Eternal Growth Partners

Update No. 40 – 01/01/12

2012-01-01T17:00:00.002+11:00

Full website: www.eternalgrowthpartners.com

Happy New Year to all readers. This will be the final post made at the www.eternalgrowthpartners.blogspot.com address; all future posts can be found exclusively at www.eternalgrowthpartners.com. The 6 months ending 31 December 2011 ended up being a difficult one for our portfolio, we trailed the market by 1.49%, which would be more tolerable in a market posting good gains, but unfortunately it came in a market that was down 9.71% for the 6 month period. Fellow owners will probably be somewhat pleased to note that under the EGP Fund No. 1 Pty Ltd fee structure; this means we are entitled to no performance fee, for that would require the achievement of outperformance over a full 6 month period (alongside a positive return). This, coupled with the fact we charge nothing in management fees, means you have paid nothing for this (admittedly fairly ordinary) performance. That is as it should be. The earning of fees for the management of assets should rightly require the outperformance of some reasonable benchmark to occur.

We retain, over the full 9 months of operation, a handsome 9.59% advantage over our benchmark (the ASX200 Total Return index), which I am hopeful of adding to this period. If we can maintain anything approaching this advantage over the benchmark over an extended period, we should be well served.

I remain extremely confident in our holdings. The weighted average stock prices of the portfolios holdings are backed by about 25% in cash alone, add to this the fact the group also possess sound underlying businesses and the returns should come, and I’m hopeful we will see them in fairly short order in some cases – Tony Hansen 01/01/12.

	April 1^st 2011	July 1^st 2011	Current Price	Current Period	Since Inception
EGP Fund No. 1	1.00000	1.08396	0.96254*	(11.20%)	(3.75%)
S&PASX200TR	35632.05	34200.68	30879.12	(9.71%)	(13.34%)

*Unaudited price will be confirmed via external audit as soon as possible.

EGP Fund No. 1 Pty Ltd. Down by 11.20%, lagging the benchmark by 1.49% since July 1^st. Since inception, EGP Fund No. 1 Pty Ltd is Down by 3.75%, leading the benchmark by 9.59%

Update No. 39 – 25/12/11

2011-12-25T17:00:00.001+11:00

Full website: www.eternalgrowthpartners.com

Merry Christmas, Feliz Navidad, Glædelig Jul, or whatever the ‘Seasons Greetings’are in your part of the world to readers. I write from from Fiji, and will be home to Australia in 2 days, in the meantime, the current asset values are as follows. There were a couple of sharp moves against us this week, a week when the market scarcely budged and given our concentrated holdings, this meant we dropped behind the benchmark for only the third week in this period (since 1 July) and leave ourselves only 3 trading days to close the gap, my only comfort is a still handsome lead in the full 9 months of operation – Tony Hansen 25/12/11.

	April 1^st 2011	July 1^st 2011	Current Price	Current Period	Since Inception
EGP Fund No. 1	1.00000	1.08396	0.95528	(11.87%)	(4.47%)
S&PASX200TR	35632.05	34200.68	31517.42	(7.85%)	(11.55%)

EGP Fund No. 1 Pty Ltd. Down by 11.87%, lagging the benchmark by 4.02% since July 1^st. Since inception, EGP Fund No. 1 Pty Ltd is Down by 4.47%, leading the benchmark by 7.08% all-time (April 1^st 2011).

Full website: www.eternalgrowthpartners.com

Update No. 38 – 18/12/11

2011-12-18T17:00:00.002+11:00

Full website: www.eternalgrowthpartners.com

I am in New York City this week, what an amazing place. Update for weekending 16 December below. – Tony Hansen 18/12/11.

	April 1^st 2011	July 1^st 2011	Current Price	Current Period	Since Inception
EGP Fund No. 1	1.00000	1.08396	1.01107	(-6.72%)	1.11%
S&PASX200TR	35632.05	34200.68	31608.67	(-7.58%)	(-11.29%)

EGP Fund No. 1 Pty Ltd. Down by 6.72%, leading the benchmark by 0.85% since July 1^st. Since inception, EGP Fund No. 1 Pty Ltd is Up by 1.11%, leading the benchmark by 12.4% all-time (April 1^st 2011).

Full website: www.eternalgrowthpartners.com

Update No. 36 – 04/12/11

2011-12-04T17:00:00.000+11:00

Full website: www.eternalgrowthpartners.com

The market jumped by 7.62% this week, and unsurprisingly, we failed to keep pace. As I have been expecting for the last couple of months, the US recovery began to show very real signs of traction as the unemployment rate there fell by half a percentage point in a month. As for the optimism out of Europe, I will wait before I get too wrapped up in it, regardless of what action is taken there, the recovery will be long and slow.

I found this comment a couple of weeks ago from Roger Montgomery here:

“I’ve always been suspicious of a company that issues a report to the market after the close of trade.”

I’ve said before on my links page, I generally like Montgomery’s methods, though his relentless salesmanship can dull the quality of his message. Nonetheless, he reminds novice investors to focus on the quality of the underlying business, to forget about day to day pricing, market gyrations and focus on business value etc, these are worthy messages. When it comes to his statement above, however, I must passionately disagree. In fact I wrote a little about it 3 months ago in Update No. 23:

“Talking about the flood of reporting that accompanies the last day of reporting season gives me a chance to get on my soap-box over an issue that really irks me. This is the reporting of price sensitive information during trading hours.”…

Warren Buffett has also commented on the importance of giving holders time to absorb the information as fully as possible before the market opens, from Berkshire Hathaway’s 2010 annual report announcement:

“Berkshire Hathaway Inc.’s 2010 Annual Report to the shareholders will be posted on the Internet on Saturday February 26, 2011… Whenever we can post our report on a Saturday we will continue to do so.”

I absolutely agree with the sentiments Buffett has expressed on this matter. Wherever possible, the longest amount of time possible should be made available to report users to digest financial information. Particularly with business updates, to me a Friday night disclosure immediately after market-close is perfect. The only exception to this is continuous disclosure related matters such as takeover offers and the like, which should be reported ASAP to keep the market informed. Scheduled business updates, earnings releases and material of this kind should always be released with the maximum practical time allowed for absorption.

So although I appreciate the generally helpful (to inexperienced investors) guidelines Roger Montgomery provides, I have to say, he is dead wrong in this statement. – Tony Hansen 04/12/11.

P.S. I leave for about 4 weeks overseas this week, I will be back in the last week of December. The next 3 posts I make should come from Washington DC, New York City and Fiji. I am sure there will be no issue with the Washington & NYC posts, though they may be shorter with just the financial info and little else. As for the Fijian post (scheduled for Christmas Day) – I have never been to Fiji before, but I’m hopeful I will be able to get the internet access required to get the post away on time. If not, I’m back in Australia on 27 December and will make the final 2011 update post then.

	April 1^st 2011	July 1^st 2011	Current Price	Current Period	Since Inception
EGP Fund No. 1	1.00000	1.08396	1.03266	(-4.73%)	3.27%
S&PASX200TR	35632.05	34200.68	32581.37	(-4.73%)	(-8.56%)
EGP 20	1000.00	883.67	814.36	(-7.84%)	(-18.56%)

EGP Fund No. 1 Pty Ltd. Down by 4.73%, level with the benchmark since July 1^st. Since inception, EGP Fund No. 1 Pty Ltd is Up by 3.27%, leading the benchmark by 11.83% all-time (April 1^st 2011).

EGP 20. The EGP20 index is Down by 7.84%, lagging the benchmark by 3.11% since July 1^st. Since inception the EGP20 is Down by 18.56%, lagging the benchmark by 10.00% all-time (since April 1^st 2011).

S&PASX200TR The benchmark index is Down by 4.73% since July 1^st. The benchmark is Down 8.56% all-time (since April 1^st 2011).

Full website: www.eternalgrowthpartners.com

Update No. 37 – 11/12/11

2011-12-01T17:00:00.002+11:00

Full website: www.eternalgrowthpartners.com

I’m in Washington DC at the moment, it’s 11pm & I’ve just returned from watching the Washington Capitals defeat the Toronto Maple Leafs 4-2 in a fascinating game of NHL Ice-Hockey. After a Capital player scored a hat-trick and all the fans around the stadium threw their hats (I suspect retail value of almost US$10,000) onto the ice (presumably to be collected and thrown away), I considered investigating a sports cap manufacturer for an investment… I’ll keep you posted. In all seriousness though, the funds figures are updated below and for your weekly reading, I can recommend this article which is a transcription of an old speech given by Warren Buffett about the extraordinary variability of the stock-market in relation to some simple underlying fundamentals that should easily guide us as to the appropriateness of the markets valuation at any given time – Tony Hansen 11/12/11.

	April 1^st 2011	July 1^st 2011	Current Price	Current Period	Since Inception
EGP Fund No. 1	1.00000	1.08396	1.01446	(-6.41%)	1.45%
S&PASX200TR	35632.05	34200.68	31940.43	(-6.61%)	(-10.36%)

EGP Fund No. 1 Pty Ltd. Down by 6.41%, leading the benchmark by 0.20% since July 1^st. Since inception, EGP Fund No. 1 Pty Ltd is Up by 1.45%, leading the benchmark by 11.81% all-time (April 1^st 2011).

Full website: www.eternalgrowthpartners.com

Update No. 35 – 27/11/11

2011-11-27T17:00:00.002+11:00

Full website: www.eternalgrowthpartners.com

For some reason, despite no particular announcements of note by our holdings, we widened the performance differential between EGP Fund No. 1 Pty Ltd and the benchmark by 5.07% this week (to 13.62% since inception 8 months ago). I wish I could say this were because of our stellar price performance, unfortunately it has far more to do with the substantial decline in the market this week (the fund assets rose by a fraction under 1%, the rest is explained by the benchmarks fall through week). In any case, as I have remarked often before, as long as we lead our benchmark we will be pleased, because in the long run, the benchmark will likely provide an adequate return on capital, so if we exceed that then our return should be better than adequate, if we exceed it by enough, our return might even be very good.

I have talked quite a bit over the past few weeks about OWS (Occupy Wall Street) and the operation of the Free Market and its benefits. A variety of topics probably not perfectly related to my key goal with EGP Fund No. 1 Pty Ltd, which is to identify and purchase undervalued equities and make market beating returns – believe me when I say, whatever intellectual diversions I might take, I always return to that ultimate goal! I will divert once more into a subject which touches on one of my great passions, the Free Market.

My (most recent) excursion into this area started with an article declaring Australia, for the second year in a row the second happiest place in the world to live. I beg to differ; I believe there is nowhere better. This article led me to another from the ABC website, which postulates which must exist first, economic freedom and the market economy, or political freedom and human rights? After thinking on that, I found myself wondering about how I would achieve the level of economic prosperity I desired had I been born in a third world country? It appears economic freedom would seem to be the driver via the worlds ‘black market’ economy. I had my eyes opened to this economy through this article on Foreign Policy magazines website, the industrious and hard-working operating within ‘System D’ certainly seem to be gaining impressive prosperity.

It seems intuitive to me that there must be a fairly substantial black market economy globally, but the article linked above indicates the global black market employs in the order of 1.8 billion workers and generates about $10 trillion, or around 1/6 of global economic output, or about twice the output of China (who have the second highest economic output globally). This is extraordinary and one clear consequence of this global black market is rising global prosperity as discussed in Update No. 33. Economics is not a zero-sum game, everyone gains in a world of free-trade; it is important we remember this in periods of global economic weakness such as that currently prevailing. – Tony Hansen 27/11/11.

	April 1^st 2011	July 1^st 2011	Current Price	Current Period	Since Inception
EGP Fund No. 1	1.00000	1.08396	.98579	(-9.06%)	(-1.42%)
S&PASX200TR	35632.05	34200.68	30273.18	(-11.48%)	(-15.04%)
EGP 20	1000.00	883.67	759.74	(-14.02%)	(-24.03%)

EGP Fund No. 1 Pty Ltd. Down by 9.06%, leading the benchmark by 2.42% since July 1^st. Since inception, EGP Fund No. 1 Pty Ltd is Down by 1.42%, leading the benchmark by 13.62% all-time (April 1^st 2011).

EGP 20. The EGP20 index is Down by 14.02%, lagging the benchmark by 2.54% since July 1^st. Since inception the EGP20 is Down by 24.03%, lagging the benchmark by 8.99% all-time (since April 1^st 2011).

S&PASX200TR The benchmark index is Down by 11.48% since July 1^st. The benchmark is Down 15.04% all-time (since April 1^st 2011).

