This week I thought I would talk a little about investment strategy and allocation and relate this back more specifically to Trident Confidential and the Trident Global Growth Fund.
First up, I thought I’d address the difference between the two in relation to the “perceived” returns. Some people think that the returns between the two can be compared. They can’t. You are comparing apples and oranges, so to speak. Apart from basic arithmetic, which I’ll get to in a minute, the investing styles are completely different.
Let me explain, Trident Confidential is a trading style investment newsletter these days, because of markets being so volatile since 2008, the newsletter has been almost a trading newsletter due to the number of trades being put through. Prior to 2008, we hardly had a stop loss triggered, nor did we have to watch our stocks almost daily. This has been a fact of life since the GFC started in 2008. Now, I don’t expect this to be the case beyond 2012, but it’s a fact of life now until we exit these difficult and changeable times. The newsletter attempts to produce profits by being not only contrarian, but acting a “little opportunistic” while still having a long term investment goal. It doesn’t always work out that way due to the volatility, however. The newsletter has a quarter by quarter time horizon. Well, these days it does. Due to market conditions, I have had to modify my methodology to be more nimble and watchful, but I expect conditions to normalise in coming months as the EU debt crisis is stabilized.
The Trident Global Growth Fund is very different. It does not invest in companies from a quarter by quarter basis necessarily. The fund bases it’s investments more on medium to long term macro-economic trends, the underlying business fundamentals, business model execution and long term prospects of the investments it makes. It looks not at what will happen next quarter, but where the business will be in 2 to 5 years. Conservative long term investment fundamentals based on buying a great business at a fair price. It often turns out that many of the stocks that we choose for the fund end up in the newsletter or vice versa. Our selection process for both vehicles is very similar as you would imagine, but not always.
Let me explain. If a company has a poor result in a particular quarter, the newsletter will probably sell it or it will be stopped out due to adverse over-reaction from the market. That tends to be the end of the story for the stocks in the newsletter until the fundamentals once again become compelling and we may look at it again. However in the fund, if we hold the stock, we may judge it’s not in fact a time to sell, but a time to buy more because the quarter that let us down may have been a timing issue where sales will come through in the following quarter or some other aberration that has no effect on the longer term prospects of the business. We are constantly thinking long term in the fund and shorter term in the newsletter.
You may still be wondering why the different approach? Well, the fund is watched by me personally every single day. I investigate every stock that drops by more than the market and make sure there isn’t a fundamental change to the business. If, on the rare occasion, this is the case, I will sell the stock – I don’t communicate this to 3,000 subscribers, I just quietly do it. I make a long term investment decision.
The newsletter is a very different approach. Many of you don’t watch the market every day, you don’t check the latest news on all your stocks daily, nor do you get up in the middle of the night most days, as I do to check the market and all the stocks. I usually rise at 3am and 4am to make sure all is as it should be, market craziness notwithstanding. Because the newsletter information is acted upon by individuals, some with little stock market experience, we have stop loss rules and buying strategies that allow you to sleep. They protect you from big losses. This works superbly well in these trying times. As the market settles down, stop losses will become rare occurrences as they were between 2004 and 2007.
As regards the fund, it doesn’t work that way I’m afraid. I can’t go and set stop losses on all the positions in the fund as it could cause market chaos, particularly as the chances are newsletter subscribers have their stop losses set on many of the same stocks and would cause even greater volatility. Not only that, the fund positions are simply too big to be putting stop losses on. I have to think through all my actions carefully with regard to subscribers, and fund unit holders, as well as complying with the regulations that are imposed on fund managers. There is much to consider so nobody is disadvantaged and there are no conflicts. However, having two different investment approaches, based principally on time horizon works out well.
The two Investment approaches in a nutshell:
The Trident Confidential Newsletter
- Time horizon is 3 months to 2 years.
- Risk is controlled by stop losses being set
- Investment philosophy is based on strong fundamentals, earnings growth, current to near term macro-economic favourability and contrarian approach to market volatility. Stocks are sold when they are stopped out, or when their prospects for near term price appreciation have faded.
