Portfolio update for May

By their usual standards, May was a busy month for our Equity Growth and Equity Income portfolios, with some buying and selling in both.

In the Growth Portfolio, we completed our purchase of a 2.5% stake in Audinate (ASX:AD8), at an average price of $3.11.

Audinate produces chips which audio equipment makers can embed in their own products, to enable them to pass signals between each other digitally over an ethernet network rather than through traditional analogue audio cables.

Depending on the type of use, this can significantly reduce the complexity and cost of audio networks, whilst also improving sound quality. By managing the signals digitally it can also provide greater flexibility around managing audio signals – and Audinate also makes a software platform for that.

Since the receiver and the sender of the signals both need Audinate chips, the company benefits from network effects, having become the dominant provider of such technology. It's still early days in the roll-out of the technology, but the company has recently become profitable and we expect rapid growth to continue. It needs to, since it was priced at around nine times revenue at our purchase price. That has now risen to 12 times due to a 28% price rise since our purchase.

Biting the bullet

Making way for Audinate in the Growth Portfolio was Ainsworth Game Technology (ASX:AGI), on which we finally bit the bullet and sold for a 55% total loss (since the portfolio started accepting real money in 2015). With the benefit of hindsight, we should have followed founder and executive chairman Len Ainsworth out the door when he sold his stake to Novomatic in 2016.

We also started selling amaysim (ASX:AYS) towards the end of the month in both the Growth and Income portfolios, in line with our downgrade to Sell, although the disposal wasn't completed until June. The announcement of TPG Telecom's (ASX:TPM) proposed pricing plans has put the entire mobile sector in a spin, and materially lowered our valuation, although again we should have been quicker to recognise our mistake.

There was better news in the other sale in our Income Portfolio, of Woolworths (ASX:WOW), which had risen 33% since we topped up the holding at $21.84 amid all the gloom a couple of years ago. It's a mark of Woolworths' quality that so much can go wrong, yet the share price is now less than 25% below its all-time high. With the higher valuation, we felt it no longer warranted a 5.7% weighting in the portfolio, so we reduced it to 4%.

With the dust having settled on all that, the cash balances in the Growth and Income portfolios have risen to 4.8% and 5.7% respectively, and we're comfortable with that as we hunt for further opportunities.

Ups and downs

All told, both portfolios returned around 1% in May, which was roughly in line with the S&P/ASX 200. Over the past year, both portfolios have lagged that benchmark by a few percentage points; but, since they opened for investment almost three years ago, they're ahead by a few percentage points per year.

The best performers in the Growth Portfolio were Audinate (up 13%), Nanosonics (ASX:NAN) (up 10% as the market warmed to regulatory approvals in the US and Canada for the updated version of its Trophon disinfection device) and Flight Centre (ASX:FLT) (up 10%). At the other end of the ledger, amaysim fell 33% and Ainsworth Game Technology fell 40%, but the damage was contained by their relatively small position sizes.

The Income Portfolio also benefited from the gain in Flight Centre, as well as ALE Property (ASX:LEP) and BHP Billiton (ASX:BHP) (both up 6%), while amaysim was the only stock to lose more than 5%.

To find out more about our Equity Growth and Equity Income portfolios, please visit their respective fund information pages.

Note: Our Equity Growth and Equity Income portfolios own many of the stocks mentioned.

Disclosure: The author has interests in Audinate, TPG Telecom, Nanosonics, Flight Centre and BHP Billiton though his interest in the Equity Growth Portfolio. He has an interest in ALE Property through his interest in the InvestSMART Australian Small Companies Fund. He also has personal holdings in Audinate and Nanosonics.