Brar Investment Fund Long Exco, NavigatorVW Staff
Via Pope Brar
- Portfolio discussion (including new purchases)
- Natural gas in the land of opportunity
- Benefits of transcendental meditation
Brar Investment Fund Presentation
Here is a link to our Fund Presentation
Articles are available under the “BIF in Media” tab on our website here. (insert all links, including below)
- Brar Investment Fund to Present at Asian Investing Summit 2014
- Brar Investment Capital Proud Sponsor of the NBA Sacramento Kings Sikh Community Night
- The Street: Checking the Pulse of Small Banks
- What You need to Find Exceptional Returns
- Brar Investment Fund Reports Q4 2013 Results (for readers wishing to view past commentary)
Next opening for Brar Investment Fund
The next opening for the Fund is May 1st, 2014. You may reach out to us if you are interested to invest.
We are pleased to report results of your investment fund. Please note that whatever numbers you see on your capital account summary should not be compounded into future indefinitely. I recommend that investors judge the performance (along with that of most investment funds) over a period of at least three years and preferably five with an economic cycle to see how we perform in both bear and bull markets. This also tests our ability (or the lack of) to take advantage of opportunities found in times of fear and panic, a key ingredient to achieving intelligent investment returns.
Recently, I spoke with various market participants and regarding an investment idea that was immediately labeled as “non-value”. Many investors in the markets equate value investing to purchasing shares of companies with broken business models, trading at low multiples of cash flow, and/or severely depressed shares. We do not prefer to categorize investing into value, growth, or other types. We believe all investing is the byproduct of value. The key principle of intelligent investing is to purchase a business that trades at significant discount to its intrinsic value. Here we compare two types of businesses, a stereotypical low growth “value”, let’s label it Hare Corp and the other ”growth” type, Turtle Corp. Let’s assume Turtle’s business has a solid competitive advantage, respectable management, grows earnings annually by 20%, and trades at a price to earnings ratio of 20. Let’s also assume Hare’s business contains an average moat, ordinary management, experiences 10% growth in earnings, and trades at a PE of 10. Over a three year period, Turtle will grow its earnings from $1 in the first year to about $1.72 in the third vs $1.33 for Hare Corp. This illustrates that it is far better to purchase a business growing at 20% with a PE multiple of 20 than one with 10% growth, trading at an earnings multiple of 10. The “value” label is more appropriate for the “growth” company than its “value” peer. All investing is the result of foreseeable value and one should look past labels to discover the best opportunity. Only this time, the Turtle outpaces the Hare.
Natural gas in the land of opportunity
During the quarter we added two new names to our portfolio, both in-line with the long term potential we see for natural gas in the United States. The reasons are simple:
In the past few years an abundant amount of natural gas was drilled from shale which caused an influx of inventories. Since 2012, prices have stabilized due to the lack of new natural gas discoveries and reductions in rig count. The supply dynamics have started to change, resulting in lower production and higher prices, as seen above. LNG export terminals are scheduled for export later this year, with the Sabine pass in Louisiana being one of the pioneers. With LNG exports on the horizon, prices may climb further and lead to increased profitability for natural gas players in the US, including transporters of the liquefied product. Reduction in rig counts and increased exports are key long term drivers of reduction in the oversupply of US natural gas. Other reasons include natural gas becoming a cleaner and larger portion of US energy supply with increasing number of power generation plants using more natural gas and less coal.
To take advantage of opportunities in US natural gas, we added the following names:
Exco Resources is a natural gas and oil producer with attractive assets in North America. The company has projects in Texas, Louisiana, the Permian Basin, and other areas. With the accumulated reserves, the company has plenty of prospects. Exco has also amassed a large capital budget for drilling which is needed to prove up the reserves. To widen their energy mix and diversify into the more profitable crude, they purchased acreage in the Eagle Ford shale in south Texas from Chesapeake. Exco has other assets in South Texas (Buda) with crude oil that are economic to drill and complete. In 2010, CEO Douglas Miller attempted a management buyout for $20.50. Natural Gas economics have changed significantly since, but the current discount to intrinsic value will prove to be large as natural gas gains momentum.
Navigator operates a fleet of handysize liquefied gas carriers and provides transportation of LPG, petrochemical gases, and ammonia. New vessels are scheduled to come online in 2015. US shale oil and gas provides the company with the possibility to export gases to global markets. Its niche is operating ships that are aimed at medium and long-haul routes, traditionally uneconomic for smaller vessels. The size of medium sized vessels allows Navigator to enter small harbors to make deliveries and pickups that are nearly impossible for larger vessels. In addition, the company has one of the largest ethylene armed vessel fleets. Newly built ships hold the eco label, which indicates fuel efficiency and the use of LNG as alternative fuel on the vessel. Navigator aims to benefit from increased exports to Asia and Europe.
Investors must note that the portfolio is not sector weighted to reduce volatility or for strategic positioning but rather driven by individual opportunity. At the end of Q1 2014 (March 31, 2014), the portfolio is weighted as follows: 32% Banks, 26% Energy, 18% Materials, 15% Insurance, 9% Consumer.
Optimism continues to show in global macroeconomics. We see momentum in the US recovery. The tide has turned in Western and Southern Europe. Wilbur Ross recently stated, “In my recent visits I went down the streets but this time I did not see beggars in Madrid, Barcelona, or other Spanish cities, while the unemployment numbers are in high double digits. The beggars suddenly did not disappear, but are likely working in the gray market. Real Estate prices have started to edge up and we are even more fanatic about the Irish economy, driven by innovation and the biotechnology sector.” Unlike Mr. Ross, we are not macroeconomic experts and prefer to generate shareholders returns through our expertise in selecting individual investments. We do feel there is excessive focus on potential overvaluation of the markets, and not enough on the remaining pockets of value.
Managing a concentrated portfolio with a wide margin of safety has always been our advantage. Various potential clients have approached us and suggested that we “diversify” (dilute) our portfolio to lower so-called “risk”. My response has been as usual. We are not in the window dressing business but are fanatics of value. Increasing the number of holdings in a portfolio does not lower risk, in fact it dilutes focus of the investor. We believe risk is reduced as one becomes more knowledge about their holdings. To us, any number above 15 equities is dilutive. We aim to earn our investors optimal returns and continue to search for equities with the widest margin of safety. We cannot promise positive performance of your capital on a monthly basis, but investors can rest assured that we will patiently seek out market inefficiencies.
Best things come last: Benefits of Transcendental Meditation
Over the past few years, I practiced meditation and it has brought numerous benefits including better focus, greater inner peace, and the ability to think different. I believe our readers can also benefit. To learn more, browse through a variety of meditation videos by Deepak Chopra on YouTube. He does a great job of describing the simple technique. In his 2013 interview, Ray Dalio, founder of Bridgewater called meditation “one heck of an investment” and touted it as the secret to his success, view the interview here.
I hope that I have sufficiently communicated the strategy and direction of your fund. If you have any questions, please feel free to give me a call.