The Trident Global Growth Fund
- Time horizon is 2 to 5 years
- Risk is controlled by daily monitoring and review, as well as the use of a proportional stop loss strategy where deemed prudent.
- Investment philosophy is based on strong fundamentals, earnings growth, dominant market position with demonstrated innovation leadership, current to medium term macro-economic favourability and contrarian approach to market volatility. Buying great businesses at a fair price. Stocks are sold when they no longer meet the stringent fundamentals requirements or when the business’ prospects have negatively changed.
Now let’s consider the “Arithmetic”
Some people try to compare the returns of the newsletter and the fund. Well firstly, any fund manager will tell you can’t judge a fund in it’s first year. The reason? When a fund starts you get a “lump” of money to invest at the beginning and the over the next several months the fund grows, as further investment becomes available. This enters the fund at the start of the next month after it was received. So, “injections” don’t come at precisely the time that may be ideal, as you would have if you were investing in your own portfolio. This means in a rising market as we had until April this year, when most funds into the fund were received, we had to constantly top up our existing positions to maintain the weighting they had in the portfolio, which at that time meant paying higher and higher prices, this tended to water down the overall return. Of course once we were “fully invested” by April the market turned south until early October. This was an unfortunate situation, but is now turning around. At the time in April, talk of mythical US recessions was only just beginning, and the Europe debt crisis was thought by most to be somewhat contained (even the EU thought it was). There is nothing you can do about events like these – except ride them out and wait for the turnaround as we are starting to see now. So, it will be better to judge the Fund in a year two when the intake of funds will be insignificant to the overall level of funds under management.
The next thing to consider is the fund return is calculated after foreign exchange fluctuations, which have been just as volatile as the stock market but in often opposite directions. There are fees charged as well as the brokerage costs. These are costs not reflected in the Trident Confidential results (as we state each week). If your positions are small, then your return may be adversely affected by transaction costs, particularly when the market is volatile. If your positions are large, then your returns would mimic the newsletters returns more closely, but only after making adjustments for foreign exchange, which may be positive or negative depending on the AUD$/US$ relationship at the time.
Also there is the issues of allocations too, which can be 1 to 3 allocations, these can also effect the returns depending on which stocks have a greater weighting when purchased due to multiple allocations. We keep to evenly weighted allocations to keep the method simple. We also keep foreign exchange out of it because if we calculated the return converted to Australian dollars, then we would have our overseas (mainly US subscribers) complaining. We also mention the return in the newsletter is a “guideline only” and that it is as simple to understand as we can make it. Most newsletters calculate their returns exactly the same way as we do, and we stick to that method so people can compare apples with apples.
The next thing is the weighting of the portfolios. The newsletter is evenly weighted to make it easy and simple for subscribers to compare a simple benchmark and the arithmetic, whereas the fund is anything but evenly weighted. The weighting of the fund is based on risk reward - The higher the weighting the lower the risk; the lower the weighting, the higher the risk. This is prudent for any long term investment strategy, and while won’t produce the mercurial results that the newsletter may on a week to week basis; it will produce a better risk weighted return over time. For example, there is a much greater weighting of the risky leveraged ETFs in the newsletter that I wouldn’t employ in the fund, due to a more conservative long term investment strategy.
In a nutshell: Over time, say 3 years, the return on the fund will probably be very similar to the newsletter return after the newsletter return is adjusted for foreign exchange and brokerage, as well as dividends. Why, when there appears to be such a difference now? Simply because 70% of the investments will be the same, but somewhat differently “risk weighted”, but bought at similar prices.
Of the companies that the fund is invested in there is not one company on this list that won’t earn more money in 2012, than it did in 2011. However, if there was any chance they wouldn’t increase earnings; they wouldn’t be in the fund anymore and would be replaced. Where I find a better prospect, it is placed in the fund at the expense of the least favoured fund stock – simple as that.