Update No. 34 – 20/11/11

2011-11-20T17:00:00.001+11:00

Full website: www.eternalgrowthpartners.com

I talked last week about how globalisation, and in particular free-trade appear to be dragging more and more of our global citizens out of poverty. The evidence empirically demonstrates that each passing year fewer people in both a proportionate and an absolute sense live in poverty. I have therefore a very strong attachment to the idea of free trade, and it is for this reason I found this article on the Institute of Public Affairs website so agreeable. I should point out that the IPA are chiefly right-wing cheerleaders, but though they drift in that direction, there is still considerable merit in much of what is published on the site. I point out the right-wing affiliation/tendency of IPA for much the same reason I denoted the leftist views of the sites I directed readers to in Update No. 31, I never wish to be seen to push a particular belief or set of beliefs. I read widely on a variety of issues (chiefly related to economics/finance) in order to properly inform my view of the world and how it operates, for as Desiderius Erasmus said “In the land of the blind, the one-eyed man is king”, knowledge is power, I never limit my reading based on the ostensible ideology of the author, a good idea is good regardless of its source.

Back to free trade, and the basis of the IPA article linked above points out that whilst quasi-protectionists/free-trade skeptics such as Paul Howes, Tony Abbott and Barnaby Joyce take understandable umbrage at the effects for example of distortions such as the Chinese Government propping up inefficient/marginal state-owned enterprises with taxpayer funds. The author rightly points out why we are the ultimate beneficiaries of these actions:

“China is a developing country. Yet it is taxing its citizens in order to prop up businesses, which then go sell their products below the market cost to rich countries. These subsidies are a direct wealth transfer from third-world taxpayers to first-world consumers.”

The obvious concern is that propped up/subsidised for long enough these businesses eventually cause competitors drop out of the marketplace and the subsidies can be removed. What they probably don’t realise or consider though if this is the true aim, is that in a dynamic capitalist marketplace, if the subsidies were what squashed competitors; their removal will lead to inevitable new entrants.

I have also mentioned before the folly of the Chinese artificially holding down their currency. This, in the short-term inevitably leads to better terms of trade (your exports are cheaper than they should be & imports correspondingly dearer than they should be), but will also lead to the Chinese government and citizens holding large quantities of foreign bonds/cash, which will at some point be worth less (not necessarily worthless) as you eventually can’t keep the currency suppressed. The piper must always be paid, eventually – Tony Hansen 20/11/11.

	April 1^st 2011	July 1^st 2011	Current Price	Current Period	Since Inception
EGP Fund No. 1	1.00000	1.08396	0.97611	(-9.95%)	(-2.39%)
S&PASX200TR	35632.05	34200.68	31733.38	(-7.21%)	(-10.94%)
EGP 20	1000.00	883.67	801.18	(-9.33%)	(-19.98%)

EGP Fund No. 1 Pty Ltd. Down by 9.95%, lagging the benchmark by 2.74% since July 1^st. Since inception, EGP Fund No. 1 Pty Ltd is Down by 2.39%, leading the benchmark by 8.55% all-time (April 1^st 2011).

EGP 20. The EGP20 index is Down by 9.33%, lagging the benchmark by 2.12% since July 1^st. Since inception the EGP20 is Down by 19.98%, lagging the benchmark by 9.04% all-time (since April 1^st 2011).

S&PASX200TR The benchmark index is Down by 7.21% since July 1^st. The benchmark is Down 10.94% all-time (since April 1^st 2011).

Full website: www.eternalgrowthpartners.com

Update No. 33 – 13/11/11

2011-11-13T17:00:00.000+11:00

Full website: www.eternalgrowthpartners.com

A fall in our asset value this week can be attributed to a fall in the value of one of our thinly traded stocks on very thin volumes, which will most likely correct itself next week.

Another quick note on the OWS (Occupy Wall Street) protests and one of my favourite subjects - perspective. I stumbled across this article a couple of weeks ago, which redefines ‘the 1%’ in terms of global inequality. I then found the same sentiments basically plagiarised here. I would suggest almost all of those people protesting how hard they have it may just be surprised to find that they are in fact part of ‘the 1%’, when the net is cast globally, you need only earn US$34,000 to find yourself in this category, I’m there – I hope you are too. How many of the OWS protestors would like to see their taxation change (increase) in order to make the conditions of ‘the 99%’ globally more equitable? Just reminds us that we tend to look at things through the prism of what we know. Perhaps (see below) we can wait on the improvements that have been steadily happening over time to continue the great equalisation…

When considering global living conditions, a fact that passed last week, which may have gone unnoticed by many was the arrival on our planet of the 7 billionth living human. Statistically this occurred on 31 October 2011, although these things are obviously hard to get exactly right, but it bears considering. The obvious concern (at least to me) is how well as a global average, all these additional people are living. I thought this article from Felix Salmon made for interesting reading on the subject. I think this article draws attention to something very important that probably goes unconsidered – the power of industrialisation, capitalism and (relatively) free trade globally to improve lives. The statistics in the article (which by the way are adjusted for purchasing power – this is important) suggest that the proportion of the world’s population living in absolute poverty (less than $1.25 per day, adjusted for inflation) has declined from about 84% in 1804 to about 12.7% today. There are actually less people living in absolute poverty today than there were 200 years ago and we have 7 times as many humans on the planet – that is extraordinary. Obviously, crossing the line from absolute poverty to poverty, whilst very good for those achieving the transition, still leaves an enormous gap to living in conditions you or I would consider tolerable, but the trend is obvious and in time it would seem possible that really abject poverty will be virtually eliminated if we continue to innovate and improve.

Despite 99% of people globally earning less than US$34,000, it is very plainly evident that living conditions have improved inexorably for the last 200 years, and are likely to continue to improve substantially further. When we think about how hard we have it, it pays to bear this in mind, were you transported back in time 200 years, you could be assured that you would not live nearly as well as you do now.

Malthusian thinking from more than 200 years ago indicated this massive human disaster, driven by over-population should have occurred by now. Bear in mind when Thomas Malthus made his predictions, the population of the world was less than 1 billion people. Given that it is now over 7 billion, he was obviously mistaken. I think the only error he really made was underestimating the ingénue of humans. At some point not long after Malthus made his predictions, human productivity, particularly in the field of agricultural productivity took off in a way that no-one had (or likely could have) anticipated. You would be a fool to bet against human industry I think, there are still enormous tracts of land in countries like Ukraine, which evidently possesses some of the most fertile black-soil in the world – that have never been farmed using modern techniques. You would be courageous to nominate a point at which a Malthusian disaster will occur, I certainly don’t expect to see one in my lifetime, I doubt my children will see one – Tony Hansen 13/11/11.

	April 1^st 2011	July 1^st 2011	Current Price	Current Period	Since Inception
EGP Fund No. 1	1.00000	1.08396	0.99070	(-8.6%)	(-0.93%)
S&PASX200TR	35632.05	34200.68	32631.34	(-4.59%)	(-8.42%)
EGP 20	1000.00	883.67	814.08	(-7.88%)	(-18.59%)

EGP Fund No. 1 Pty Ltd. Down by 8.6%, lagging the benchmark by 4.01% since July 1^st. Since inception, EGP Fund No. 1 Pty Ltd is Down by 0.93%, leading the benchmark by 8.35% all-time (April 1^st 2011).

EGP 20. The EGP20 index is Down by 7.88%, lagging the benchmark by 3.29% since July 1^st. Since inception the EGP20 is Down by 18.59%, lagging the benchmark by 10.17% all-time (since April 1^st 2011).

S&PASX200TR The benchmark index is Down by 4.59% since July 1^st. The benchmark is Down 8.42% all-time (since April 1^st 2011).

Full website: www.eternalgrowthpartners.com

Update No. 32 – 06/11/11

2011-11-06T17:00:00.002+11:00

Full website: www.eternalgrowthpartners.com

I have been harping for a couple of months now that I don’t think the economic situation in the U.S. is nearly as bad as it is consistently being portrayed. To this end, I found this article very interesting in the way it articulates a number of positive factors in the American story that are being overlooked.

I also consistently point out that the U.S is the world’s primary economic engine. Although China is a large and increasingly important player on the world scale and will inevitably become the world’s largest economy, consistently overlooked (at least in mainstream media) are the demographic issues China will face, predominantly caused by the ‘One-child policy’, but exacerbated by a disproportionately high male population, evidently caused by selective abortions and female infanticide (however it has happened, there were apparently 118 males born for every 100 females in 2010). Some interesting writings about these various demographic issues are available here, here and here.

This graph and the one in the third link above are particularly instructive; one doesn’t need a background in economics to picture the likely problems such a demographic set-up will create. In Europe, the elder share of the population passed 10 percent in the 1930s and will not reach 30 percent until the 2030s, a century later. China will traverse the same distance in a single generation.

The upshot of these demographic issues has basically been the fact that China has been in a ‘Demographic Sweet Spot’ for about 25 years, with an ever-increasing proportion of the population becoming ‘working-age’. Evidently the peak of this has passed (most likely in 2010) and will probably lead to China having the shortest ever reign as the most powerful economy in the world (depending of course how they handle their ascent).

In any case, China will be extremely important to the world economy for the foreseeable future, I just think it should be borne in mind that the country will also face an unprecedented demographic challenge that will likely lead to severe and prolonged economic stagnation following almost immediately after an extraordinary and prolonged economic boom. The next 10 or 20 years will likely be very good for China, although they should start to face a business cycle that more closely resembles Western cycles. After that, it is much harder to tell, those that can correctly pick and time the turning points and their specific effects could do very well – Tony Hansen 06/11/11.

	April 1^st 2011	July 1^st 2011	Current Price	Current Period	Since Inception
EGP Fund No. 1	1.00000	1.08396	1.02024	(-5.88%)	2.02%
S&PASX200TR	35632.05	34200.68	32302.32	(-5.55%)	(-9.34%)
EGP 20	1000.00	883.67	808.92	(-8.46%)	(-19.11%)

EGP Fund No. 1 Pty Ltd. Down by 5.88%, lagging the benchmark by 0.33% since July 1^st. Since inception, EGP Fund No. 1 Pty Ltd is Up by 2.02%, leading the benchmark by 11.36% all-time (April 1^st 2011).

EGP 20. The EGP20 index is Down by 8.46%, lagging the benchmark by 2.91% since July 1^st. Since inception the EGP20 is Down by 19.11%, lagging the benchmark by 9.77% all-time (since April 1^st 2011).

S&PASX200TR The benchmark index is Down by 5.55% since July 1^st. The benchmark is Down 9.34% all-time (since April 1^st 2011).

Full website: www.eternalgrowthpartners.com

Update No. 31 – 30/10/11

2011-10-30T17:00:00.002+11:00

Full website: www.eternalgrowthpartners.com

Stocks moved sharply upward this week, fellow owners and regular followers will have noticed our portfolio is generally much less volatile than the broader market. When the market declines sharply, we rarely decline as fast, unfortunately, when the market rises sharply, we usually fail to keep up as we have this week. The Europeans seem to have developed a ‘solution’ the market likes – for now…

I have talked a little over the past few weeks about my view of the difficulties faced by the Euro-Zone countries and about the hobbling effect on the weaker economies of a common currency (there is a correspondingly ‘undeserved’ boost to the stronger economies which is less mentioned). I mentioned in Update 28 that absent the ability for the currency underlying a weak economy to weaken, the prospect for recovery is severely muted. Among my daily consumption of financial reading is Paul Krugman’s blog, ‘The Conscience of a Liberal’, many of Krugman’s views are at odds with mine (though he’s the one with the Nobel Prize…), but his writings are always eminently readable and wonderfully considered. Though he stridently disputes it, Krugman is prone to ‘cherry-picking’ data that tell the story as he sees it (though if we’re honest, I think we’re all guilty of that). In order to demonstrate my view about the importance of a sovereign currency I will cherry-pick this post, which shows how Iceland, which was probably the worst economy in the world during the GFC is in what could only be described as a state of rudely good health. Well, rude good health could be an exaggeration, but many factors that point to economic strength are much better than the three comparison countries Krugman uses (Latvia, Ireland & Estonia) which either use the Euro or have their currency pegged to the Euro. It is a short, sharp reminder of the importance of a (freely floating) sovereign currency as a defence against the economic cycle. There have been a few follow up posts which give more detail to the story, also well worth reading.

