March has been the busiest month at the UK Value Investor head office (spare bedroom) for a long time. I’ve had reports from Mallett and J Smart, a report and strategic review from French Connection (I love their new website) and dividends from Waterman, Gleeson, Northamber and Titon. Then there’s the somewhat infamous purchase of Luminar, a company so scary it seems that almost no one will touch it.
I’ve updated the Benchmark, Holdings and Trades pages so you can see how things have evolved since last month. The total book value is up by over 14% and the market value is up by just over 7%. This compares quite well with the benchmark FTSE 100 ETF, with over 13% out-performance over 3 months. However, I won’t get too excited as that could vanish in no time. I’m looking forward to getting some 6 and 12-month comparisons which will be a bit more meaningful, and one thing to remember is that these 3-month figures are helped out somewhat as the portfolio was coming out of a bit of a lull a few months ago.
Annual and Interim Reports
French Connection’s latest report provided some information on their strategic review of how the management is going to turn things around. I don’t really look into these sorts of things too deeply, preferring instead to leave the running of the company to the professionals. Book value was down slightly.
J Smart, the property investment and development company, said (via the Chairman) “There seems to be little prospect of an increase in turnover here over the next twelve months“. Book value was effectively unchanged.
As mentioned in the last post, Mallett’s situation is improving somewhat and book value was down only a small amount.
First up is the very large dividend from M J Gleeson (over £1,000). Since they have basically shut the business down into hibernation mode to sleep out the recession, they’ve built up excess cash which they gave away in this dividend. For now, this is going to stay as cash although I expect to invest it somewhere more exciting during the month.
After that dazzling payout, there’s been a good showing of dividends from some of the other holdings. Waterman has paid out another small amount, bringing the return so far from that company to 3.8%. Northamber continues to keep me happy with another dividend bringing their realised returns to 5.3%, although that’s only 3% annualised. Finally, the eternal Titon (soon to reach its second anniversary as a holding) has paid out again, bringing returns to 8.5% or 5% annualised.
It’s interesting that despite me paying no attention to dividends whatsoever, they still make up about 35% of the realised gains so far.
As I said in my last post, EDP is no more and Luminar is now the newest and (by book value) biggest holding in the portfolio. Because of the extremely low valuation, I have decided to limit the amount put into Luminar; and according to others that’s a good thing as most people seem to think the company is either doomed or about to raise capital thereby diluting existing shareholders, i.e. me. As ever, I try to keep any prognostications to a minimum and simply look at the company structure and valuation today.
FTSE 100: 15% under fair value
I thought I’d have a go at market prognostication. Sweeping many of the details under the carpet, I try to value the UK market via the FTSE 100 and its current price relative to the last 10 years’ real earnings (PE10 or CAPE) and how that compares to the long-run average of CAPE. There’s not much data for the UK but there is plenty for our friends in the USA. Over there the average value of CAPE is about 16.5 and I can only assume that ours is in the same ballpark. That’s not a hideous assumption since from 1993 it has averaged 18.7 during the biggest bull market in history.
From what data I can salvage for the FTSE 100, our current CAPE is 14, which is good since a lower CAPE results in higher expected future returns (a subject I will bang on about in future posts since I think it is important and doesn’t seem to get mentioned enough). I might even stick my neck out and say the 30-year annualised real returns are likely to be between 1.75% and 5.75% based on some scatter plots and other fiddlings I’ve hacked together.
House Prices : 37% over fair value
Another area that I think can be valued using PE ratios is housing. In this case you don’t need to average earnings over 10 years when looking at housing, as house buyer earnings are pretty stable, vastly more so that corporate earnings. The long run average PE (from 1980) is about 4 and in my mind 3 means the market is very cheap and 5 is very expensive. Of course there are regional variations etc etc, but I try not to worry about the details. Also I think my 37% number is ludicrously precise but at least I didn’t add a decimal place.