Intelligent Investor Portfolio update for July 2018

If you want to see a fight, put two value investors in a room together, remove all sharp objects, and ask them how much cash they should hold.

It's such a contentious issue because of a clash between two important elements of the value investing canon.

On the one hand, we have a strong view that you can't predict the market's short-term movements – so it makes sense to stay in shares rather than cash, given the long-term returns of the two asset classes.

On the other hand, we have a strong view that the market throws up undervalued stocks from time to time. However, the opportunities are often fleeting so you need to be ready and able to take advantage.

At the moment, the second view seems to be in the ascendancy, with our Equity Growth Portfolio holding 18% in cash at the end of July and our Equity Income Portfolio holding 17%.

Focusing on the opportunities

As is often the case, though, when there's an impossible question to answer, it's probably a sign that you should be asking a different question.

In this case, we try to worry less about the actual level of cash we're holding and stay focused on the stocks we're holding and the opportunities that appear. If we want to sell something and we don't have anything immediately on hand to replace it, then the cash balance will increase.

Performance to 31 May
  1m
(%)
3m
(%)
6m
(%)
1yr
(%)
2yr
(%pa)
3yr
(%pa)
SI*
(%pa)
Equity Growth 1.1 3.5 1.0 8.5 7.1 10.2 11.3
Equity Income 0.4 4.7 2.4 7.3 9.4 11.5 12.2
S&P/ASX 200 Acc. Index 1.4 5.8 6.2 14.6 10.9 8.0 9.3
Performance is stated after costs.
*Inception date was 1 July 2015.

Since we like to hold stocks for long periods – or at least we are prepared to do so – while their value is released. On that basis, it's much better to be patient for the right opportunities to appear rather than worry about having elevated cash levels for short periods.

To put it in context, the gap between the long-term returns expected from cash and stocks might be about 5%, so to hold 20% for even a year might handicap our performance by about 1%. Being patient for the right opportunities can make a lot more difference than that.

That said, our preference is for our cash weighting to be in single figures, but we're in no rush to get there.

Dropping out of Navitas

Our most significant transaction in July was the sale of our holding in Navitas, amounting to about 3.3% in each portfolio. It's been a frustrating investment for us, with a series of setbacks denting our original investment case. Ultimately, though, rising concerns about the company's US business that have caused us to throw in the towel.

Competition to provide ‘pathway programs' for international students who wish to attend US universities has exploded over the past decade. But competitors such as Shorelight and INTO have taken most of the growth and Navitas has struggled to sign up large, respected institutions.

Also, while some US universities have renewed their agreements with Navitas, others have found the experience disappointing. Enrolments at both the University of New Hampshire and Florida Atlantic University, signed up in 2010 and 2015 respectively, have failed to meet expectations.

The external climate is making it worse. US universities are demanding higher quality students, but fewer are interested in attending a country they perceive as being unwelcoming. More student visa applications are also being rejected as US immigration authorities tighten up who they'll accept.

This is compounded by weakness in the Australian business and, although Navitas remains a high-quality business, we no longer think the potential rewards outweigh the risks. Ultimately the investment cost us 5% (excluding dividends), which is not too bad for one that hasn't worked out as we hoped.

Unhitching Fleetwood

Our other transaction was the disposal of the remainder of our holding in Fleetwood – a weighting of about 2.2% – in the Equity Growth Portfolio. We'd been hoping for the company to sell its caravan business for a while and it's finally done so – or, perhaps more accurately, closed it down and sold the brand. We'd initially hoped it might get more for it, but in the end we were happy just to have closure.

After a bumpy ride, we made an annual return of about 17% from the investment, including 6c of dividends, which is not too shabby albeit perhaps rather less than we'd initially hoped.

We hope our next transactions will be buys rather than sells, but it also won't worry us if it needs to be the other way.

Follow these links to fo find out more about investing in our Equity Growth and Equity Income portfolios.

Disclaimer
Intelligent Investor provides general financial advice as an authorised representative under the AFSL held by InvestSMART Publishing Pty Limited (Licensee). InvestSMART Funds Management Limited (RE) is the responsible entity of various managed investment schemes and funds and is a related party of the Licensee. The RE may own, buy or sell the shares suggested in this article simultaneous with, or following the release of this article. Any such transaction could affect the price of the share.

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