• Angus Crennan

Balmoral Fund 3Q19 Update

Hi All

Please see below extracts of the investor update sent out to investors in October.

Executive Summary

We had a quiet quarter by design. The reasons for our conservative positioning, which I wrote about in the 2Q19 letter, remain unchanged.

After fees an investment in the Balmoral Fund increased in value 1% over the last three months. This was better than our benchmark index, the MSCI World, which increased 0.1%. Having said that the Australian Dollar weakened over the quarter and we only partially participated in those currency changes as the bulk of our cash was held in AUD.

In AUD terms the MSCI World Index increased 4.11% over the quarter.

Fund Performance

Including reinvested distributions our Fund has generated 31% growth after all fees and charges since inception on Australia Day 2017. This translates into a compound annual growth rate of 10.7%.

Over the first three quarters of calendar year 2019 invested capital in our Fund has grown 16.6% after fees.

Holding cash is not in our interest long term and is a tactical positioning adopted because of my belief that opportunities to invest at better prices will be provided by the market in the near future. Over the quarter there was added justification for this cautious positioning. The US long term Treasury Bond yields dropped below short-term yields (known as an inverted yield curve) which indicates a very cautious bond market and historically has been an accurate predictor of US recessions. US manufacturing is now shrinking at the fastest rate since the GFC despite the increased Trump administration protections intended to support domestic US companies. There was also signs of liquidity pressures in the US Money Market requiring sustained US Federal Reserve intervention.

It’s not just the US market which needs close monitoring. European economic data has notably deteriorated at a time when its banking system has been under severe strain.

In August we saw markets whipsaw around on various concerns. During that small buying window we made two purchases. A stake in Netherlands chemical company LyondellBasell was acquired and shortly after sold for strong gains. We also increased our stake in the Cheesecake Factory. The August buying opportunity was shallow as the market was not yet ready to offer the attractive valuations where we could invest with more conviction.

I am happy with the Fund’s performance and confident our being conservative is the right posture for the time being.

Portfolio summary

As at end September 2019 we are part owners of 10 companies:

1. Villeroy & Boch - German fine china and bathroom interiors.

2. Hugo Boss - German corporate and smart casual clothier

3. Sartorius Stedim Biotech - French pharmaceutical and laboratory equipment supplier

4. Kroger - US retailer

5. H&M – Swedish fashion retailer

6. Mattel – US toy and entertainment company

7. Telstra – Australian telecommunications

8. Euronext – European securities market exchange (headquartered in France)

9. Biogen Incorporated – US biotech

10. Cheesecake Factory – US restaurant chain

Portfolio construction

As at end September the Balmoral Fund remained conservatively positioned while we await better opportunities.

62% is in cash of which is 49% Australian and 13% US Dollars respectively.

34% is in US and European shares, roughly evenly split. When opportunities improve these markets are where we will be investing our cash.

4% of our pooled capital is invested in Australian telecommunications company Telstra.


The market’s confidence has been brittle although we have not seen a sell off close to what we profited from in late 2018.

While geopolitical risks are the dominant catalyst for market moves I am seeing individual companies spasmodically selling off into attractive prices then quickly recovering. This suggests to me buying depth is thin and lacks conviction. Our LyondellBasell trade this quarter represents how attractive those tactical opportunities can be.

The US trade arguments with China remain the market’s focus and that anxiety is playing out across all asset classes. While there will be good and bad press releases about those conversations China has made clear its values and strategy are not up for discussion nor its approach to intellectual property. On that basis my view is no lasting and significant agreement can be agreed in the near term.

I will be watching markets closely to manage risk as well as to take the better opportunities as they are presented.



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