better trader and investor as you focus

more on what you want and less on the noise that confuses us in markets.

Most traders enter the market without really knowing what they want. The

most common questions we are asked as analysts is “what do you think of the

market” or “what do you think of this particular currency”. When we start to

question the motivation behind that answer a common recurrence is


that many traders and investors don’t really know what their goals are and why they are even in the market at all. The 4 Hour Work Week will help you realise this planning process and hopefully allow you to achieve your goals much quicker.

Author Tim Ferriss was nominated as one of Fast Company’s “Most Innovative Business People of 2007”. He has been featured in hundreds of media outlets for his revolutionary and often simplistic thoughts about achieving goals. He speaks six languages, runs a multinational firm from wireless locations worldwide, and has been a popular guest lecturer at Princeton University since 2003, where he presents entrepreneurship as a tool for ideal lifestyle design and world change. He recently wrote The 4 Hour Body so, with summer around the corner, those more interested in their physique than your trading results, might start on the second book and then move on to the first.

The 4 Hour Work Week has a 4.5 star rating on Amazon out of 1,689 reviews. It can be purchased for around US$13 and hopefully pay itself off many times over before you even finish reading it.

Get more information about gold and trading currencies from our resources page.

http://www.invast.com.au/resources/video-centre.aspx

http://www.invast.com.au/resources/video-centre.aspx


4.0 Disclaimer

Please note that you are receiving this report complimentary from Invast

Financial Services Pty Ltd (AFSL 438 283). Invast staff members may from time

to time purchase securities which are included in this or future reports. The

authors of this report may or may not be holding a position in the securities

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october 2013 portfolio performance review

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