• Angus Crennan

March 2020 Balmoral Fund Investor Update

Updated: Apr 18, 2020

Please find below extracts from the Balmoral Fund update sent 6 April 2020.

Executive Summary

In our December letter I laid out the case for being cautious at the end of a long bull market. I also noted we had been cautiously holding on average 52% cash over calendar year 2019. I can now share with you that this caution has paid off and that we have had an outstanding three months.

For the three months till end March 2020 the Balmoral Fund grew the value of our investment capital by 9.0%. In contrast global share markets, represented by the MSCI World Index in AUD, declined -10.1%. Our more than 19% outperformance against global shares is the strongest three-month relative return in Balmoral’s history. That outperformance comes at the best possible time as we avoid the asymmetry of investment losses.

The -10.1% market losses resulted from the reductions in economic activity due efforts to control the Covid-19 pandemic. Other assets classes besides shares also moved significantly during the period.

We have grown our portfolio during this significant market stress event, an unquestionably welcome outcome, due to close monitoring of the economic cycle. This close monitoring meant we were ready to make major and timely adjustments to our portfolio’s construction when required.

At the end of March our portfolio remained extremely conservatively positioned with 90% of our assets held in cash. This allows us to look forward to using that increased investment purchasing power to acquire excellent assets at attractive prices and so earn strong investment returns in the years to come. I caution however that investments made today will take time to increase in value because we remain in a negative market environment.


Over the first three months of calendar year 2020 our fund increased in value by 9.0% vs the market’s losses of -10.1%.

Over the twelve months to end March 2020 our fund has increased in value 13.3% vs the markets 1.7%.

Since inception on Australia Day 2017, including reinvested distributions, our Fund is up 41.6% vs 26.2% for global share markets.

Our Fund is strongly outperforming global share markets over all time periods.

A consistent compound annual growth rate will do wonderful things to our investment capital over time. Since inception on Australia Day 2017 our Fund has delivered a compound annual growth rate of 11.6%, a very strong track record firmly delivering on the Balmoral Fund’s purpose.

Portfolio Holdings

As at the end March 2020 we are part owners in three medical businesses well positioned for these times:

1. Sartorius Stedium Biotech - French pharmaceutical and laboratory equipment

2. Johnson & Johnson – US medical and consumer products

3. Fresenius – German private hospital operator and medical equipment producer

Sartorius Stedium Biotech is a French pharmaceutical and laboratory equipment producer specializing in single use laboratory products. This company makes strong profit margins on its products and is well positioned for a world focused on rapidly ramping up medical testing needs. We have owned this business for quite some time and that investment has been a great success for us. We will acquire more if share prices fall.

Johnson & Johnson is a US medical and consumer business which has consistently delivered decade after decade for its owners. The business is well positioned to benefit from this virus and we acquired a stake representing around 5% of our Fund at the most attractive valuation available in years.

Fresenius is a German medical equipment business and private hospital operator. Aside from the immediate needs fighting the Corona Virus pandemic this consistently well-run business has an enduring strong tailwind given Europe’s large and affluent aged population. We acquired our stake at a very attractive valuation.

The first quarter of calendar year 2020 in review

Over 2019 share markets were mostly euphoric. All the warning signs of an aged bull market were confronting us and history informed us that, whatever the catalyst would be, at some point it was inevitable that better investment opportunities would emerge. I had no special insight that the novel coronavirus which first started attracting headlines in December 2019 would be that catalyst.

We entered January 2020 with our Fund half in cash because we had sold a lot of our investments to lock in strong profits and sensible opportunities to reinvest that cash were scarce.

During January some better opportunities started to appear, yet news of the Corona Virus also started to look like a major risk evolving. On 20th January China admitted the new virus was spreading between humans. On 23rd January the Chinese city of Wuhan, which has direct flights to most of the major global cities, was quarantined with 639 confirmed cases. It was estimated that several million Chinese citizens left Wuhan in the days leading to its lockdown, a major concern. To position our portfolio appropriately, meaning it would to be able to take advantage of better valuations if the virus became a non-event, but also to ensure we would be protected if the virus evolved into a pandemic, I constructed a specific type of portfolio. I made some investments but also purchased some protective derivatives which would increase in value if the market sold off. Because it was impossible to tell with confidence where investor risk aversion would manifest, if at all, we purchased individually small, but collectively significant, protective derivative positions covering equity, credit, commodities and currency markets. Those derivative protections ended up being extremely valuable to us.

As February evolved, and the Coronavirus news became more alarming, a range of markets started selling off. Our response was to realise gains on our investments while retaining our broad suite of protective derivatives. In this way we adjusted our portfolio’s construction substantially so we were oriented to benefit from falling markets.

In early March global markets fell heavily. While parts of Europe was already suffering from the virus it was only on the 1st March that New York reported its first confirmed case of Covid-19. By the 14th March the US had 2,147 confirmed cases which quickly ballooned to 188,172 cases by the 31st March with New York suffering the largest concentration of cases. It became clear that the virus was spreading like wildfire. In mid-March we sold our derivative positions for strong gains. We also picked up our three current investments at the low point for the quarter, with those investments then increasing in price modestly in the last few days of March.

Our asset allocation at end March 2020 remained extremely conservative. The Balmoral Fund held 90% of our investment capital in cash with the remaining 10% invested in the three US and European businesses mentioned above.

To move away from our extremely conservative positioning I will be looking for some visibility of a post virus future as well as appropriately valued opportunities to compensate for the additional risks the investment landscape will feature over the next few years.

Market Commentary

The first three months of 2020 reminded everyone of the perpetual ‘human’ element in capital markets. When people feel emotional, we see large and rapid changes in prices for investment assets.

Although share markets have sold off from their peaks there could be more weakness to come. There are four potential drivers for this.

1. Companies experience a prolonged period of revenue and cashflows reductions due virus-induced shut downs,

2. Consumer and business behaviour become, and remains, risk averse,

3. Share market’s start expecting the two points above to stay that way forever, and

4. Mistakes from recent years start to become apparent and need to be painfully rectified.

The positive side to this negative backdrop for share prices is it would provide more time for me to acquire the portfolio we want at compelling valuations. 2020 could evolve into one of the best investment opportunities we see for many years. Utilising our portfolio’s increased purchasing power to buy stakes in excellent businesses at cheap valuations is perfectly aligned with our long-term interest and our Fund’s purpose.

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