• Gus Crennan

Balmoral Fund 4Q18 Update

Happy New Year. I hope everyone is well and thank you for your ongoing support. Below I have extracted parts of the update I emailed to everyone in early January.

Over the final quarter of 2018 capital markets have been the most nervous I have seen since our fund started, which is coming up on two years ago on Australia Day 2017. By nervous I mean investor perceptions and therefore their behaviours changed markedly between September and December – of most interest to us; shares in very good companies were being offered cheaply especially in December.

Of course, we need to check if something fundamentally has changed to justify this nervousness. The economic data that is coming out of Europe is weaker. The US economy however remains strong with a lot of momentum. Otherwise the investment community was focused on geopolitical risks, and the uncertainty of political decisions, and my view is that is why markets have been nervous. Markets have over reacted given our economic environment. The general consensus is a lot of capital controlled by quantitative processes (ie algorithm or rules driven investment funds) picked up the falling market momentum and added to the selling. In short the nervousness of markets is December 2018 was a very good opportunity for long term investors like us.

Our fund was well prepared for this market weakness.

While the current quoted price of the companies we part own declined along with the market, which has reduced our fund’s unit price, we can look through this because we are not selling at present; rather we have used that buying opportunity in full. We want to be buying when markets are nervous and great assets are ‘on sale’, and saving our selling to periods of optimism and confidence.

To refresh on Balmoral’s investment philosophy – we seek companies which consistently generate strong returns on equity with high levels of free cash per unit of invested capital and look to purchase when pieces of these companies can be acquired at attractive prices. This approach blends seeking high quality businesses with a rational valuation approach.

This investment philosophy and process is working well. As at end December, with less than a month till our Fund has been operating for two years, our returns are 3.3% in front of our global equities benchmark after fees and transaction expenses. Although it remains a short time frame it’s a strong affirmation we are on the right track. As importantly we go into 2019 really well positioned for the medium and long term.

Unit price of the Balmoral Fund, after fees and expenses, as at end December 2018: $1.09690

Our fund has taken advantage of opportunities the nervous market has provided and an end December 2018 we are back to being fully invested.



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