Quarterly Returns

Portfolio as at end of September
Asset	Bloomberg Ticker
Exova PLC	EXO LN	21%
Leucadia	LUK	11%
AIG	AIG US	10%
FLYBE	FLYB	10%
Glaxo Smithkline	GSK	9%
Tessenderlo	TESB	9%
Next PLC	NXT LN	8%
Alternative Asset Opportunities	TLI LN	3%
Plaza Centers	PLAZ LN	1%
Dolphin Capital	DCI LN	0%
GBP Cash		17%
Quarterly Return	Quarterly Benchmark Return
12.34%	5.57%
Return Since Inception	Benchmark Return since Inception
16.08%	70.86%
Annualised Return since Inception	Annualised Benchmark Return since Inception
4.06%	16.66%
Quarterly Leveraged Return	Annualised Leveraged Return
21.84%	12.47%
Leverage
56%

My quarterly return was boosted by the fact that the liquidation of Alternative Asset Opportunities is progressing towards completion with the imminent return of cash meaning that the share price has progressed towards cNAV.   In the end the terms for the sale of assets were better than I had hoped, at a premium to NAV, and I will get a nice kicker from the collapse of GBP, which will probably boost my return by 5% or so.

So now I have the problem of where I put the proceeds from this liquidation, which was meant to act as “collateral” for my spread betting positions.  My choice now is whether to discard the spread betting strategy or not and I will continue.  But as that strategy relies on not losing intrinsic value or too much MtM value at times of market distress, I will have to be very careful about what I select – largely liquidating real estate assets, but some with longer term capital appreciation.

These are interesting times for the British economy and I have no idea whether the current GBP collapse will turn out to be helpful or not.  The ERM fiasco resulted in strong growth for several years and I suspect the economic numbers might surprise on the upside.  There is a lot of risk inherent in the current US election and while it appears that Trump’s fortunes are on the decline he is not down and out yet.  It feels like there is a lot of risk out there, but equally I can imagine a situation where Hilary wins, the US economy remains decent and markets jump another 15%.  In short, who knows?

A few things have happened recently, which necessitate a posting.

Distribution Now (DNOW): I got stopped out of my position a few days ago at 20.35.  I was ok with this, because it was using up far too much margin in my spread betting account and my strategy is to get to a portfolio of large cap stocks, which only require 5-10% margin.  I got out with a small profit, when earlier in the year, it was maybe 30-40% down, and I may end up owning it again.

Alternative Asset Opportunities (TLI):  In their shareholder update of 23^rd June, TLI announced that they were in discussions around a sale of the portfolio.  This was not surprising, although mildly disappointing.  I think the shareholder base of TLI is probably minded for an exit of assets that have disappointed over the years and recent cost of insurance increases and a dearth of maturities have probably strengthened that resolve.  It’s really been a perfect storm for TLI, to the end that it was trading c20% below a NAV that should still be expected to grow c10% over time.

My fear was that the board, who have steered the ship badly over the years, would deliver one final blow to the long suffering shareholder by negotiating a bad deal that destroyed value.  In the event, that doesn’t seem to have been the case.  They will sell 71 of 80 policies still remaining for $40mln cash (7.1% premium to book), which is approximately the value of the whole company as at the announcement date.  This cash will be distributed reasonably quickly, with 9 policies remaining to be disposed of.  They are the most toxic policies, with cost of insurance increases expected to be applied, and so will be trickier to get rid of.

As at today, the numbers look like:

	Pence per Share
Value of sale	41
Cash on Hand	7.2
Winding Down Cost	-0.6
Cost of bid	-0.6
Remaining policies	0-6
	47-53p

That represents anything from a 14 – 29% uplift from where the shares were trading prior to the announcement and a final return to the shareholder of approximately NAV. 

While my preference would have been for the portfolio have been held to maturity, at least the board have managed to sell assets at a premium to NAV, and there is no value destroyed.  There are some further positive aspects.  First, it allows me to rotate into other assets.  Emergent Capital is trading extremely cheaply again, perhaps because of fears over LTV breaches as assets are written down because of cost of insurance increases.  I will have to look into that  Second, it has affirmed that there are buyers out there for portfolios of secondary life insurance policies and they place a value on these assets of maybe 10-12% IRR, which gives comfort as to the value embedded into Emergent’s portfolio.

However, I can’t just rotate all of my cash from TLI into Emergent, because those life insurance assets are meant to act as collateral against my leveraged spread bet positions.  I was reasonably comfortable owning TLI because I knew that it would liquidate over time and that there would be large cash returns.  While it is the case that I think Emergent is significantly undervalued, there can be no assurance of what the share price will do in the medium term, and so in times of equity market distress, it may well also fall.  So I suspect that I will replace TLI with Emergent and a portfolio of liquidations, to try and ensure that whenever I require cash it will be available.

