East 72 Holdings Limited released its Q2 2019 Report – a copy of which can be downloaded below. Founded in 2016, East 72 is a leveraged investment firm formed as a result of Australian Premier Finance Holdings Limited’s recapitalization. The company’s Executive Director, Andrew Brown, has over 36 years of investing in the Australian equity market and served on 12 public company boards listed on the Australian Securities Exchange. Before working at East 72, Brown held leadership roles in several companies including Rothschild Australia Asset Management, Adelaide Resources Limited, Australasian Wealth Investments Limited, Australian Rural Capital Limited, Kirrihill Wines Pty. Limited, and Stiletto Investments Pty Limited. He also writes for the Under the Radar Report investment newsletter.
In its most recent report, East 72 announced an 8.8% return for the second quarter and discussed the inconsistency of trends in the financial markets, especially in June.
“Quarterly portfolio return: (8.8%)
A world of inconsistency
The June quarter, especially the month of June 2019, has beguiled us. It has been a period of numerous inconsistent trends across financial markets, equity valuations and more importantly earnings downgrades which we believe increase the probabilities of a more proximate and potentially worrisome dislocation in markets.
Value investing – defined here as purchasing securities priced below conservatively assessed sum of the parts valuations – has come under its fiercest questioning since 19993. On many measures, “value” type stocks are priced at their lowest levels relative to the wider market since the height of the dot.com boom of 1999-2000; this had a negative impact on our performance for the period.
The quarter was dominated by the June month; the strong rebound in global equity markets as bond yields declined, together with hopes of short term interest rate reductions propelled indices to recoup the losses of May 2019. In Australia, where we have a significant short index position “hedging” against our physical portfolio, there was no May downturn, but we were temporarily hurt by our “value” long positions being subject to tax loss selling and in two specific cases, fund mandate transitions. Additionally, our largest fundamental short, Tesla, gapped up 20% from its May 2019 close. The move in Tesla reinforces that these reports are at a point in time, are involuntary and arbitrary measurement dates, and that our strategies in stock selection are driven by fundamentals, not reporting dates.
But what’s “value”? Quantitative research typically defined “value investing” as purchasing securities exhibiting low price/earnings or price/book value ratios. On that basis, the tenet of value investing is increasingly being brought into question. Recent research suggests that very low interest rates, emanating from quantitative easing, low inflation and easy monetary policy have systematically reduced discount rates applied to future cash flows – a feature Australian investors are very familiar with in the infrastructure sector4. The argument goes that this makes “hard” book value plant and equipment less of a factor and is reflected in the winning strategies and large protective moats of mega-cap technology companies.”
You can download a copy of East 72 Holdings Limited’s Q2 2019 Investor Letter here:
East 72 Holdings Limited’s Q2 2019 Investor Letter
You can also see the list of our 2019 Q2 investor letters and download them on this page.