Something else very much in the news (at least the finance news, which is where most of my attention goes) is the ongoing OWS (Occupy Wall Street) protests. I must be honest; I don’t share a lot in common with many of the sentiments expressed by protesters. I can appreciate the perception that the financial world occupies an unfairly privileged space that seems to have enormous upside and government backstopped downside. I also understand the concerns about executive salaries and the high proportion of national earnings earned by ‘the 1%’, I’m pretty sure it isn’t ‘the 99%’ who have driven house prices in the Hampton’s up by 22% last year, while the rest of the US housing market is basically wrecked – and some executive salaries are indubitably obscene, but it is the shareholders (mostly) who get burnt by that. To me though, a central tenet of living in a capitalist economy is that if I covet what my neighbour has, I can work hard and obtain the same level of income or power or whatever thing that he has that I covet. The thing for which OWS is most widely criticised is having no particular goals. The closest I have seen to a coherent aggregation of the feelings behind the movement was presented here by ‘Lemony Snicket’; my personal favourite is number 7:

7. Someone feeling wronged is like someone feeling thirsty. Don’t tell them they aren’t. Sit with them and have a drink.

It is for this reason that provided the protests are peaceful, I see no harm in them whatsoever. I maintain that if the movement provided a coherent plan to resolve their issues, I would give them a great deal more respect, as Benjamin Franklin said “Any fool can criticize, condemn and complain and most fools do!”

While I’m directing blog-readers to my ‘liberal’ information sources, I should direct you to one more here, the site ‘macrobusiness’ aggregates the writings of a variety of economists writings with, as I mentioned, mostly left-wing in their views, but invariably well written and comprehensively explained. The article linked briefly details a county in Georgia (near Atlanta), which ‘incorporated’ its local government with considerable success. It must be noted that this is much easier to do successfully in a relatively affluent area, but the results appear to have been so good they certainly warrant further examination. Most interesting is the leftie columnist (perhaps unknowingly) praising the work of a libertarian mayor. Tony Hansen 30/10/11.

	April 1^st 2011	July 1^st 2011	Current Price	Current Period	Since Inception
EGP Fund No. 1	1.00000	1.08396	1.03050	(-4.93%)	3.05%
S&PASX200TR	35632.05	34200.68	32846.67	(-3.96%)	(-7.82%)
EGP 20	1000.00	883.67	836.88	(-5.30%)	(-16.31%)

EGP Fund No. 1 Pty Ltd. Down by 4.93%, lagging the benchmark by 1.03% since July 1^st. Since inception, EGP Fund No. 1 Pty Ltd is Up by 3.05%, leading the benchmark by 10.87% all-time (April 1^st 2011).

EGP 20. The EGP20 index is Down by 5.30%, lagging the benchmark by 1.34% since July 1^st. Since inception the EGP20 is Down by 16.31%, lagging the benchmark by 8.49% all-time (since April 1^st 2011).

S&PASX200TR The benchmark index is Down by 3.96% since July 1^st. The benchmark is Down 7.82% all-time (since April 1^st 2011).

Full website: www.eternalgrowthpartners.com

Update No. 30 – 23/10/11

2011-10-23T17:00:00.000+11:00

Update No. 30 – 23/10/11

Full website: www.eternalgrowthpartners.com

I mentioned in my post a fortnight ago that US housing starts were expected to continue their strong upward trajectory, well they were reported through the week here:

“Privately-owned housing starts in September were at a seasonally adjusted annual rate of 658 000. This is 15.0 percent (±13 7%) above the revised August estimate of 572,000 and is 10.2 percent (±13.3%)* above the September 2010 rate of 597,000.”

Notwithstanding the strong signs that the US is turning the corner, markets continued their downward trajectory this week, Europe is the big concern. The key European powers are meeting over the weekend to propose a ‘solution’. It remains entirely likely that nothing will come of it; a properly catastrophic failure (such as the Lehman collapse in 2008) is probably required to force action.

Despite all the calls for action, I think inaction and allowing events to run their course without significant political interference would likely have the greatest long-term benefits. Unfortunately, our political leaders the world over need to be seen to be ‘strong & decisive’ and this causes them to act even when inaction is the prudent course.

The more I think about it, the more it puzzles me that we fail to accept the inherently cyclic nature of the (predominantly) capitalist world we live in. Don’t get me wrong, I understand the political motivation that drives the interventionist behaviour, I just think it is not in our best interests. For many years, a good savage downturn cleaned out inefficient/marginal industries in a country, driving productivity increases as the truly competitive industries thrived when conditions turned. Too often interventionist policies are blunting the natural regenerative properties of capitalism.

To our holdings - although we have been performing (in respect of price) only marginally better than the market, the AGM season has provided some very ‘upbeat’ commentary about our holdings. An example from one AGM this week is:

“At the end of the first quarter of FY2012, order intake is up 65% and unit sales are up 25% on the first quarter of FY2011. As a result, our order bank at the end of September 2011 is up 155% on the order bank at the end of the prior corresponding period”

Now the prior period was an historically weak one for the above business and I had this firm pencilled in for significant sales and operational improvement this year. I didn’t however picture anything like a 155% growth in back-orders, that type of superior business performance materially increases the intrinsic valuation and we already acquired them at less than half my previous estimate of IV! The gains will come, of that I am very confident, but the present sentiment dulls the response even to such positive announcements. Unfortunately the gains in some of our holdings have been offset by the ongoing takeover saga surrounding one of our largest holdings. An AGM must be called soon and we should get a better understanding of exactly what’s happening there - Tony Hansen 23/10/2011.

	April 1^st 2011	July 1^st 2011	Current Price	Current Period	Since Inception
EGP Fund No. 1	1.00000	1.08396	1.00453	(-7.33%)	0.45%
S&PASX200TR	35632.05	34200.68	31248.43	(-8.63%)	(-12.30%)
EGP 20	1000.00	883.67	791.2	(-10.46%)	(-20.88%)

EGP Fund No. 1 Pty Ltd. Down by 7.33%, leading the benchmark by 1.30% since July 1^st. Since inception, EGP Fund No. 1 Pty Ltd is Up by 0.45%, leading the benchmark by 12.75% all-time (April 1^st 2011).

EGP 20. The EGP20 index is Down by 10.46%, lagging the benchmark by 2.83% since July 1^st. Since inception the EGP20 is Down by 20.88%, lagging the benchmark by 8.58% all-time (since April 1^st 2011).

S&PASX200TR The benchmark index is Down by 8.63% since July 1^st. The benchmark is Down 12.30% all-time (since April 1^st 2011).

Full website: www.eternalgrowthpartners.com

Update No. 29 – 16/10/11

2011-10-16T17:00:00.001+11:00

Full website: www.eternalgrowthpartners.com

A short update this week as I’m travelling, don’t worry, nowhere luxurious, I’m in Cooma as I write. Because I haven’t the time to write anything interesting myself, I will refer you to someone else’s work, which in any case is a thousand times more insightful than my weekly observations.

I refer to this article, which is a transcript of a speech given by Charlie Munger in 2003 on ‘Academic Economics’. Like almost all Munger speeches, it drifts into multi-disciplinary learning, which I believe is one of the most valuable (and under-considered) concepts around.

I hope you enjoy the article as much as I do, if you do, you should consider laying your hands on a copy of Poor Charlie’s Almanac, which expands further on the ideas – Tony Hansen 16/10/11.

	April 1^st 2011	July 1^st 2011	Current Price	Current Period	Since Inception
EGP Fund No. 1	1.00000	1.08396	1.01730	(-6.15%)	1.73%
S&PASX200TR	35632.05	34200.68	31729.47	(-7.23%)	(-10.95%)
EGP 20	1000.00	883.67	836.67	(-5.32%)	(-16.33%)

EGP Fund No. 1 Pty Ltd. Down by 6.15%, leading the benchmark by 1.08% since July 1^st. Since inception, EGP Fund No. 1 Pty Ltd is Up by 1.73%, leading the benchmark by 12.68% all-time (April 1^st 2011).

EGP 20. The EGP20 index is Down by 5.32%, leading the benchmark by 1.89% since July 1^st. Since inception the EGP20 is Down by 16.33%, lagging the benchmark by 5.38% all-time (since April 1^st 2011).

S&PASX200TR The benchmark index is Down by 7.23% since July 1^st. The benchmark is Down 10.95% all-time (since April 1^st 2011).

Full website: www.eternalgrowthpartners.com

Update No. 28 – 09/10/11

2011-10-09T17:00:00.000+11:00

Full website: www.eternalgrowthpartners.com

The market staged a big turnaround this week; unfortunately our holdings didn’t keep pace. I guess the question is - can the gains be sustained. It is hard to tell, but to my way of thinking, positive economic news is starting to out-weigh negative economic news. I always focus on US news, because like it or not, the US is still the worlds economic engine. August US building permits were up 3.2% month on month and 7.8% year on year, September is expected to be marginally better still. Building permits are an approximate 6 to 12-month leading indicator to housing starts, which is a pretty direct proxy for the strength of the building industry, which is in turn consistently underestimated as a key driver for growth and employment. Total housing starts for the whole of calendar 2009/2010/2011 will be less than they were in each of the 2002/3/4/5 calendar years. In fact fewer US houses have been built in the last 3 years than the average constructed each year on average for the 10 years prior to that. The excess supply has been largely absorbed, the only question is how long it takes the market to react to the new undersupply situation and more than double the current new home construction to return it to its equilibrium level of about 1.3m per year. I would be surprised if by the end of 2012, housing starts weren’t up to about 900k per year and unemployment below 7.5%. These are not forecasts, just a supposition as to how a rational market would react (remembering the market is rarely perfectly rational).

Real GDP in the US increased to 1.3% in quarter 2 and is particularly impressive when you consider a relatively high inflation rate of 3.8% reported in August (real GDP measures the GDP factoring inflation). Another big positive is a recent narrowing of the trade deficit, combined with the continued strong growth in exports (set the chart to 5 years to get a good feel for how impressive the growth is), this proves the enormous ongoing effort to weaken the US$ is working (like it or not).

The other side of the coin of course is the Euro-currency zone and Europe generally. The Euro-Zone is an economic area comparable in GDP to the US. Unfortunately, I am not so excited by Euro-Zone prospects. I have always been sceptical of the workability of a common currency across a disparate group of economies. Unless a country has the capacity to weaken its currency when its economy is weaker than the global average (either through natural forces, or by manmade force as the US has done), trade factors will be distorted and an economy has no means of finding equilibrium.

I can attest to what a wonderful ‘concept’ the Euro is, having spent time travelling through Europe, spending the same notes and coins in nearly every country. Despite this, whatever improvements in trade and portability the Euro has created, the is enormous downside is being witnessed by the weaker Euro economies now. Under normal conditions, Greece’s currency should have plummeted, they should now be in the midst of an export led recovery, probably led by tourism, but supplemented by other Greek export industries - fruit, vegetables, olive oil, textiles and steel. The weak currency would make imports prohibitive and some sense of normality would quickly be established. Foreign Greek bond-holders would be burned by currency losses rather than capital losses. None of these normal solutions can occur because of the distortion caused by the shared currency. The best thing the Euro-Zone could do is declare the Euro a failure and return to floating sovereign currencies in the most orderly way possible. This option is enormously politically difficult, but will likely have to happen in the next few years to help Europe deal with its issues properly.

In any case, I don’t hold out much hope for the sparks of a recovery coming from the Euro-Zone, but I am very hopeful of a US led recovery – Tony Hansen 09/10/2011

P.S. talking of currencies, there are many more benefits than costs to the Chinese in allowing their currency to trade somewhere closer to fair value - also the global economy would benefit.

	April 1^st 2011	July 1^st 2011	Current Price	Current Period	Since Inception
EGP Fund No. 1	1.00000	1.08396	1.00917	(-6.90%)	0.92%
S&PASX200TR	35632.05	34200.68	31405.67	(-8.17%)	(-11.86%)
EGP 20	1000.00	883.67	794.02	(-10.15%)	(-20.6%)

EGP Fund No. 1 Pty Ltd. Down by 6.9%, leading the benchmark by 1.27% since July 1^st. Since inception, EGP Fund No. 1 Pty Ltd is Up by 0.92%, leading the benchmark by 12.78% all-time (April 1^st 2011).

EGP 20. The EGP20 index is Down by 10.15%, lagging the benchmark by 2.02% since July 1^st. Since inception the EGP20 is Down by 20.6%, lagging the benchmark by 8.74% all-time (since April 1^st 2011).

S&PASX200TR The benchmark index is Down by 8.17% since July 1^st. The benchmark is Down 11.56% all-time (since April 1^st 2011).