Now, let me give you some statistics on a selection of the stocks currently held in the fund:
- The average Return on Equity is over 25%
- The average Forward Price to Earnings Ratio (PE) is 12
- The average Earnings Surprise is 11%
- The average Annual Revenue Growth Rate is 26%
- The average long term historical PE rate is 17 for these stocks
- The average long term market is PE is 15.5
Based on this information, the average stock from the selection in the fund should be at least 42% higher in 2012 and this doesn’t take into account the fact that these stocks beat earnings generally by 11%.
The other stocks in the fund have higher growth profiles generally, but on this basis, the fund has potential to grow by at least 42% next year, not withstanding further earnings guidance increases, as things improve. When you consider these facts and review the underlying investments, you have some idea why I’m ploughing most of my money into the fund. The newsletter stocks offer higher potential, but with a degree of higher risk in keeping with our shorter investment time frame.
Sure the fund unit price is down still from it’s starting price at the beginning of the year, but that’s just the market turmoil and negativity lowering earnings expectations for 2012 and is short term. Remember, expectations have been beaten for the last nine quarters (and will be again this quarter) and yet the market still holds down valuations.
My focus is purely longer term (2 to 5 years) with great prospects, which you can see from this list of fabulous companies. The fund owns some of best and most well-known companies in the world and real “world beaters”. Imagine how these companies (and the fund) will be doing a in a year or two. Have a look at the current market valuations for some of these companies and you’ll find that they are all still grossly undervalued based on historical valuations. So, the future for the fund looks very good and should, when market conditions normalise, easily outperform the market.
December 1, 2010.
Alicia Hunt, Operations Manager at AMH (responsible entity)
Ph: 02 9241 7959 E: info@amhonline.com.au
Anybody. You do not have to be a Trident Confidential subscriber.
Now! - using the application form at the back of the PDS.
New intakes are processed at the start of each month.
New Applications must be received and funds transferred and cleared prior to the last business day of the month to be included in the next month's intake.
If you are already a Halifax client please contact Alicia Hunt at AMH to ask about ID requirements prior to completing the form– Ph: 02 9241 7959 E: info@amhonline.com.au
AUD$15,000. There is no maximum at this stage.
Australian and US - through the New York Stock Exchange (NYSE) and NASDAQ. We also have the ability to invest in Asian and European markets if the opportunities arise.
Lance Spicer will be managing the fund personally and deciding which stocks are included. Lance Spicer is an accountant, and licensed Financial Adviser as well as being the editor of the Trident Confidential Newsletter that has acheived returns of nearly 90%pa since inception in 2004. Lance has also written over 30 books on the subject of investment published by Trident Press.
Not unless you have your own Self-Managed Super Fund will you be able to use your Super Funds to invest in this Fund. No Super Funds currently offer the option of your choosing the Trident Global Growth Fund. So you need an SMSF. They are easy to set-up and manage.
Our Contact: at Superannuation Accounting Services who can assist you with this is:
Edmond Ong Ph: 1300 735 254
E: edmondong@superaccounting.com.au
Australian Mutual Holding (AMH) who are a very experienced responsible entity for funds and are a public company. The custodian of the fund is Australian Executor Trustees Limited (AET Ltd). The fund will be highly regulated and audited for the benefit of all investors, of which I’ll be one.
Yes, identification will be required as it is to open any account with an Australian financial institution. However, if you are already a Halifax account holder, please contact Alicia Hunt at Australian Mutual Holdings (AMH) prior to completing your application as some of your details to verify your ID may have already been supplied and this will make the process easier for you.
Alicia Hunt – AMH – Ph: 02 9241 7959
The minimum initial commitment is AUD$15,000, however after that contributions can be made for any amount. It will be a Direct Credit facility or Cheque payment or cash deposit only. However, each contribution must be made using the PDS application form, but you don’t need to go through any further ID process.
Yes, it will. This income will vary based on dividends and realized capital gains and the fund automatically re-invests these funds into your account. However, you can easily elect to have these funds deposited into your bank account. These will occur at the end of the Financial Year and is usually paid within 60 days.
On any income (dividends etc.) there will be normal withholding taxes incurred (15-30%). This is normal practice and it represents “tax paid” which means in your own country you will not pay this tax again as it represents a tax “credit” to you. This is what is meant by a double taxation agreement – you don’t pay double tax. Australia does have a double tax agreement with most countries such as the UK, US, NZ, Canada, EU countries etc. No tax is deducted when you redeem or sell your units at all.
