Quite A Saga…

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auction house, auctioneer, China, emerging markets, fur farming, fur trade, Kopenhagen Furs, luxury goods, network effect, Origin Assured, Russia, Saga Furs, SAGCV, Sotheby's

It’s my 200th post – I’ve been saving up! These are a few of my favourite things…

i) Emerging Markets:   No surprise there, I recently posted a detailed write-up of my emerging (& frontier) markets investment thesis. They enjoy some key advantages – younger/faster growing populations (with far lower entitlements), labour costs that are a fraction of developed market costs, control of a major portion of the world’s natural resources, low/stable debt ratios, a 50% share of world GDP, and GDP growth expected to be twice that of developed markets. And all this is offered at a discount!?

However, all investors see is a slowdown in emerging market growth (a legacy of the financial crisis) vs. developed markets which are bouncing back (fueled on the crack of QE) – emerging markets have been punished accordingly. But you can’t escape the fact these markets will probably generate far superior GDP growth for years to come… As an investor, that kind of growth (& value) is exactly where you want to be. Unfortunately, emerging market stock-picking can be a daunting task! A short-cut is to seek out Western listed/managed companies with a majority of their revenues & profits in emerging markets – presuming they’re on sale at the right price, that is…

ii) Luxury Goods:   I’ve an enduring faith in human vanity & insecurity – luxury goods companies have long existed to satisfy those traits. By selling dreams, status, taste, style, heritage, exclusivity…basically wants, not needs. But needs can usually be satisfied at a fair price, while wants are often infinite & indifferent to price. Of course, this creates a v desirable opportunity for companies – high-margin annuity revenue streams.

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Sirius Real Estate – I’m Out

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commercial property, German property, Karoo Investment Funds, KWG Kommunale Wohnen, Laxey, Margin of Safety, NAV discount, Net LTV, Principle Capital, residential property, Sirius Real Estate, special situations, SRE, Weiss

I’ve completely disposed of my remaining Sirius Real Estate (SRE:LN) holding. [I previously noted a small sale in August, reducing my portfolio stake to 2.8%]. This is a rare event – in the past year, my selling’s been mostly limited to top-slicing as certain stocks neared/exceeded my price target(s). Crikey, I must sound like a bloody buy & hold investor!? Rarer still, I think it’s only my second disposal of an investment that clearly hasn’t been working out. [Cresud (CRESY:US) was the first – a v different macro decision. Fortunately, the right decision…the stock’s down nearly 25% since!]

I actually managed to avoid a loss in both instances – not what you’d expect from stocks that haven’t worked out..! Obviously, there was plenty of luck involved – but I’d definitely credit a good entry price as a key saving grace. Having the discipline to demand an adequate margin of safety for each purchase isn’t just about increasing your potential upside – it can also save your bloody ass when things go wrong. Let’s take a closer look (using my original Sirius post for reference) & see if there’s anything to learn here:

Investment Opportunity & Crisis Hedge:   My investment thesis identified German property as a secular investment opportunity – it’s cheap in absolute terms, the German economy’s perhaps the most resilient in Europe, and Bund yields remain incredibly supportive. I continue to believe this thesis is correct, but actual property & share price gains to date have been mostly enjoyed by the residential sector. [Check out my German property series: Parts I to V]. I also suggested German property might be a good hedge against any further unraveling of the European sovereign debt crisis. Fortunately, sentiment’s improved dramatically this year – it’s interesting to see German residential share prices peak & then trade sideways/lower for much of the year, as investors migrated back into higher risk European exposure.

The Great Irish Share Valuation Project – Some New Arrivals

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Ardmore Shipping, ASC, Baltic Dry Index, Green REIT, GRN, IPO, Irish shares, Irish value investing, Keywords Studios, KWS, shipping sector, TGISVP, The Great Irish Share Valuation Project, US Oil & Gas, video game sector

I finished the valuation phase of The Great Irish Share Valuation Project in May, but we’ve actually seen a grand total of three Irish companies IPO since then. Seriously, that’s a bit of a bloody record – one of them even listed on the ISE! I’ll be taking a closer look at each company in this post, and including them in TGISVP for the rest of the year.

[btw I can’t help but remember it was about this time last year I first sat down, took a look at US Oil & Gas (USOP:G4), and promptly fell off my chair. It was a bit like meeting Paul Calf for the first time – I laughed, I cried, I was horrified… I ended up predicting an ultimate TGISVP price target of 3.5p (a 99% price decline). Not surprisingly, this was greeted with outrage  – with multiple muppets going out of their way to explain, in great detail, why I didn’t have a f***ing clue! Oh, how right they were, and how wrong I was – USOP’s now trading at 32p, a share price decline of only 95%..! Clearly an apology is warranted – perhaps I should suck up my pride & make it?! ;-)]

Well, maybe I can’t promise you anything as exciting as USOP, but let’s see if we have any bargains or disasters on our hands:

Argo Group – 2013 Interim Results

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% of AUM, Andreas Rialas, AREO, ARGO, Argo Group, Argo Real Estate Opportunities Fund, Globalworth Real Estate Investments, intrinsic value, Kyriakos Rialas, Price/Cash, The Argo Fund, TPPI

You may want to first read my preview of Argo Group’s (ARGO:LN) interim results here.

My estimate for end-Jun Assets under Management (AUM) was $333.8 mio. Actual AUM was reported at $308.0 m – down (5.6)% from end-Dec, but up 1.9% y-o-y. The H1 return estimates I noted for The Argo Fund (TAF), the Argo Distressed Credit Fund (ADCF) & the Argo Local Markets Fund (ALMF) were all spot-on. [And my Argo Real Estate Opportunities Fund (AREO:LN) estimate was derived directly from their published results]. What tripped me up was the Argo Special Situations Fund (SSF) – its (20.6)% H1 NAV decline was rather unexpected… That’s a loss of nearly $23 m, which accounts for the vast majority of my AUM over-statement (net redemptions presumably explain the rest).

Even with more info to hand, I’m not sure I would have anticipated this kind of result anyway. Here’s management’s explanation: ‘The main contributors to this position were the decline in share price of AREOF; a write down in the value of an investment in the Greek telecommunications company, On Telecoms; a higher valuation ascribed to the investment in TPPI.’ Now, let’s consider each of those components:

– The PT Trans-Pacific Petrochemical Industries (TPPI) gain is no great surprise – TPPI was also the main performance contributor for TAF & ADCF this year.

– While AREO’s price decline (from EUR 0.0522 to EUR 0.02) may seem fairly irrelevant at this point, the company’s share count is high & Argo (Group & funds) own a 73.9% stake. [NB: Argo Group itself only owns a 1.8% AREO stake]. That still translates into a meaningful write-down. If I assume SSF’s the only Argo fund invested in AREO – and I’m not at all sure that’s a correct assumption – by my calculation, its loss could total up to $18.8 m.

– As regards On Telecoms, the Greek telecommunications company, it was my understanding that SSF’s predecessor funds (ACPF & AHL) had already recorded a complete write-down on their investment in the company.

Considering the points above, I’m puzzled how SSF lost almost $23 m..?