Full website: www.eternalgrowthpartners.com

Update No. 27 – 02/10/11

2011-10-02T17:00:00.000+11:00

Full website: www.eternalgrowthpartners.com

I write this blog mid-week before it is to be posted (i.e. prices used were sourced Wednesday – don’t scream if they’ve changed, they change all the time!), after looking back through my posts last week to find the post I referred to in last weeks blog, I found my proposal in Update No. 6. I thought I might review it this week, the post proposed a way to potentially speculate in what I viewed as an overheated silver bullion market.

Regular readers will remember that I proposed the following ‘pairs trade’:

Buy 60oz platinum @ AU$1,662.98 per oz for $99,778.80
Sell 2,375oz silver @ AU$42.01 per oz for $99,773.75

We are now 133 days (19 weeks) down the road; let us review how the trade would look if we closed it out now:

Sell 60oz platinum @ AU$1,517.33 per oz for $91,039.80 (Loss = $8,739)
Buy 2,375oz silver @ AU$29.41 per oz for $69,848.75 (Profit = $29,925)

So the pairs trade worked almost exactly as we wanted/expected it to, and I have demonstrated how we could potentially make money in a (sharply) falling market. The platinum price, which was trading below it’s historic average (relative to gold), has declined only modestly (about 8.8%), and the silver price, which I demonstrated was at it’s all-time high (in relation to gold) has declined the majority of the way (30% in real terms) to the long term mean (a further 20% decline relative to gold would return it to the long-term mean (1/65^th the price of gold per unit). The total gain demonstrated above of $21,186 represents a 10.62% profit over the 133 days, or an annualised gain over 30% (I haven’t followed the prices closely, but I am sure there were probably greater profits at some point). Given that the EGP share price has done virtually nothing in the same period, fellow holders may question why I didn’t take on such a trade. The answer is simple, when it comes to currencies, commodities and other tradeable items, the underlying causes of the movements are too hard to pick. Now, share prices can swing just as wildly as the last month or two have reminded us (funny the swings only seem wild when prices head down though…), however the drivers in increasing the prices are much more predictable. Relying on mean reversion is not an investing format I am comfortable with; in the long-run owning outstanding companies with sound fundamentals will prove more profitable I believe.

Gun to my head, if you make me choose a precious metal to own, I would still take platinum over silver/gold as it is still very close to historic lows in relation to gold price. By the way, this is an absolutely imperfect view to hold, there may have been a great many platinum discoveries over the past few years that have reduced the scarcity of platinum relative to the other precious metals, which has led to the lower ratio; or a variety of demand factors could have forever changed the precious metals market. Think about these things before you storm the Perth mint & buy hundreds of kilos of bullion (under AU$50,000 per kilo after recent price falls! Cheap as chips!)

Many of the underlying macroeconomic factors can be the same for stocks as for commodities, for example, when the global economy is weak, commodity prices fall due to weakened demand & stock prices of companies producing those commodities will fall as they will make less profit at the lower prices. Gold and Silver can sometimes defy this trend, due to their perception as a currency/store of value, but correlated price movements can often hobble this argument as we have seen in the last couple of weeks.

Imagine this - the price of the commodity a company produces stays static for 10 years (for some reason). The price of the company could still grow if it increases production and controls costs. The other thing a company can do that a commodity can’t is use the cash it generates to buy new businesses or expand in other ways. So provided you can pick a company with the right fundamentals, you won’t have to rely on the greater fool to be successful – Tony Hansen 02/10/11

	April 1^st 2011	July 1^st 2011	Current Price	Current Period	Since Inception
EGP Fund No. 1	1.00000	1.08396	0.98604	(-9.03%)	(-1.4%)
S&PASX200TR	35632.05	34200.68	30239.41	(-11.58%)	(-15.13%)
EGP 20	1000.00	883.67	752.82	(-14.81%)	(-24.72%)

EGP Fund No. 1 Pty Ltd. Down by 9.03%, leading the benchmark by 2.55% since July 1^st. Since inception, EGP Fund No. 1 Pty Ltd is Down by 1.4%, leading the benchmark by 13.73% all-time (April 1^st 2011).

EGP 20. The EGP20 index is Down by 14.81%, lagging the benchmark by 3.23% since July 1^st. Since inception the EGP20 is Down by 24.72%, lagging the benchmark by 9.59% all-time (since April 1^st 2011).

S&PASX200TR The benchmark index is Down by 11.58% since July 1^st. The benchmark is Down 15.13% all-time (since April 1^st 2011).

Full website: www.eternalgrowthpartners.com

Update No. 26 – 25/09/11

2011-09-25T17:00:00.001+10:00

Full website: www.eternalgrowthpartners.com

We start this week with a quote from the greatest literary work of the 20^th century:

The investor with a portfolio of sound stocks should expect their prices to fluctuate and should neither be concerned by sizable declines nor become excited by sizable advances. He should always remember that market quotations are there for his convenience, either to be taken advantage of or to be ignored. – Benjamin Graham, “The Intelligent Investor”

Aside from the sexist assumption that an investor is a man (over 78% of EGP shares are owned by women – though many of those are my wife’s holding), this statement is every bit as correct now as when it was written, over 50 years ago.

As for ‘a portfolio of sound stocks’, after the recent reporting season, in the 12 months ended 30 June 2011, our holdings (as you can tell below) have declined in price, though not as severely as the benchmark. In order to give fellow owners a sense of the type and strength of businesses we hold, I will give an update to some financial metrics, for a comparison you may wish to look back to Update No. 5 where I first mentioned a comparison of the metrics of the stocks we owned in comparison to the ASX200.

Now the second half of Financial Year 2011 was quite successful for our 8 holdings. In particular our 3 largest holdings posted significant profit improvements compared to the second half of FY2010. The end result of this is that in aggregate, because their prices have remained relatively static, and earnings have risen is that our portfolio, which had a P/E of 7x in May, now has a (weighted average) P/E 4.36x. Because we have added a little to some of our smaller holdings, our (weighted average) Market Capitalisation is $219.75m, and the weighted average NPAT for FY2011 was $50.35m. This NPAT is not some freaky number caused by some ‘one-off’ items, revaluations or any such thing, but a true reflection of the earning capacity of the ‘portfolio of sound stocks’ you own a share of, if anything, there were more negative ‘one-off’ items than positives, I truly expect our holdings in aggregate to grow their earnings in FY2012, even if the global economy remains weak. In Update No. 5 I reported that our average gearing was 22.1%, but this was all debt included, without subtracting cash holdings (i.e. not net debt). In order to give you a better picture of our holdings’ true balance sheet position, I have calculated the ‘Net Position’, the sum of all cash & cash equivalents less any long or short term debts. You should be impressed to know that your companies as a weighted average hold $45.3m of net cash on their balance sheets, which represents over 20% of their weighted average Market Capitalisation.

Now to put this in terms that might mean something more tangible to fellow investors. Imagine instead I owned a smaller business; say a coffee shop, for arguments sake. Imagine I offered to sell this coffee shop to you for $500,000, coming with the business is a sound management (so you won’t have to do any work!), included in the sale price is the $103,071 in cash that sits in the bank and best of all the shop returned (after taxation) in FY2011 $114,679 in profits, which have grown consistently over the last 10 years and appear likely to at the very least continue at approximately a similar rate (or even grow). I would hazard that given such an opportunity, you would probably knock me over on your way out the door to get to the bank and sort the finances (at least I would if you offered it to me). Well, for fellow EGP shareholders, there is no need; you already own a portion of such a business in aggregate, there is no coffee shop, but a diverse range of businesses that include two miners, a mining services provider, a property developer, manufacturers of industrial and consumer goods etcetera, in my view, much better than the coffee shop presented above. All we need to do is remember Ben Grahams advice and be patient – Tony Hansen 25/09/11

	April 1^st 2011	July 1^st 2011	Current Price	Current Period	Since Inception
EGP Fund No. 1	1.00000	1.08396	0.99890	(-7.85%)	(-0.11%)
S&PASX200TR	35632.05	34200.68	29426.26	(-13.96%)	(-17.42%)
EGP 20	1000.00	883.67	749.69	(-15.16%)	(-25.03%)

EGP Fund No. 1 Pty Ltd. Down by 7.85%, leading the benchmark by 6.11% since July 1^st. Since inception, EGP Fund No. 1 Pty Ltd is Down by 0.11%, leading the benchmark by 16.31% all-time (April 1^st 2011).

EGP 20. The EGP20 index is Down by 15.16%, lagging the benchmark by 1.2% since July 1^st. Since inception the EGP20 is Down by 25.03%, lagging the benchmark by 7.61% all-time (since April 1^st 2011).

S&PASX200TR The benchmark index is Down by 13.96% since July 1^st. The benchmark is Down 17.42% all-time (since April 1^st 2011).

Full website: www.eternalgrowthpartners.com

Update No. 25 – 18/09/11

2011-09-18T17:00:00.001+10:00

Full website: www.eternalgrowthpartners.com

I’ll be relatively brief this week; for there are a great many valuations I need to focus my efforts on at this time of year. Wednesday evening (14^th), the time the first draft of this post being written, the S&PASX200 TR index (our benchmark) is down 15.3% since our April 1^st inception, our fund at this time is a few percentage points above it’s $1 foundation price, but is well down since July 1. This is undoubtedly a difficult time to be an equity investor, for every bit of positive economic news we hear; I reckon we are hearing 6 or 7 negative pieces. I have heard it described before that when all the financial commentators and talking heads are talking the market’s down, then that’s when you want to back the truck up and load up. Though not universally bearish, there are not a lot of positive commentators around, so perhaps we’re getting close to the bottom?

The only thing that piqued my interest was the changes to the component stocks of the S&P indices. Specifically, I thought it was an interesting reflection on the state of our economy that a newly enlarged Iluka Resources (ILU – a mineral sands miner) is replacing a newly shrunken Bluescope Steel (BSL). It’s a shame that Australia appears destined not to be able to maintain a strong (read – profitable) domestic steel industry, but if we’re honest in our assessment, it’s been coming for a long time. The industry may like to look at the high $AUD and the carbon-tax for scape-goats, but the fact remains, we are uncompetitive in these areas and unfortunately, if the market forces that drive the rise of ILU decide the demise of our domestic steel industry, then we must accept that and focus on those areas where we (as a nation) have a competitive advantage.

Reasons such as national security are cited when commentators discuss the need to maintain a domestic steel industry; these are invalid reasons to maintain an uncompetitive industry. We will never be at war all at once with every other steel manufacturing nation in the world, so we shall always be able to buy from someone, if the asking price rises high enough, a domestic industry will likely sprout, that’s capitalism – Tony Hansen 18/09/11

	April 1^st 2011	July 1^st 2011	Current Price	Current Period	Since Inception
EGP Fund No. 1	1.00000	1.08396	1.04017	(-4.06%)	4.02%
S&PASX200TR	35632.05	34200.68	31270.96	(-8.57%)	(-12.24%)
EGP 20	1000.00	883.67	817.19	(-7.52%)	(-18.28%)

EGP Fund No. 1 Pty Ltd. Down by 4.06%, leading the benchmark by 4.51% since July 1^st. Since inception, EGP Fund No. 1 Pty Ltd is Up by 4.02%, leading the benchmark by 16.26% all-time (April 1^st 2011).

EGP 20. The EGP20 index is Down by 7.52%, leading the benchmark by 1.05% since July 1^st. Since inception the EGP20 is Down by 18.28%, lagging the benchmark by 6.04% all-time (since April 1^st 2011).

S&PASX200TR The benchmark index is Down by 8.57% since July 1^st. The benchmark is Down 12.24% all-time (since April 1^st 2011).

Full website: www.eternalgrowthpartners.com

Update No. 24 – 11/09/11

2011-09-10T11:12:00.000+10:00

Full website: www.eternalgrowthpartners.com

The Fund NTA dipped a bit this week (more than the market) as our largest holding which is the subject of a corporate action declined in price, as the bidder games the target. If the takeover falls over at current prices, I truly believe it will serve our fund-holders better, though it may hurt short-term performance.