While the PDS will allow use of derivatives, it doesn’t allow for borrowing or leveraging. I will be using various ETF’s as I do with Trident Confidential. I have no intention at this stage of using any derivatives. If this changed I would certainly let my investors know.
Redemptions will be processed on a regular quarterly basis. This is done so investors don’t use investment in the fund as an “ATM”, which increases costs of administration greatly and can be an impediment on returns having to keep more cash available rather than putting it to work where it will do the most good.
Yes, there will be, otherwise why would I do it? My interests are aligned with yours, if you don’t make money above the index, then I don’t. Trident Investment Management receives 20% of profits ABOVE the benchmarked index. If we perform in-line with the index (which are the returns most funds do), we don’t receive a performance fee of any kind. We have to beat the market to earn a performance fee.
Yes, we will, as discussed in the previous question. Yes, the benchmark will be the MSCI World Index. This index best represents what we’ll be investing in and comprises a number of companies in 24 developed markets such as Australia, UK, the US, Hong Kong, Canada, Germany, New Zealand, France and other markets.
In light of some scandalous dealings by some well-publicised funds there is now widespread suspicion of fund managers, which is understandable. So, first off, I’m putting a substantial amount of my own money into this fund. My family and friends are doing the same. I will be providing regular updates as to what I’m investing in and it will be Trident Confidential style stocks and ETFs only, no derivatives or weird investments even though the PDS allows me to do so, I would only do so with full disclosure to my investors. I’m not permitted by law to invest in unlisted or private investments, as the fund managers in the Trio case have done. At all times my interests and yours will be totally aligned. Secondly, the fund will be fully audited by an ASIC approved external auditor and the responsible entity and the custodian are well respected and very experienced in the management of funds.
The stocks we invest in through the newsletter are more, what I call “immediate buys” and are prone to make the “explosive profits” we have seen with say MIPS, whereas with the fund, positions have to be built over time with care taken not to alert the market of my intentions and this means some stocks that are great for the newsletter won’t be suitable for the fund. What I mean here is that when I tell you about a stock in the newsletter, I want you to buy it in the immediate future or up to the buy up to price. However, with the fund it may take months to get the percentage position we need at the right price. The whole process is very different.
No, it supplements it. The fund offers another level of diversification and into companies and industries that may not have been suitable stocks for the newsletter. The newsletter and the fund will in many cases have different stocks in them because of this. Where the fund and the newsletter are going to buy the same stocks, newsletter subscribers will be advised as a matter of disclosure.
This won’t be replacing Trident Confidential in any way. I expect the fund and the newsletter will be mostly investing in different things. There are so many great opportunities out there in Europe, the US, China, other parts of Asia as well as Australia that to put them all in the newsletter would be impossible, simply because I think a newsletter portfolio with over 40 stocks is unwieldy and it’s unrealistic to think that there are many subscribers with more than say 20-30 stocks in their portfolio.
This is where the fund comes in. It offers another level of diversification and into companies and industries that may not have been suitable stocks for the newsletter. In essence, the Fund is not replacing the newsletter, but supplementing it.
Alicia Hunt, Operations Manager at AMH (responsible entity)
Ph: 02 9241 7959 E: info@amhonline.com.au
Investors will be able to monitor the price of units on line. The website where you can access the unit price will be www.amhonline.com.au/trident and new unit pricing will be calculated on a monthly basis at the Close of Business on the last day of each month.
The application forms part of the PDS. The instructions for completing are on Page 31 and the forms themselves run from 33-36. Please ensure that you follow these carefully, so your account is set-up correctly and your application and funds are received at the correct entity.
Bank: National Australia Bank
BSB: 082 067
Account: 191692555
Account Name: Australian Executor Trustees Limited ACF Trident Global Growth Fund
Transaction Reference: Name of your investment i.e. the name you used on the application form - your name or your superfund name, or company or trust name - whichever is applicable.