TGV Partners Fund commentary for the first half ended June 30, 2016; titled, “Don’t Be A Dividend Monkey.”

Dear Partners,

On June 30, 2016, the price for the Teilgesellschaftsvermogen (TGV) Partners Fund was quoted at 103.22 Euro. Including costs, the TGV thus appreciated in value by +1.71 %. In the same period, the DAX had a performance of –9.89 %.

For an investor who invested in the DAX instead of the TGV Partners Fund in March 2015, the DAX would have needed an upturn of 27.60 % to catch up with the performance of the TGV.

Although the outperformance seems impressive, a qualitative statement about the performance still makes only little sense, since a period of just over a year is not an appropriate scale for assessing an investment manager. The ability of an investor only, if at all, becomes apparent when looking at multiyear results, which include both periods of rising and falling markets.

In recent weeks, the referendum on the withdrawal of the United Kingdom from the EU (“Brexit”) has caused substantial eruptions in the stock markets, mainly because the actual consequences and the schedule of the withdrawal are not clear yet. For the allocation of companies included in the TGV Partners Fund, I ascribe only little importance to the referendum. None of the enterprises in the TGV Partners Fund would be permanently threatened in their competitive advantages or existence by a withdrawal of the UK. Cheap car insurance will still be in demand (Admiral Group) and engines for wide-body aircraft (Rolls Royce) will still be built in the UK.

Turbulent times may, therefore, be lying ahead for the European Union, I, however, do not see any reason to change horses in midstream. On September 10, 2001, the world was just as unsafe as on September 11, 2001, and even in the future, there will be unexpected shocks and events on a regular basis as well as good and bad years on the stock exchanges. I cannot predict in which order or when they will occur. Therefore, I will continue to focus on the things I can actually influence – the selection of companies according to the following criteria:

  1. Does the company have a reasonable business model?
  2. Does the company have a lasting competitive advantage?
  3. Does the management act rationally, with integrity, and does it consider the shareholders to be partners?
  4. Can the company’s stocks be purchased at a reasonable price?

What all assets in the TGV Partners Fund have in common is that they are excellent companies whose prospects I consider to be positive in the long run and whose shares were acquired at a good price, bearing in mind the intrinsic value I calculated for them.

Companies in TGV Partners Fund

Out of the 15 companies the TGV has been invested in on 30/06/2016, I would like to list the top ten holdings in alphabetical order:

  • Admiral Group
  • Alphabet (Google)
  • Distribution NOW
  • Fastenal
  • Leucadia
  • Rolls-Royce
  • Energy Assets
  • Gruppo MutuiOnline
  • National Oilwell Varco
  • TGS Nopec

These ten companies account for approximately 75% of the fund’s assets. The largest company the TGV is invested in currently has a market capitalization of about 500 billion US dollars, the smallest of less than 10 million euros. The TGV Partners Fund has no preferences as to the size of companies, the countries, currencies, or industries.

Changes in the top 10

Although the positions of Microsoft and Amazon no longer appear among the ten largest positions, their number of shares within the Partners Fund has been unchanged since the beginning of the year. Overall, there have been only few changes within the portfolio.

TGS Nopec

The TGV Partners Fund took advantage of the significant price slump of TGS Nopec1 after an investment and profit warning in January 2016 to buy additional shares of the company. TGS Nopec is now among the top ten holdings of the TGV Partners Fund again. The funds that were needed for the purchase have been withdrawn from another holding within the oil sector so that the overall risk with regards to the oil industry as a whole within the TGV has not changed.

The essence of the investment warning regarding TGS Nopec in January was that considerably lower investment in seismic material is planned in the near future, and therefore lower profits are to be expected in the years to come. For the long-term partner, these at first glance bad news contain two positive aspects:

1) The company is and remains extremely disciplined in terms of its interest in investing in seismic material. Typically (and unlike many competitors) they invest only if certain investment criteria, such as prepayments, purchase obligations of customers, and high return expectations are met. The ability to say “no” and to not compromise these investment criteria, even in difficult times, is a great strength and of utmost importance for the long-term success of the company. Therefore, the management’s actual course of action of keeping the bar up and not resorting to mediocre investment is of great value to the shareholders. Even if we have to live with lower profits in the short term.

2) The cost of creating seismic maps, mostly consisting of the day rates for seismic vessels, have more than halved since the crisis in the oil sector has begun. For example, to invest the same absolute amount of 400 million US dollars as in 2013 and 2014, today TGS Nopec would have to initiate twice as many projects as in these two years – given the reluctance to invest in the sector an impossible task. Against this backdrop, a planned investment of 220 million US dollars for 2016 is lower in recorded kilometres, but similar to 2013/2014.

Furthermore, TGS Nopec is currently the only company in the entire industry that has plenty of cash and can use the current “distress at sea” to their advantage. It allows, for example, for securing shares in other companies or databases at distressed prices. During a visit to the EAGE conference (European Association of Geoscientists & Engineers) in May this year, it was very impressive to see how much the competitors are driven by their own debt. Kristian Johansen, CEO of TGS Nopec, however, can act free of debt and loan commitments and is apparently already laying in the course for tomorrow and the future.

Energy Assets:

Our position in Energy Assets Plc can only be described with mixed feelings: due to an acquisition of the company which was announced shortly after our investment, it has delivered an exceptionally high rate of return, but will be sold only a few short months after the purchase.

Energy assets is a Scottish company, which installs and operates “intelligent” or Internet-enabled gas meter (so-called “smart meters”) for larger industrial and commercial clients. After changes in the regulation a few years ago, in Britain, there is a nationwide plan, according to which all the gas meters have to be replaced or renewed. As part of this new regulation, the rules for the operation and ownership of the meters have changed significantly. Whereas almost all gas meters were owned by the state-owned energy utility, in the future, free competition and private companies are taking over this role as so-called “Meter Asset Managers”.

Over the past years, Energy Assets has exchanged a large number of old gas meters with

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