It has been a little while since I passed comment on the managed fund industry. For a starting point, in order to find funds operating in a similar area to ours, I went to the Comsec website. I filtered for ‘Equity Region Australia mid/small value’ as I feel this sector most closely resembles the area I focus our capital on. I thought I’d display the performance of some of the better ranked funds, since April 1 which was our inception date. The top 3 (by last 12 months performance) were:

Perpetual Smaller Companies Fund. This fund has fallen 14.3% since April 1. From $3.063 to $2.625 (as retrieved here Thursday)
Invesco Australian Smaller Companies Fund. This fund has fallen 11.4% since April 1. From $1.125 to $0.99652 (as retrieved here Thursday)
Sandhurst Future Leaders Fund. This fund has fallen 7.9% since July 1 (I couldn’t find an April 1 price). From $0.7216 to $0.6649 (as retrieved here Thursday)

I don’t point this out to gloat, despite our performance over 5 months being as much as about 20% better than the funds above. More it is to harp on (again) about one of my favourite topics, the alignment of interests between fundholders and money managers. Each of these funds have handsomely beaten their benchmarks over the medium to longer term (over 5 years or more), but each are trailing, or at least cutting very close to their respective benchmarks in the period examined. Despite this period of weakness, each of the above funds is charging an MER (Management Expense Ratio) of between 1.95% and 2.14%, which is eating into fundholders capital despite weak performance. When a client lodges their funds with a money manager, they do so in the hope (or dare I say expectation) of the performance of their investment being better than the benchmark their fund competes against. While I think most investors will understand the odd period of underperformance (no fund ever will out-perform a benchmark in every period), what I can’t understand is people tolerating payment of fees for such underperformance. As I have pointed out many times before, there are a variety of exchange traded funds that closely track a variety of benchmarks for negligible fees.

In my view a confident money manager should have no problem working as EGP Fund No. 1 Pty Ltd does on a performance fee only basis. If you truly believe you can beat the indices in 70 or 80% of periods, a performance fee only manager still knows they will get paid; they just need to budget for the odd period when you miss the mark – budgeting is something a competent money manager should know how to do!

With each passing day, there is more and more information suggesting we are in for a period of relatively poor global financial health.

Australia

still seems to be holding up pretty well, though a case could be made either way. For example, there were solid GDP figures for the June quarter on Wednesday, followed Thursday by an unexpected rise in August unemployment. I still maintain the best protection we can have against a weak period is a concentrated portfolio of superior stocks, to my view, that is what we hold – Tony Hansen 11/09/2011

	April 1^st 2011	July 1^st 2011	Current Price	Current Period	Since Inception
EGP Fund No. 1	1.00000	1.08396	1.05408	(-2.76%)	5.41%
S&PASX200TR	35632.05	34200.68	31567.35	(-7.7%)	(-11.41%)
EGP 20	1000.00	883.67	823.15	(-6.85%)	(-17.68%)

EGP Fund No. 1 Pty Ltd. Down by 2.76%, leading the benchmark by 4.94% since July 1^st. Since inception, EGP Fund No. 1 Pty Ltd is Up by 5.41%, leading the benchmark by 16.82% all-time (April 1^st 2011).

EGP 20. The EGP20 index is Down by 6.85%, leading the benchmark by 0.85% since July 1^st. Since inception the EGP20 is Down by 17.68%, lagging the benchmark by 6.27% all-time (since April 1^st 2011).

S&PASX200TR The benchmark index is Down by 7.7% since July 1^st. The benchmark is Down 11.41% all-time (since April 1^st 2011).

Update No. 23 – 4/09/11

2011-09-04T17:00:00.002+10:00

Full website: www.eternalgrowthpartners.com

The second month of the new financial year has been completed. Wednesday saw a flood of profit results, as a lot of smaller companies released results detailing FY2011. The last day of August & the last day of February (and the first day of the next month) are the only days I look to the Small-Ordinaries index in comparison to the S&PASX200. The reason being is that on these days, the flood of last-minute reporting from the smaller end of the market can sometimes move the Small-Ordinaries out of step with the ASX200 (which has usually substantially completed reporting beforehand). This is not for the purpose of some ‘technical indicator’; regular readers will know I don’t care for technical analysis. In my view, due to the disproportionate amount of late reporting from the small businesses in the Small-Ordinaries, and the way the market reacts to the results give me a feeling about how the smaller end of the market is doing (without reading every Appendix 4E). Generally, the behemoths like the banks and the big miners are responsible for most of the movements in the indices, the only days we can notice the little guys in any significant way is when there is a flood of information. So I generally feel that if the Small-Ordinaries is stronger than the ASX200 on these days, the little businesses as a whole are probably doing better (or giving upbeat commentary about the future) than the market was expecting. We need to remember, however, that a lot of the businesses that report on these days are explorers and other highly speculative enterprises, profit & loss statements for these businesses are rarely a driver for share-price movements.

As for the comparison, the Small-Ordinaries was scarcely different to the ASX200 on Wednesday, up 0.8% compared to 0.6%. So the little guys didn’t report any remarkably unexpected results as a whole.

Talking about the flood of reporting that accompanies the last day of reporting season gives me a chance to get on my soap-box over an issue that really irks me. This is the reporting of price sensitive information during trading hours. About 240 x 4E’s were delivered on 31 August; nearly half of these hit the market during trading hours. Of all the market releases a company makes, probably the most important to an investor are the profit announcements, as they give investors the chance to understand how their company has performed in a given period. In my view it is imperative these should be released out of hours, to give shareholders time to digest the information properly before acting on it. Particularly for retail investors, who perhaps don’t have ready access to the market during market hours, it places them at a disadvantage, if the result is a good deal better or worse than the market expects, they are unable to react to the information as quickly as others.

As I mentioned last week, we had half of our holdings report this week (not part of the Wednesday flood, ours reported on Monday/Tuesday). There was a couple of outstanding results, one about on par, and one that was a good deal weaker than I’d hoped, though the weaker than expected result can be clearly explained by revenues being delayed into FY2012, which should mean a good 12 months ahead.

The next 2 or 3 months will be very busy for me as I use the recent reporting season to refine my Intrinsic Valuations (IV’s) for those businesses I am interested in. Five or Six months ago, I produced IV’s for 440 companies based on February reports. I have trimmed my list down to 687 already, and by the time I get to reading some of their information, I will likely confirm that more than 200 of the 687 are still rubbish, and either can’t be valued or aren’t worth the effort – For Example, when I looked to see how many were on the list, I noticed Brisconnections (BCS) are on it. Without reading their latest report, I can remember they have something like $3.5b of intangibles that relates to future cash-flows from toll-roads currently under construction (from memory there’s a 40 year concession to operate the roads). I feel no capacity to place a value I could be happy with on this - which is the key asset of the company, with a couple of years traffic I could start to make an assessment, but for now, when I get to the letter ‘B’, BCS will fall off my list. I will probably end up by late October with values on about 440 companies. Tony Hansen 04/09/2011

	April 1^st 2011	July 1^st 2011	Current Price	Current Period	Since Inception
EGP Fund No. 1	1.00000	1.08396	1.08396	0.00%	8.4%
S&PASX200TR	35632.05	34200.68	31846.26	(-6.88%)	(-10.62%)
EGP 20	1000.00	883.67	814.54	(-7.82%)	(-18.55%)

EGP Fund No. 1 Pty Ltd. Up by 0.00%, leading the benchmark by 6.88% since July 1^st. Since inception, EGP Fund No. 1 Pty Ltd is Up by 8.4%, leading the benchmark by 19.02% all-time (April 1^st 2011).

EGP 20. The EGP20 index is Down by 7.82%, lagging the benchmark by 0.94% since July 1^st. Since inception the EGP20 is Down by 18.55%, lagging the benchmark by 7.92% all-time (since April 1^st 2011).

S&PASX200TR The benchmark index is Down by 6.88% since July 1^st. The benchmark is Down 10.62% all-time (since April 1^st 2011).

Full website: www.eternalgrowthpartners.com

Update No. 22 – 28/08/11

2011-08-28T17:00:00.004+10:00

Full website: www.eternalgrowthpartners.com

There was a flood of profit announcements this week, I will briefly focus on 4 that are members of the EGP20 and discuss one that is not. The funds holdings did not quite keep pace with the markets bold upward move this week, but we still have half of our holdings yet to announce and I expect there could be some good news from a couple of our largest this week.

First to the one that is not, Amcor Limited (AMC) announced this week a profit if 45.9 cents per share, I will ignore NPAT and other metrics for reasons I have discussed over the preceding weeks. Its share price this week moved almost in-line with the market; however, it trades at about a P/E of about 14.8, which is approximately a 25% premium to the broader market, which should indicate significantly superior prospects – let us examine that. Those who like the stock would point out AMC have substantially grown ROE over the last 10 years, from an average FY02-04 of 7.77% to a FY09-11 of 12.97%. The reason for the improved ROE is simple, in the same periods, average equity shrunk from about $4.5b to about $3.6b, but long-term debt more than doubled to over $3b - ROC improvement, therefore has been much more modest, simply replacing equity with debt. Those like me, who prefer to think (as I have posted previously about here) about return on the price paid for equity would be more interested in EPS. Over the same period, EPS grew from an average of 39.8c to an average of 41.9c, I don’t know about you, but with inflation, EPS growth of 0.52% per annum over 10 years is probably not enough. Interestingly, despite negligible EPS growth, AMC has returned 6.5% p.a. in total shareholder return over the last 10 years, of which only 0.2% has been in capital growth – makes you happy for Australia’s high dividend pay-out ratios…

Other concerns for me would include the falling cash-flows, FY02-06 saw cashflow per share of $5.15 for AMC but FY07-11 saw only $3.73, to my view, a business as mature as this should have improving cash-flows, at least stagnant and certainly not a 28% decline (Telstra using the same periods grew theirs by 18% despite a fall in EPS in the same period). AMC are forecast (not by me – analyst consensus) to grow EPS by about 27% over the next 2 years, interestingly TLS are forecast (again – not by me) to grow theirs by 19.9% in the same period, yet AMC trades on a P/E of 14.8 and TLS on 11.8x. One of those numbers is either too high, or one is too low; I’m inclined to think the former. I could go on, but just thought I’d share some thoughts, it astounds me how much unjustified faith the market will place in a company which has failed for so long to deliver anything. JB Hi-Fi trade on roughly the same P/E as TLS and significantly lower than AMC, without any deep analysis, basic instinct should tell you which of those three businesses is most likely to look back in say 5 years and to have grown EPS at the fastest rate.

To the 4 EGP20 stocks - reporting this week were Hills Holdings Limited (HIL), Australian Infrastructure Fund (AIX), Fairfax Media Ltd (FXJ) and Pacific Brands Limited (PBG). Now three of the four shot much higher on announcements that, to me, provided little more than a confirmation things were about as expected.

HIL actually reported a loss, while SP went from $1.01 at last Fridays close to $1.225 at this weeks close, so something in the result sparked hope. HIL (unfortunately for them) have interests in steel-making (which is not the place to be in Australia at present…), these were substantially the cause of the write-off, the ORRCON business had assets, inventories and plant written down heavily, write-downs totalled $108.8m for HIL, which are HUGE for a business with a market cap this small (about $300m), the positive for investors is it leaves only $49m of intangibles on the balance sheet (not much left to write off). I think HIL are at (or very near) the bottom of a cyclical low, I expect revenue will probably stabilise in FY2012 (barring some new crisis), NPAT will grow marginally and with the buy-back, EPS will be something like 12 or 12.5 cps, and could be as much as 15 cps in FY2013 if things continue to improve. If that eventuates, the stock would seem to be pretty cheap even with the big jump this week; one concern is that it must be close to being replaced in the ASX200, which could spark short term price declines as index-huggers re-balance.

PBG also announced a loss, SP went from 63.5c at last Fridays close to 69c at this weeks close, so again, there were sufficient positives taken out of the report. The write-downs leading to the announced loss, however, were flagged 6 months ago. Underlying EPS of 11.1 cps leave the company even with a large spike this week trading at about 6.3x earning. Benjamin Graham tells us a business that is likely to earn the same EPS in perpetuity should trade at about 8.5x. Although I think EPS growth for PBG will be muted, I don’t think it will decline, which is the way the stock is being priced. PBG are generating solid cash, though unlike HIL, they still have over $1b in intangibles, which is pretty big for a company with a $650m market cap, but when you look through their stable of brands and consider their cash generating power, it is probably not an unreasonable figure. With the continued pay down of debt and eventual increases in dividends, yield alone is likely to force PBG higher, I maintain my opinion this stock should outperform over the next few years.

