Friday, May 7, 2010

Portfolio gains 4% in April, but May starts in horrible fashion

The portfolio gained 4% in April, as NAV rose to $1.064. On a total return basis, the benchmark STI gained 3.6%. Year-to-date, the portfolio has risen 6.4% and has outperformed the STI's 3.5% (recall that this is after performance fees of 20% of an outperformance of a 6% annual return).

While we would like to focus on what went well in May, that is rather irrelevant at present as the first few days of May has seen markets reverse their gains. The STI is already 1% lower (YTD, as of 6 May 2010), while our portfolio is marginally positive, up 2.4% over the same period. Instead of moping over the poor performance of our holdings, we have re-examined our investment thesis for each stock and have highlighted lower conviction ideas which we will wish to sell in the near future. At the same time, we have also identified stocks which we may want to increase exposure to if the market presents suitable opportunities. We are relatively pleased with our holdings overall (and view the recent market weakness as a temporary condition).

Thus far, our key low-conviction idea is SGX. We dislike the high valuations and the company's growth potential is likely overrated. Latest earnings have been slightly disappointing, and we think that the Exchange is not likely to be successful in the futures market (traders prefer anonymity). Other products like ETFs have shown a bit of promise - volumes have been rising but are a far cry from being a stable source of revenue. Overall, the breadth of products has been expanding, but the actual impact on revenue has not fared quite as well. 

On the other hand, SGX still maintains its monopoly status as a clearing house in Singapore, and a wildly exuberant market could send the stock heading much higher, as market turnover rises. It will likely take more than normalised trading volumes to provide an upward lift to the stock price, something we are not comfortable "speculating" on.

At the same time, Chinese property stocks have displayed considerable weakness as the Chinese government implemented new regulations to cool the property market, and several stocks have been beaten down considerably (names like Yanlord Land spring to mind). We purchased another 1000 shares of Capitaland at $3.57 today (6 May 2010), amid the weak market conditions. The stock trades at just a slight premium to book value (about 1.13X), a far cry from the 2.75X seen in the 2007 bull market. Capitaland has been sold down on concerns over its Chinese property exposure (about 35% of assets), and we think the recent correction provides a good entry point to double our exposure in the stock.  

[on a less fundamental note, the 38.2% retracement from the Apr 2007 decline to the 9 Mar 2009 bottom is $3.55 (adjusted for rights)]

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