Foresight Capital Partners

I just finalized my performance figures for the period 1st Jan 2006 – 31st Dec 2006, and my own portfolio which is purely (a higher risk) capital growth portfolio I obtained a performance of 46.3% (in GBP), where as the 3rd party (lower risk) capital growth and income portfolio obtained a performance of 33.6% (in GBP).

Though over all I am reasonable pleased with the performance I did miss a number of opportunities and partially mishandled the markets during the sell-off during April-June. If I had got the April-June period completely right and had been a little more trigger happy (I missed at least two 75%+ opportunities this year due to being to slow to deploy capital), then I would have obtained at least 10-20% higher performance figures. Saying this, my macro positioning was just about right and at no point during the year was I in the red. The performance distribution last year was rather lumpy due to the April-June period, but as always I am happy to sacrifice smooth tranquil performance for over-all end-of-year higher performance.

In terms of my development as an investor which should always to kept central to any investment activity, since performance is mealy a consequence of an investors training, technique and ability. I feel I am moving forward in a number of ways. For example, over the last year I have been developing a more systematic, structured approach; which though does introduce the advantages of having certain structures (reducing the chance of good ideas falling through the cracks) still allows sufficient flexibility to think creatively. On a practical note moving to the Isle of Man last year has provided an environment where one can maintain aplomb, balanced state of mind, and distance oneself sufficiently from the prevailing views, news flow to endorse a dissident mind-set allowing significant out-performance.

The PLIW.L equity warrants for PLI.L (Mark Barnett’s, Perpetual’s Income and Growth) matured today and came through at 131.237p, the relative performance vs FTSE so far this year is as follows:

Note: For details of the investment trust Perpetual Income and Growth we refer the reader to Trustnet It.

Now, though PLIW.L out performed the FTSE 100, by 7.53/4.53 = 166%, one would expect this sort of outperformance for the following reason. The average PLIW.L price over period of 125p, allowed control over an average underlying asset (PLI.L) of 225p over the period implies the warrants had an implies average gearing of 180% over the period. For all you quantative analysts out there, I realise this is back of an envelope stuff (i.e. not 100% rigorous) but I am just using it to illustrate a point. Hence to summarize, in the term of risk adjusted performance the performance was broadly in line with the FTSE 100.

Further details concerning Equity Warrants

Within the post Investing in Equity Warrants we detail a number of practice issues associated with investing in Equity Warrants such as PLIW.L. These including an introduction to Equity Warrants, how one can efficiently trade in and out of positions in Equity Warrants, how and why Equity Warrants often offer a clean exit at maturity, and for Investment Trust Equity Warrants how the phenomenon of ‘Window Dressing’ of investment trusts can effect the associated Equity Warrant.

Transaction
Brought stock in ‘Royal Dutch Shell Plc A Shares of EUR0.07′ at GBP ‘17.4977′.

Fundamentals
The purchase represents good value on a relative and absolute basis with the wider oil and gas section trading on multiple of nearly 12 times earnings and Shell trading on 7.83 times earnings and 8.48 times next years estimated earnings (source Finance Google Quote and Reuters Quote for more details analysis).

Purchase Funded By
The purchase was partly funded by recycling the BT Group final dividend which just came through at 7.6p per share with some other recently paid dividends. At present, I considered Shell to represent better value than adding to our BT position (which is now on 13 times earning, but was on a sub-10 rating earlier in the year).

Compression of Earnings
Like the other oil majors the earnings of Shell have not kept pace over the past several years with the increase in earnings. Hence, all the majors are trading on attractive valuations; see:

ExonMobile: Google FInance Quote
BP: Yahoo Finance Quote

at least which respect to the spot (i.e. present) crude and refined product prices. As far as I can see the price of the majors at present in factoring in price falls across the energy products, maybe even oil falling to $50 (or less). In short, I just do not buy this, and the supply and demand dynamics just do not support this assumptions. Anyhow this is another story which will need to be left to another time.

Hard Assets versus Paper Currencies
Please also note that for me when taking a position in any commodity producer. I also see the trade as representing ’sell paper money, but hard assets’. The point is that very high levels of global liquidity (as noted in Economist article on Global Liquidity), will ultimately mean the re-valuing of paper money versus hard assets such as commodities. Since paper money is being created faster than hard assets are being discovered. For GBP based investors I also believe on the balance of averages that the GBP currency to devalue against other major currencies due to the fundamental outlook of the UK economy and the already high level of sterling.

Shell versus increasing BP position
I already have holdings in BP, and could have added to this position. Sometimes it is better to hold relatively fewer stocks since it allows me more time to monitor each of the business in which I have a stake. But the premium of BP over Shell was just to much, at present it is on 9.5 times prospective earnings, and has the nice feature that it has agreed to return $65bn to shareholders over the next three years via dividends and share buybacks, over the existing 3%+ dividend. But still a 30%+ premium is terms cost to buy per $ of profit is just to much. BP has a slightly better out-look (ie better at replacing reserves) but it is not that much better than Shell’s outlook. Similar remarks would apply to Shell verses ExonMobile.

Earlier in the year and last year I was buying into BT.A with my own money and for a third party. Though the third parties fund is designed partly for income after the payment of Vodaphone special dividend of 15p on the 16th, I discovered after consultation with the individual that there was more cash in the holding bank account that the third party needed in the intermediate term. Therefore, I decided to top-up on the BT.A position this morning with some of the cash, still leaving enough cash to allow the individual in question to go on a spending binge if desired. The trade was just confirmed at 244.16p, which means I was buying in at a PE of 11.35, and a yield of around 5%, OK but not as good as earlier in the year when was buying in at a PE of under 10. Saying that, BT.A still has a very healthy balance sheet and good net operating margins at 8.54%. I am also glad to see BT.A management have the sense to not get involved in a price war in the broadband space.

If you want to read up on BT Group then I suggest that you start at the BT Group PLC page at:

http://www.btplc.com/

and read maybe the last two annual reports, also the special reports concerning the future out-look, future products and plans are very informative, then I would start looking at others analysis and commentary, a good place to start on this is:

http://finance.google.com/finance?q=LON%3ABT.A

Personally, when ever considering an investment I read (or at least try) everything I can find on the stock or topic in question. Then only after I have read a reasonable amount of material on the topic or investment do I try to rationalise the reasons for which an investment should or should not be made.

As Ben Graham (Warren Buffet’s mentor) would say, “It is the quality of your analysis that makes you right as a stockpicker, not whether the market happens to agree with you”.

DISCLAIMER: This post should not be considered investment advice, and it offered for informational purposes only.