AIX - I know infrastructure and real estate are unpopular at the moment, but the assets AIX own are truly outstanding collection of reasonably priced infrastructure assets with great growth potential, notwithstanding Athens Airport (probably not going so well, what do you think?) which makes up less than 4% of the portfolio. This group of predominantly Australian airports, ports and some German airports are very good and in my view likely to perform very well in the coming 5 or 10 years. The NTA of $2.85 is not overstated in my view (especially when compared with a current share-price of $1.80), and while I don’t think AIX will blast substantially higher in the very short term, I think there is a good chance of it consistently outperforming the market as cash-flows and the value of the underlying assets move steadily higher, coupled with a closing of the gap between price and NTA. If I were CEO, I would reduce dividends and increasingly buy-back shares as the best way to add shareholder value and capitalise on the disparity between NTA and share-price. At current prices AIX is trading at less than 16x cashflow and only 5.2x FY2011 EPS, if we assume cash-flow grows at 5% p.a. and asset values at 2.5% (both quite conservative, given the placement and quality of the assets), then the ‘repeatable’ earnings for FY2012 would be somewhere in the order of $140m, leaving AIX trading marginally below the Benjamin Graham, zero growth multiple of 8.5x (8.2x actually), when actual growth is unlikely to be less than about 7.5% in my view. Pretty cheap for a fairly defensive asset I reckon.

FXJ A $655m impairment to intangibles, wow, still carrying $5.26b of intangibles on the balance sheet, double wow… Serves to remind investors of the earning power intangibles such as newspaper mastheads (used to, at least) have. Given that FXJ trade at a market cap of $1.95b, the market is implicitly writing of a lazy couple of billion more of those intangibles. The underlying performance of FXJ was actually pretty good, it is generating a lot of cash and despite the last 12 months being much tougher than the preceding 12 months, the underlying performance was roughly flat. As I have said before FY2011 is in my view going to be the cyclical bottom for advertising/media and FXJ don’t really even need to grow their earnings to be cheap, but I suspect they have some growth left in them.

I have criticised the many ASX companies who were in very strong financial positions through FY2009, yet sat on cash when their share-prices were clearly and ridiculously under-priced, the boards of HIL and PBG are to be commended for recognising the mis-pricing of their stock and acting in the interests of long-term holders, buying back stock, I do find it interesting how a buy-back announcement almost always causes a very sharp re-pricing of a stock though, do buyers really need their opinions validated this way? Aren’t there highly paid equity analysts keeping the market ‘efficient’? – Tony Hansen 28/08/11

	April 1^st 2011	July 1^st 2011	Current Price	Current Period	Since Inception
EGP Fund No. 1	1.00000	1.08396	1.05376	(2.79%)	5.38%
S&PASX200TR	35632.05	34200.68	31445.24	(8.06%)	(11.75%)
EGP 20	1000.00	883.67	805.13	(8.89%)	(19.49%)

EGP Fund No. 1 Pty Ltd. Down by 2.79%, leading the benchmark by 5.27% since July 1^st. Since inception, EGP Fund No. 1 Pty Ltd is Up by 5.38%, leading the benchmark by 17.13% all-time (April 1^st 2011).

EGP 20. The EGP20 index is Down by 8.89%, lagging the benchmark by 0.83% since July 1^st. Since inception the EGP20 is Down by 19.49%, lagging the benchmark by 7.74% all-time (since April 1^st 2011).

S&PASX200TR The benchmark index is Down by 8.06% since July 1^st. The benchmark is Down 11.75% all-time (since April 1^st 2011).

Full website: www.eternalgrowthpartners.com

Update No. 21 – 21/08/11

2011-08-21T17:00:00.001+10:00

Full website: www.eternalgrowthpartners.com

The global share-markets seemed to settle somewhat this week until Friday, when I had cause to think of famous bush poet John O’Brien’s words in his Australian classic – Said Hanrahan.

"We'll all be rooned," said Hanrahan, "Before the year is out”.

As long as the market is ‘rooned’ by October, I’ll be happy. Sharp-eyed readers will notice our ‘per share’ values (below) didn’t change this week, I didn’t forget to update, just through the vagaries of movements in the prices of our holdings this week, we ended exactly where we began. Fund-holders need remember it is to our financial advantage if markets stay down until October, when we will likely have a substantial proportion of the fund in cash and looking to deploy.

The US market, like ours is in the middle of reporting – in their case, quarter 2 results, whereas our reporting season is predominantly full year results. I follow the US reporting season closely, because although we hold no economic interest in US businesses, the inescapable fact is when the US is weak, the world is weak, it always makes sense to keep an eye on ¼ of the global economy.

This week, I was particularly interested to observe some US retailers reporting. Walmart, for example improved Q2 earnings by 12.4%, Home Depot by 13.9% and Costco by nearly 20%. These figures are very impressive and would seem to belie the stream of fairly negative economic data; as usual we need to look a little closer.

Walmart are the world’s biggest retailer with a US$180b market capitalisation, they trade on a fairly modest multiple of 12x (indicating about a US$15b current annual profit). This multiple would indicate any significant growth is behind them, making any 12% quarter such as their June quarter very impressive. The most significant (in relation to assessing how the US is going) part was that substantially all of the growth came outside the US, sales in the US were slightly worse than flat, whilst international sales were up over 16%, so the US retail environment is pretty weak still according to Walmart. The weak US dollar and their substantial international footprint substantially supported their result.

Costco and Home Depot haven’t nearly as large an international footprint as Walmart and that makes their results even more impressive. Sydney (and Canberra) based readers will be aware of Costco opening its first Sydney (and Canberra) stores, I had my second visit there this week and I have to say it’s a pretty compelling offering. I have spent a lot of time thinking about the likely effect of this development on Australian grocers.

The most amusing thing about the reporting of Costco’s push into

Australia

is how I keep seeing ‘American Giant’ in the media-reporting relating to it. Costco’s market capitalisation is about US$33b, which would make it just a little smaller than Woolworths based on the current exchange rates. If they are successful in Australia, it will not be because of their size and power, but because of a superior business model.

If Woolworths and Coles truly want to compete with Costco, they would be far better rolling out their own ‘membership’ based offering, with their existing logistical advantages; it would be very difficult for any newcomer to compete. Walmart compete with Costco with ‘Sams Club’ - though the US market is much bigger.

The issue here (for Coles and Woolworths) is that they would be cannibalising their own stores in the catchments of each new ‘membership’ store, this is a likely reason for not pre-emptively competing in the ‘membership’ business. After poking around the Woolworths ‘store locator’, I estimate there would be about 25 of their supermarkets closer than the approximately 15 kilometres I drive to get to Costco (2 are walking distance – less than 1 kilometre), I would imagine there are approximately 50 other reasonably large supermarket alternatives (between Coles/Franklins/Aldi/IGA etc) in the same radius. So it is reasonable to assume that in medium density areas at least, that while Coles or Woolworths would cannibalise some turnover from existing stores, they would likely ‘steal’ about twice that amount from their competitors. Judicious site selection could probably further distort that ratio to cause less harm to their own stores (and correspondingly more to their competitors).

By the way, I’m not joining the chorus-line of people who want to bash Coles and Woolworths. I sympathise - people think our grocery duopoly has led to price-gouging, or grocers earning unreasonable returns, I have read many reports such as this which would indicate that not only are our grocers generally efficient on most commonly used metrics, but they also operate on much leaner margins than their international counterparts. Don’t forget Australia is a large, distant and sparsely populated country, transport adds enormously to the cost of both local and imported products compared to most countries.

Reporting Season:

It’s my blog, so I guess I can report on the things that interest me most, though there were much larger/more important results announced this week, I wanted to mention a little business I have been interested in for some time. One that gets relatively little attention in financial press - Slater & Gordon (SGH) - a listed law firm. The listed law firm is a fairly recent innovation in Australia, SGH listed in mid-2007, given how the market has performed since; their performance has been comparatively good. The company is capitalised at just over $300m, they are not in the ASX300, but I would imagine, given that there are smaller entities within that index that they will probably be in it soon enough (this type of entry usually generates a short-term spike in prices as index-trackers add the stock).

Their result gave media the chance to (again) trumpet one of the most misrepresented reporting figures - NPAT; headlines read ‘Slater & Gordon profit up 40.9%’. Now this figure is not wrong, SGH grew NPAT by 40.9% (from $19.8m to $27.9m), however, more importantly EPS ‘only’ grew by 6.7% to 19.1 cps, and this is the shareholders result out of the growth. I could be wrong here, but I would hazard SGH could probably have grown EPS by about 6.7% organically (I outline why below). I explained in more detail here a fortnight ago that NPAT is essentially worthless to shareholders unless it translates into EPS. If NPAT growth is not reflected in EPS growth, the only benefits are likely so be in the salaries of senior executives who now preside over a much larger empire.

In order to examine the benefits to shareholders of the acquisitions we can compare various ratios from last year to the current year. For example in FY2011, SGH have converted 15.31% of revenue into NPAT ($27.908m/$182.309m) last year the conversion rate was higher – 15.87% ($19.8m/$124.73m). So in growing the business, management would seem to have made it less profitable.

Other ways of looking at whether the acquisition has delivered cost savings is by examining whether various important expenses have grown more slowly than NPAT (this will deliver efficiency benefits to the business and EPS growth to the shareholder). The biggest single SGH expense was salaries, which grew by exactly the same as NPAT (40.9%). I can cop this, you are not going to retain good lawyers by paying uncompetitive salaries, truth is I probably would not expect savings here. The next biggest expense is administration, and it is in this area most acquisitive companies would seek to make big savings by removing duplicated functions and eliminating excess costs caused by the combination of businesses. Here though is the greatest failing of the report, administration expense grew by 44.5%, or about 10% faster than profit. Now it could be that there have been additional costs incurred in the short term, but I would be eagle eyed on this area in future reports, if you cannot reduce administrative costs through acquiring more firms (scale), it is hard to argue the acquisitions will have significant shareholder benefits. Advertising costs were up 60.6%, provided the spending generates future revenue and helps imbed the brands then it is justified. The only area where a significant instant pay-off in expense reduction (I define as expenses growing more slowly than corresponding NPAT) came was in rental. Rental expense only grew by 23.8%, much slower than profit growth, this was probably due to acquiring businesses with footprints in areas with substantially cheaper rental costs, but there will likely be further savings as when it comes time as a larger player to negotiate new deals.

I still like the business idea, but without any obvious benefits deriving from scale, it is hard to see what the real SGH competitive advantage is. I don’t believe a law firm has a realistic hope of properly creating a brand as law is so reliant on individual talent. However, I do think that owning listed equity gives the partners of the firm a much more tangible and visible attachment to their employer and could result in less leaving with their portfolio of clients to start their own firm.

I think SGH equity is very reasonably priced at the moment, but I would like to be able to assess with a little more certainty the flow-through (to EPS not NPAT) of benefits through acquisitive growth before I commit. I think slowing the growth trajectory down a little and trying to make purchases with a greater portion of cash and less new equity would also ensure more of the growth in NPAT appears in EPS. Helluva post again this week (lengthwise – you be the judge of quality…), but I think it helps my investors to know the types of things I am considering when I deploy your cash – Tony Hansen 21/08/11

	April 1^st 2011	July 1^st 2011	Current Price	Current Period	Since Inception
EGP Fund No. 1	1.00000	1.08396	1.05233	(2.92%)	5.23%
S&PASX200TR	35632.05	34200.68	30578.23	(10.59%)	(14.18%)
EGP 20	1000.00	883.67	762.49	(13.71%)	(23.75%)

EGP Fund No. 1 Pty Ltd. Down by 2.92%, leading the benchmark by 7.67% since July 1^st. Since inception, EGP Fund No. 1 Pty Ltd is Up by 5.23%, leading the benchmark by 19.41% all-time (April 1^st 2011).

EGP 20. The EGP20 index is Down by 13.71%, lagging the benchmark by 2.12% since July 1^st. Since inception the EGP20 is Down by 23.75%, lagging the benchmark by 9.57% all-time (since April 1^st 2011).

S&PASX200TR The benchmark index is Down by 10.59% since July 1^st. The benchmark is Down 14.18% all-time (since April 1^st 2011).

