As I have mentioned previously, the vast majority of our energies in respect of valuations are concentrated outside of the ASX200. The reason of course being that we seek to look where very few other eyes are going and in this way, hope to find value others have missed.
The results of our investment company EGP Fund No. 1 Pty Ltd will be the thing most people are interested in tracking on the site. These will be the companies we are actually invested in, and the results of this fund will be the actual returns to our investees. We will not disclose the stocks we hold, because if we give clear directions on our holdings, our investors could instead hold the stocks directly and would find no use in subscribing for shares in our company. We are already presenting an investment alternative with no annual management fee. If we then also disclosed our holdings, we would have nothing to offer prospective investors. After an investment has been realised, such as by sale, or take-over, only then will we disclose our holding and our thinking behind it.
I have always maintained, that even restricted to investing only in the ASX200, we could outperform the index (S&P/ASX200 TR). In order to (we expect) demonstrate this, Dave & I have instead proposed that in order to keep our non-investor followers entertained, we will track a selection of 20 businesses from the ASX200, which we do not hold in our fund (because we believe we have superior alternative opportunities), but which we rate as some of the better prospects in the ASX200 (on a margin of safety basis). We will do this in order to present a pre-determined, trackable index of investments for our followers.
It is my expectation that over time, The EGP20 will do better than the S&P/ASX200 TR, and that our EGP Fund No. 1 Pty Ltd will do better than both, given a reasonable timeframe, say 3-5 years.
The 20 holdings in the EGP20 index will be equally weighted at their announcement (i.e. 5% of the index attributable to each). The index will be re-balanced twice a year (the first weekend after June 30th & December 31st) to include the 20 companies (which we do not hold in EGP Fund No. 1 Pty Ltd) from the ASX200, which we believe, on a chiefly quantitative basis (we will not spend as much time on the qualitative factors as we do with our own investments) represent those with the greatest margin of safety in the ASX200.
Based on our current valuations, we believe the EGP20 stocks will outstrip the broader markets performance by about 3 – 5% per annum, this is our expectation, and obviously the market rarely performs exactly in the way that we expect. We have stated this (3 – 5% out-performance) is our target for EGP Fund No. 1 Pty Ltd, so the fact we will not own these 20 stocks implies we have found something we believe has even greater upside. The EGP20 index will launch alongside the launch of EGP Fund No. 1 Pty Ltd, our fund at the end of the first quarter (31 March 2011). We will announce the 20 constituents around then. Bear in mind, the EGP20 index will be completely passively managed. That is to say, we will nominate the 20 holdings at the start of the period and regardless of any moves in intrinsic value, or reduction in the margin of safety, we will commit to retaining those same 20 stocks in the index until the next adjustment period. The 20 selections therefore do not represent investment advice and followers are advised to do their own research in respect of the selections if they are interested.
My next post will be on March 31 and will be the launching post for both EGP Fund No. 1 Pty Ltd and for the EGP 20. Tony Hansen 20/03/2011
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