Some comments on the quarter

     It feels a bit strange to even be writing about my portfolio returns, one week after the UK voted to leave the European Union.  The last week has been one of politic upheaval and surprise and the Labour party seems to be tearing itself apart.  I think it will end up splitting with a "New Labour" party being formed and the present Labour party being a far left version.
Immediately after the surprise vote, markets plummeted, which was to be expected.  The pound fell by around 10% against the USD, from a fairly low level historically.  And global markets also plummeted.  Many market commentators appeared to panic, and even educated friends of mine seemed genuinely scared.  My view was, and is, that panic will dissipate as the long negotiation begins and this negotiation becomes just like any other international trade or political negotiation - a very boring thing to the general public.  I voted to leave the EU because I believe that the EU cannot help but continue to be a protectionist bloc, and it will become evident that it is destined to be the poorest performing region of the world over the long term.  This was a one off chance for the UK to break free and develop  into outward looking country the is economically open to the whole world, not just the EU.  Whether this actually happens depends on the ability of those who are negotiating for the UK and how much they want to follow the electorate's mandate which was clearly for full separation.  I am not particularly optimistic.  Regarding the UK economy, I think there may be a short recession but the long term of performance of the company will depend on what is negotiated.  We may end up with something that looks just like the current arrangement.
     The market panic did dissipate as the pound stabilised and equity markets recovered to where they had been prior to the vote.  Certain things did not recover, however, including UK Mid Caps, and I own three of them.  In addition, because I hold certain of my equities via a spread betting account, which is effectively currency hedged, I didn't benefit much from the USD appreciation like my benchmark index did.  But it is what it is - and nothing to do with Brexit was the fall in Alternative Asset Opportunities as it was disclosed that it was receiving Cost of Insurance Increases.  I think the full in TLI was overdone but time will tell.  In addition, I took the opportunity to buy Leucadia when markets were low.  I am betting that Richard Handler, who has done a great job over many years of building Jefferies, is not the awful businessman and capital allocator that many seem to think.  At just over half of book value, it could do well if just a few things go right.

To summarise - a terrible quarter, but I don't think the Brexit vote has changed the investing environment much and in ten years it will be seen as a blip on economic history.

Quarterly Return

Portfolio as at end of June
Asset	Bloomberg Ticker
Exova PLC	EXO LN	20%
Distribution Now	DNOW US	12%
Leucadia	LUK	11%
Tessenderlo	TESB	10%
AIG	AIG US	10%
Next PLC	NXT LN	9%
FLYBE	FLYB	4%
Alternative Asset Opportunities	TLI LN	2%
Plaza Centers	PLAZ LN	2%
Dolphin Capital	DCI LN	0%
GBP Cash		22%
Quarterly Return	Quarterly Benchmark Return
-9.23%	8.79%
Return Since Inception	Benchmark Return since Inception
3.33%	57.54%
Annualised Return since Inception	Annualised Benchmark Return since Inception
0.94%	13.87%
Quarterly Leveraged Return	Annualised Leveraged Return
-9.68%	16.66%
Leverage
36%

New Holding

Subsequent to Quarter End, I put approximately 10% of my portfolio in Next PLC.  It has sold off substantially after a recent gloomy earnings report, with unfavourable debt developments.  I believe it is now a "Wonderful Company at a Fair Price".  It's in a tough sector, but I think Simon Wolfson is a classic "insider" type CEO, who is laser focussed on shareholder returns and knows about capital allocation.  By partnering with him, I believe I have limited downside, and hopefully some serious upside.

Quarter End Results

Portfolio as at end of March
Asset	Bloomberg Ticker
Exova PLC	EXO LN	18%
Markel	MKL	12%
Distribution Now	DNOW US	10%
Tessenderlo	TESB	10%
AIG	AIG US	9%
FLYBE	FLYB	6%
Alternative Asset Opportunities	TLI LN	3%
Plaza Centers	PLAZ LN	1%
Dolphin Capital	DCI LN	1%
GBP Cash		30%
Quarterly Return	Quarterly Benchmark Return
2.23%	2.95%
Return Since Inception	Benchmark Return since Inception
13.83%	44.81%
Annualised Return since Inception	Annualised Benchmark Return since Inception
4.07%	12.07%
Quarterly Leveraged Return	Annualised Leveraged Return
5.40%	9.19%
Leverage
36%

December Portfolio Update

Portfolio as at end of December
Asset	Bloomberg Ticker
Exova PLC	EXO LN	17%
Avesco Group PLC	AVS LN	13%
Markel	MKL	12%
AIG	AIG US	11%
Distribution Now	DNOW US	10%
FLYBE	FLYB	9%
Tessenderlo	TESB	4%
Alternative Asset Opportunities	TLI LN	3%
Dolphin Capital	DCI LN	1%
Plaza Centers	PLAZ LN	1%
GBP Cash		19%
Quarterly Return	Quarterly Benchmark Return
-4.33%	8.09%
Return Since Inception	Benchmark Return since Inception
11.35%	40.65%
Annualised Return since Inception	Annualised Benchmark Return since Inception
3.65%	12.04%
Quarterly Leveraged Return	Annualised Leveraged Return
0.66%	5.90%
Leverage
34%