Full website: www.eternalgrowthpartners.com

Update No. 20 – 14/08/11

2011-08-14T17:00:00.001+10:00

Full website: www.eternalgrowthpartners.com

Well, what a fascinating week that was, for those who were watching the market from day to day, you would have noticed some highly unusual behaviour. The market moved from substantial losses to gains in a single day and vice-versa, depending on a variety of factors. Interestingly, the Australian market was one of the strongest of the international markets and closed the week up slightly. Markets like this certainly test the resolve of some people, if your sphincter is still twitching, stock-market investing may not be for you…

Reporting Season:

One of the results I was most interested to see this season was JB Hi-Fi (JBH), I think this is about the 3^rd time in the last month I’ve mentioned this business. They are getting near the valuation point where I would give them serious consideration for investment, in fact if it wasn’t for a particularly swift upturn in price, I probably wouldn’t be mentioning them now as they’d be one of the funds holdings. This week their price hit a low of $13.35 just after announcement, this was despite what I would describe as a pretty sound result. I think by the end of the week the market started to realise what brighter prospects JBH has (relative to the broader market), its closing price Friday was nearly 15% above its opening price Monday, which was a much better weekly performance than the overall market.

I usually look to pay less than 50% of my intrinsic valuation, but for larger, well-run businesses, such as JBH, with particularly good economics, I will consider lower margins of safety. JBH are a growth stock on the verge of becoming a mature business, their P/E ratio has quite properly been declining to reflect this fact, but the current price in the market of about 12x would indicate it is likely to only manage a couple of percentage points of growth in EPS in future years. Whilst I appreciate the difficult retail conditions currently being experienced are not likely to abate in the immediate future, I am quite sure the current market price for JBH is incorrectly estimating likely future earnings.

One of my main reasons for believing this is the ability JBH have over the next few years with their ongoing roll-out of new stores to continue to grow EPS. Underlying EPS grew this year despite flat same-store sales in mature stores. This would indicate with the pace of the roll-out of stores over the coming years, even with flat mature stores sales (I do not believe mature stores will continue to present no sales growth), there is likely to be solid growth in EPS over the next few years, as new stores are introduced and immature stores mature. I also appreciate that the quality of the stores they are introducing is declining, the really cracking ‘tier 1’ store roll-out is substantially complete.

So bearing in mind this is subject to new information coming to light and all the usual caveats, I would say this; I would be surprised by FY2015 if JBH didn’t earn somewhere approaching $2 per share. Coming of the normalised $1.25 per share just announced, this essentially implies about 12.5% per annum growth over the next 4 years. This may prove to be ambitious, but at that price, even if we assume a similar P/E to now (say 12.5x) this would imply a $25 share price. Assuming JBH payout about 2/3 in dividends (by FY2015 I would be surprised if this payout figure were not in the 70%+ range); they will also pay out about $4.42 in dividends.

To the mathematically inclined, this $29.42 in (theoretical) 2015 value ($25 SP + $4.42 in dividends) could be purchased at a closing price on Friday for $15.90 (or earlier in the week as noted above for $13.35). Assuming the purchase played out exactly as I described above, the buyer at $15.90 on Friday afternoon would generate a 16.63% gain per annum over 4 years (18.47% if we include the franking credits attached to the dividends as we should). The buyers who picked the 12-month low of $13.35 this week would have a 21.84%/23.76% annualised 5-year gain situation under the same circumstance, so you can see why a low entry price is so beneficial. I believe the possibility presented above is approximately in the middle of the range of possible outcomes, with a superior return approximately as likely as an inferior return.

Please bear in mind this is not a forecast for JBH, just one man’s view of how things could play out, as I have said many times before, do your own research and seek professional advice. Here’s hoping for a more sedate week ahead – Tony Hansen 14/08/11

P.S. I had intended to give an analysis of Computershare’s (CPU) result, but don’t want to drone on and on and bore regular readers (it was a pretty mediocre result, but the business is getting to the price where I will start to pay closer attention over the coming months & sharpen up my analysis).

	April 1^st 2011	July 1^st 2011	Current Price	Current Period	Since Inception
EGP Fund No. 1	1.00000	1.08396	1.05233	(-2.92%)	5.23%
S&PASX200TR	35632.05	34200.68	31005.98	(-9.34%)	(-12.98%)
EGP 20	1000.00	883.67	784.22	(-11.25%)	(-21.58%)

EGP Fund No. 1 Pty Ltd. Down by 2.92%, leading the benchmark by 6.42% since July 1^st. Since inception, EGP Fund No. 1 Pty Ltd is Up by 5.23%, leading the benchmark by 18.15% all-time (April 1^st 2011).

EGP 20. The EGP20 index is Down by 11.25%, lagging the benchmark by 1.91% since July 1^st. Since inception the EGP20 is Down by 21.58%, lagging the benchmark by 8.59% all-time (since April 1^st 2011).

S&PASX200TR The benchmark index is Down by 9.34% since July 1^st. The benchmark is Down 12.98% all-time (since April 1^st 2011).

Full website: www.eternalgrowthpartners.com

Update No. 19 – 07/08/11

2011-08-07T17:00:00.001+10:00

Full website: www.eternalgrowthpartners.com

Some investors in shares at the moment could be forgiven for feeling like Rodney Dangerfield when he said “My luck is so bad that if I bought a cemetery, people would stop dying”.

If your horizon is a couple of years out or more, I really believe you need not panic. In fact for holders in EGP No. 1 Pty Ltd, it appears very likely that October will see a large holding, which represent a sizable portion of our (currently) small assets returned to us at a price 16.66% above current trading price. Should the deal close, I will talk more about it then, but between now & then, you should pray for further declines, so I can deploy the incoming cash at advantageous prices.

Reporting Season:

NVT, Navitas is an education provider; they have reported profit up 20.5%, off revenues up by 15.6%. These are the figures you’d have seen if you read the financial press coverage. One area it always staggers me the financial press fail to focus on is the growth in earnings per share (EPS). If a company I own doubles its profit, but at the same time doubles its shares on issue, the profit growth is essentially useless to the shareholder, yet the financial pages will trumpet “Company X doubles profits”. Its EPS I care about, all else equal, if the EPS rises, the share-price rises.

I should say, EPS and the competitive strength of the business. I will accept growth in profit, for example by acquisition, not reflected in EPS as long as I can see a compelling benefit to the business (that is to say, future EPS will benefit, so really it still comes down to EPS)

So, having had my little rant about EPS, I should point out, NVT grew their EPS by a quite impressive 15%, so the majority of profit growth was reflected in EPS. NVT made a major acquisition, for which it paid predominantly in cash, taking it from a net cash position to a net debt position of $102.8m, which is about as heavy a debt-load for a company of their size as I’d tolerate.

I actually think the result is pretty impressive given an enormous variety of headwinds the company faced. The most important, I think is the strong AU$. This hurts NVT in two ways, with a good chunk of their earning coming off-shore, and also with the impact on international students, who when faced with a particularly strong currency are likely to choose alternative countries for their education. There were also some issues around the issue of international student visas.

All in all, a pretty good result for Navitas, if a few factors turn in their favour, the 12% per year analysts are forecasting EPS to grow over the next 2 years could be conservative. In any case, in my view, they are neither cheap nor expensive at present, my reviewed intrinsic value (IV) is virtually unchanged at $3.73, and doesn’t have me clamouring for my wallet, given their SP is currently very near that.

The other result this week most likely to be of interest to regular readers is Rio Tinto (RIO). RIO is a member of the EGP20, and I thought the result was very commendable. RIO are in the fortunate position of being in the many of the best commodities, with extraordinary capacity in, for example iron ore when demand is very strong and supply is not expected to catch up for some time. RIO’s result gives a good opportunity to draw attention to the use of EBITDA (Earnings Before Interest, Taxation, Depreciation & Amortisation) in reporting. For some CEO’s, EBITDA is trumpeted loudly and often, but it is again, EPS that matters. For an example here, if a company were to earn an extra $1b in a jurisdiction with a 40% corporate tax rate, it would not have as much value to shareholders as the same $1b earned in a jurisdiction with a 15% tax rate, in fact, the EBITDA earned in the latter jurisdiction would have about 41.66% more value to shareholders, so use the metric with care.

I don’t say this with particular reference to RIO, in my view; their reporting gives a good balance between the important metrics, cash-flow, EPS, EBITDA & net-earnings. US$8.185 per share is what RIO has generated in the last full 12 months. Using an AU$1.07 exchange rate, this equates to AU$7.65 in after-tax earnings. RIO are trading at the close of the ASX this week at $72.00 (down 10% in a week, ouch… sometimes size doesn’t matter), which puts them on a P/E multiple of about 9.4x (trailing 12 months). RIO trades generally at a discount to the market, over the last 7 years, the average P/E has been about 11.3x (this tells you they are 16% under their historic valuation, which would be $86.45). There is understandable concern that many commodity prices are likely to decline over the medium term, in my view RIO’s growth in output should more than compensate, barring a particularly savage fall. Come 2015, I would hazard they will be reporting EPS a good deal higher than AU$7.65, that being the case, I view them as pretty cheap. My current estimate of IV is $103.75, which for one of 10 biggest companies (on the ASX) is a handsome discount (there are still far better alternative listed investments in my view, so none of our capital will be heading their way)

To me, the most fascinating thing in the RIO results package was a graph explaining the seemingly logarithmic growth in steel used in taller buildings, on a KG/M² basis. It showed that an 8 storey or smaller building can be built using as little as 5kg/m², whereas buildings over 100 storeys high require as much as 220kg/m². Estimates indicate that over the next 15 years, an additional 300 million Chinese will urbanise (move to cities), that’ll require a lot of very tall buildings and a mind-blowing amount of coal & iron ore.

	April 1^st 2011	July 1^st 2011	Current Price	Current Period	Since Inception
EGP Fund No. 1	1.00000	1.08396	1.07596	(0.74%)	7.6%
S&PASX200TR	35632.05	34200.68	30472.60	(10.91%)	(14.48%)
EGP 20	1000.00	883.67	777.39	(12.03%)	(22.26%)

EGP Fund No. 1 Pty Ltd. Down by 0.74%, leading the benchmark by 10.17% since July 1^st. Since inception, EGP Fund No. 1 Pty Ltd is Up by 7.60%, leading the benchmark by 22.08% all-time (April 1^st 2011). It is probably a cold comfort to those who joined us on 1 July, that we’ve ‘only’ had our assets decline in value by 0.74%, but I maintain that if we can beat the market when it plunges and keep pace with it when it rises, our long-term results will be satisfactory.

EGP 20. The EGP20 index is Down by 12.03%, lagging the benchmark by 1.12% since July 1^st. Since inception the EGP20 is Down by 22.26%, lagging the benchmark by 7.78% all-time (since April 1^st 2011).

S&PASX200TR The benchmark index is Down by 10.91% since July 1^st. The benchmark is Down 14.48% all-time (since April 1^st 2011).

Full website: www.eternalgrowthpartners.com

Update No. 18 – 31/07/11

2011-07-31T17:00:00.001+10:00

Full website: www.eternalgrowthpartners.com

A question without notice to readers:

Without researching, which sectors of the market do you think have been the best and worst performers this year?

To help those less familiar, the main sectors are these:

Energy, Materials, Industrials, Consumer Discretionary, Consumer Staples, Health Care, Financials, Information Technology, Telecommunications Services, Utilities and Real Estate Investment Trusts.

I would hazard most readers would have suggested Materials (-6.30%) including BHP & RIO and a raft of other miners. But interestingly, Telecommunications Services +7.13% has been the best performer, that sector is substantially made up of Telstra (TLS), who it seems may have staunched their decade long share-price decline this year (still a very ordinary business). Coming in second is Utilities (-2.26%), closely followed by Consumer Staples (-2.45%), comprising beer and grocery purveyors Woolworths (WOW), Coles (WES) and Fosters (FGL) among others.

The worst sector thus far in 2011 is Information Technology (-18.38%). The major constituent of these indices is Computershare (CPU), which is basically responsible for the whole decline. Second worst performing sector is a sector I delved into somewhat last week, Consumer Discretionary (-15.14%), chiefly retailers such as MYR, DJS, & JBH, the most interesting thing about these indices in my view is the inclusion of funeral home operator Invocare (IVC), I don’t believe there is truly much ‘discretionary consumption’ in burying the dead, but I guess where else would you put them? Surely not in Health Care? Perhaps IVC is a ‘consumer staple’…

I put this out there just to make readers think about sector allocations. In my opinion, portfolios should be virtually sector agnostic, concentrating instead on acquiring good businesses at below intrinsic value. I very much doubt whether 8 months ago, anyone with any market understanding would have nominated Telecommunications as the place to be for 2011. Nor IT & retail to be the worst performing sectors. It pays to focus on the business, not the sector.

Throughout reporting season, I will provide a little of my take on some of the more interesting results from reporting season.

To start with, I mentioned last week that Alesco (ALS) would essentially kick-off our FY2011 reporting period (as they have a May balance date). ALS started the day at $2.70 per share and after announcing rapidly rose about 7.4% to $2.90 (closed up 5.5% with market up 0.9% on the day, and held most of the gain as the market declined further through the week). Interestingly, ALS’ results were only fair in relation to analyst expectations, but they still jumped pretty hard, I reckon you might see that a bit this reporting season ‘oh, that’s not too bad…’ bounce. I like to keep an eye on Alesco as they represent a good diverse set of businesses that give a useful feel about the economy (particularly housing/construction). In my view the result does nothing to weaken my view that the market is undervaluing the current state of the Aussie economy. This aside, in my view, the most interesting thing (at least to me & other accountants) about the results were that my attention was drawn in the documentation to a recent ruling by the Australian Taxation Office (ATO) whereby if:

“net assets below book value of capital and accumulated losses –dividends are unfrankable”

This would mean that that ALS’ 1.5c interim & 5.5c special dividend could be unfranked (though the company takes a dissenting view) preventing a 3c Franking Credit from being distributed with the dividend to its rightful owners (shareholders). Most interesting to me is that the ATO feel they should be able to interfere in the capital allocation decisions of business. The actions of CEO’s & boards are often frightening enough in this field without a cumbersome government bureaucracy getting involved. There are already laws around boards responsibilities, the ATO have no place in this area in my view, if the tax has been paid at some point in the past and the Franking Credit earned, it should be distributable with any dividend. The implication would be that a company in such a situation should unlikely be paying dividends (until NTA exceeds capital & losses), and again I question whether the ATO has any business in this realm.

The other announcement that may be of interest to followers of the EGP20 this week was appendix 4D of Oceanagold (OGC). After announcing Thursday night, the shares were hammered Friday by about 11.5%. The reaction was chiefly to a change in accounting which made the production cost seemingly jump significantly over the previous quarter. This is purely an accounting change, OGC’s New Zealand assets were always high cost, and should be viewed as a funding engine for the Didipio project, which is where the company’s future lies. A market over-reaction in my view, they still managed to fund about $11m in development out of cash-flow in the quarter.

Finally, there are huge concerns out there about the US debt-cap. It would not trouble me if it doesn’t get resolved, it will cause an enormous global over-reaction which should present a good opportunity to buy long-term assets very cheaply, but I think that is unlikely – Tony Hansen 31/07/2011

	April 1^st 2011	July 1^st 2011	Current Price	Current Period	Since Inception
EGP Fund No. 1	1.00000	1.08396	1.12130	3.44%	12.13%
S&PASX200TR	35632.05	34200.68	32841.59	-3.97%	-7.83%
EGP 20	1000.00	883.67	860.68	-2.60%	-13.93%

EGP Fund No. 1 Pty Ltd. Up by 3.44%, leading the benchmark by 7.41% since July 1^st. Since inception, EGP Fund No. 1 Pty Ltd is Up by 12.13%, leading the benchmark by 19.96% all-time (April 1^st 2011).

EGP 20. The EGP20 index is Down by 2.6%, leading the benchmark by 1.37% since July 1^st. Since inception the EGP20 is Down by 13.93%, lagging the benchmark by 6.10% all-time (since April 1^st 2011).

S&PASX200TR The benchmark index is Down by 3.97% since July 1^st. The benchmark is Down 7.83% all-time (since April 1^st 2011).

Full website: www.eternalgrowthpartners.com

Update No. 17 – 24/07/11

2011-07-24T17:00:00.002+10:00

Full website: www.eternalgrowthpartners.com
Like a kid before Christmas, I am counting down to reporting season. I have found this useful link that shows what appear to be most of the ASX300 companies reporting dates. Alesco (ALS) seem to kick-off reporting season on 26 July, only 2 days until I get a daily dose of Appendix 4E’s to keep me entertained…

I am, despite much of the media commentary pretty optimistic about the up-coming season. Obviously retailers and many industrial companies are going to report some pretty weak results; as investors, we must be mindful to try to look past the end of our nose and really think about the underlying quality of the businesses we examine, and their long-term prospects - the stock-market is supposed to be a leading economic indicator, I don’t think it’s presenting much of a ‘lead’ at the moment.

For example, I can appreciate that the strong $AUD and consumers’ growing confidence with online purchases will ensure a (probably large) proportion of future retail growth will go to this sector, but I think many retail stocks are likely to do particularly (compared to the rest of the market) well over the next few years. When David Jones (DJS) announced a profit downgrade recently, substantially all retailers were sold of indiscriminately. For many, this is short-sighted and likely presents buying opportunities.

I have mentioned JB Hi-Fi (JBH) before as being beaten down beyond any recognition of its likely future results, The Reject Shop (TRS) is a stock that finds itself similarly downtrodden, despite the difficulties they currently face looking predominantly short-term and eminently surmountable. Interestingly, Super Retail Group (SUL), which operates Super-Cheap Auto & BCF stores (among others) has not faced sell-offs in the same way, it has never gotten to the situation where I would refer to the stock as really ‘cheap’, but it is priced quite reasonably at present in my view given the sound business prospects. These 3 stocks are approximately similarly positioned in their phase (i.e. with still considerable room to grow in their respective markets), trade with excellent ROE & cash-flow and have managements that have historically acted with shareholder interest’s front-of-mind. For JBH & SUL, these businesses will pick up a good portion of the substantial disposable incomes much of the economy is generating. Young FIFO workers are particularly prone to want to drive a ‘tricked-out’ (with SUL supplied ‘tricks’) car and enjoy a house full of reasonably priced electronics and accessories (JBH supplied). I am less hopeful for example about David Jones (DJS) and Myer (MYR), as they are more exposed to the ‘slower speed’ of our ‘two speed’ economy, though I believe that said even they are somewhat oversold at current prices in my view.

I feel like a bit of a lone voice with my optimistic posts of the last couple of weeks, but to a reasonable extent, I think my optimism stems from my tendency to look a little further ahead than the majority of the market. Buyers at current prices may be looking at some ‘red ink’ in the short term, but with a little care in the businesses selected, today’s astute equity buyer will do very well in my view. When I still think the businesses facing extremely difficult conditions (such as MYR & DJS) look fairly priced, the market as a whole is probably reasonably priced and those businesses with sound franchises, solid balance sheets and brighter futures could probably be described as quite cheap – Tony Hansen 24/07/2011

Performance:

	April 1^st 2011	July 1^st 2011	Current Price	Current Period	Since Inception
EGP Fund No. 1	1.00000	1.08396	1.13623	4.82%	13.62%
S&PASX200TR	35632.05	34200.68	34164.31	(0.11%)	(4.12%)
EGP 20	1000.00	883.67	908.26	2.78%	(9.17%)

EGP Fund No. 1 Pty Ltd. Up by 4.82%, leading the benchmark by 4.93% since July 1^st. Since inception, EGP Fund No. 1 Pty Ltd is Up by 13.62%, leading the benchmark by 17.74% all-time (April 1^st 2011).

EGP 20. The EGP20 index is Up by 2.78%, leading the benchmark by 2.89% since July 1^st. Since inception the EGP20 is Down by 9.17%, lagging the benchmark by 5.05% all-time (since April 1^st 2011).

S&PASX200TR The benchmark index is Down by 0.11% since July 1^st. The benchmark is Down 4.12% all-time (since April 1^st 2011).

Full website: www.eternalgrowthpartners.com

Update No. 16 – 17/07/11

2011-07-17T17:00:00.002+10:00

Update No. 16 – 17/07/11
Full website: www.eternalgrowthpartners.com

	April 1^st 2011	July 1^st 2011	Current Price	Current Period	Since Inception
EGP Fund No. 1	1.00000	1.08396*	1.13280	4.51%	13.28%
S&PASX200TR	35632.05	34200.68	33204.34	(2.91%)	(6.81%)
EGP 20	1000.00	883.67	881.26	(0.27%)	(11.27%)

*Note – Audited Period Starting Price

EGP Fund No. 1 Pty Ltd. Up by 4.51%, leading the benchmark by 7.42% since July 1^st. Since inception, EGP Fund No. 1 Pty Ltd is Up by 13.28%, leading the benchmark by 20.09% all-time (April 1^st 2011).

EGP 20. The EGP20 index is Down by 0.27%, leading the benchmark by 2.64% since July 1^st. Since inception the EGP20 is Down by 11.27%, lagging the benchmark by 4.41% all-time (since April 1^st 2011).

S&PASX200TR The benchmark index is Down by 2.91% since July 1^st. The benchmark is Down 6.81% all-time (since April 1^st 2011).

I thought I would share a little of my recent analysis with you. It significantly boosted my confidence about the near to medium term global economic outlook. I was prompted to do a little digging after the most recent US employment figures ‘spooked’ the market a little on July 8, it’s been on a downward tear ever since. Basically, the US unemployment rose (admittedly by only 18,000 jobs) to 9.2%, this obviously indicates a struggling economy;

Australia

’s unemployment rate is below 5%.

Before making ridiculous conclusions about the dire future of the US economy, I decided to further investigate the underlying reasons for the current situation.

In my view, the primary driver for US unemployment is the sorry state of the US housing market. Consider this, for the last 52 years; the

has averaged 1.497 million housing starts per annum. Troughs included 1.16 million in 1975 at the nadir of the 1974/1975 recession, about 1.07 million per year over the 2 years of 1981 and 1982 and 1.01 million in 1991. These three recessions accompanied 3 of the 5 most severe bear-markets in the period (the 1987 crash & 2000/2001 tech-wreck had different drivers) 1959 – 2007.

So in the 50 years leading up to 2008, the least number of housing starts was 1,013,900 in 1991 to put that in context of the GFC, housing starts in 2008 were 905,500, in 2009 were 554,000, in 2010 were 586,900 (there were less houses built in 2008/2009/2010 combined than in 2005). 2011 again looks likely to again fall short of 600,000.

I have estimated that at its peak, the total excess housing generated in the lead-up to the GFC approximated 2.9 million houses (in late 2007). This equates to over 2 years worth of excess supply and in hindsight it is little wonder there was a significant crash. The level of dip in US housing starts is absolutely unprecedented. In order to rapidly return the housing market in equilibrium, it needed to be.

This brings me to my analysis, using an approximate natural level of US housing formations of 1.35 million (based on various figures I have seen, which nominate between 1.2m & 1.45m as the current ‘natural’ level) and my assumption that the market was last approximately in equilibrium in 2000, I estimate the ‘excess’ 2 years supply (in 2007) of housing will be ‘mopped up’ some time in the first half of 2012 (February or March is my calculation, but definitely sometime in early 2012 in my view). This is subject to the caveat that there is anecdotal evidence of children staying home longer and increased house-sharing, which may delay the tipping point. A note about the caveat though, is that if the trough occurs later, the acceleration out of it will occur much more rapidly as people return to their normal behaviours.

My positive conclusion - given that total starts are running at about 600,000 it naturally follows that employment in the housing/construction industry will need to grow substantially (i.e. in order to return output to its natural level of 1.35 million per annum). This leads me to believe that smart builders will start hiring the best unemployed construction workers available in the second half of 2011, in preparation for what will (over calendar 2012 & 2013) in my view be the biggest upturn in housing starts since 1983 (when starts grew by 60% after the two down years mentioned above) and possibly ever. From January 1983 to July 1984, the

unemployment rate fell from 10.4% to 7.1% (that’s right, down 3.3% in 18 months) according to this site. Put in context, in order to get back to the natural level, the housing industry will need to grow much more rapidly (it needs to more than double from 0.6m to 1.35m). I confess, I love to be contrary, but I expect US unemployment is very likely to fall by approximately the same quantum between about now and December 2013 as it did in 1983 & 1984. It should not be forgotten that in the 4 years from 1982-1985, the S&P500 more than doubled, now I do not make predictions, but barring some other factor (such as the European debt issues) having a bigger than expected global impact, in my view the next few years are likely to be better than average in the US. In my view Australia’s market will do better than the US, you do the math…

It needs to be remembered, whilst the ‘China Story’ is the most exciting thing happening to the Australian economy, the

is easily and will be for a good while yet, more important to the global economy as a whole. The US accounts for about ¼ of global GDP and the US economy is more than twice the size of China’s economy. In my view, things look a good deal better than the news I’m seeing out of economists and commentators. The most important thing for the US to do is to recognise the up-tick as early as possible, raise interest rates and eliminate the deficit spending – Tony Hansen 17/07/2011

Full website: www.eternalgrowthpartners.com