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Semi-Annual Letter to Investing Partners 2023
Oceanside Family Investment Trust
04 July 2023
It brings me great pleasure to reach out and communicate for the first time with you - my investing partners (beneficiaries) of Oceanside Family Investment Trust. As we embark on this journey together, I am filled with excitement and enthusiasm for the future that lies ahead. I thought that this letter is a good opportunity to give you a flavour of the reporting which is likely to occur in many years to come.
Before delving into the ins and outs of our shared investment journey, allow me to provide a brief overview of our fund and its purpose.
Oceanside was established with a singular mission: to create long-lasting values through strategic investments in financial markets. I firmly believe in the power of long-term compounding, fundamental analysis, a sound risk-taking posture and a disciplined approach to stay ahead in the ever-evolving financial landscape.
At the core of my investment philosophy lies the unwavering commitment to generating attractive returns by running a concentrated portfolio - less than twelve holdings - while maintaining a laser focus on risk management. I am aware every investment carries inherent risks and I cannot promise results to you. However, what I can do and promise is that:
Our investments will be chosen on the basis of value and quality, not popularity;
I will attempt to bring the risk of permanent capital loss, not short-term quotational loss, to an absolute minimum by obtaining a wide margin of safety in each investment; and
I will have virtually my entire net worth invested in the fund.
Whether I do a good or poor job is not to be measured by whether the fund is up or down for the year. Instead, Oceanside’s performance will be measured against:
the ASX 200;
MSCI World Index - a broad global equity index that represents large and mid-cap equities across 23 developed markets; and
the 10-year Australian Treasury - long-term government-issued bonds.
If our record is better than that of these benchmarks, I consider it a good year for Oceanside. And in the case of underperformance, I deserve your wrath.
Speaking of measuring investment results, I am highly critical of attempts to assess performance over short periods of time. While I much prefer a five-year test since it is my desired holding period of any investment, I feel three years is an adequate time for judging performances. It is certain that there will be years in which the fund underperforms, perhaps substantially so, and gets “beaten” by the benchmarks. I will be then ready for the criticisms and rotten eggs and tomatoes or whichever is at your disposal. So if any three-year period produces subpar returns, I would highly suggest that you should start looking for other places to have your money.
Performances and Interpretations of Results
With that being said, I would like to bring you an update on Oceanside’s results for the first six months of 2023.
From 1 January 2023 to 30 June 2023, Oceanside’s stock portfolio rose by 20.14%. This compares with some common benchmarks as follows (as of 30 June 2023):
Oceanside Family Investment Trust
International Equities 11.75%
Australian Equities 32.47%
Total Return 20.14%
Benchmarks
MSCI World Index1 13.99%
ASX 200 3.70%
Long-term bonds (10-year AUS Treasury) 3.96%
In the first half of 2023, Oceanside outperformed the MSCI World Index by 6.15% and ASX 200 by 16.44%.
This was achieved in the background of the period in which it dawned on many market participants that the aftermath of the pandemic with its knock-on effects were still being felt by many businesses, namely the supply chain disruptions, the massive layoffs across big-tech companies, the collapse of banking institutions, and most noticeably the high inflation and interest environment.
We witnessed a moderate decline in stock prices in the second half of 2022. This movement in the market, coupled with factors mentioned above, can be explained by the swing of investors’ psychology. When circumstances take a downturn, investors have the tendency to follow suit. They view the market as a place to lose money and prioritise avoiding risks at all costs. Under the excess of caution that prevails, investors are unwilling to accept possibilities that incorporate even just a hint of optimism. This negativity causes prices to fall to levels where the likelihood of losses is at minimum while the potential for gains becomes quite appealing.
As a result, the excess on risk-aversion has created many opportunities among undervalued situations so that Oceanside’s portfolio is weighted heavily toward undervalued or mispriced securities. In the first six months, I have taken positions in four situations which I believed at the time of purchase were oversold, representing significant values with high upside potential. One of them was Codan Limited (as of 30 June 2023 has returned 105%).
Codan exemplifies the type of business that aligns with my investment criteria. It holds a prominent position as a major player, occupying a significant market share within a niche industry—an analogy I often refer to as being a "big fish in a small pond." The Codan brand carries a reputation for producing top-tier metal detecting products and has built a robust distribution network across key markets in Africa, North America, and Europe. This favourable market positioning allows the business to generate high returns on invested capital, leading to quality earnings and increased cash flow.
In a significant development, Codan had undergone a major operational restructuring that transformed it into a more resilient enterprise with a diversified portfolio of products and services. This strategic shift was aimed to reduce reliance on metal detection while expanding revenue streams from the communication segment of the business. Notably, the business had been successful in securing more contracts from local governments in the United States, which serves as its main market for the communication segment.
Furthermore, it is crucial to highlight that Codan was in a sound financial position with a healthy balance sheet. The company had managed its debt levels prudently, avoiding excessive leverage, and had sufficient cash reserves to weather any financial hardships that might arise. And I found the fact that the management team had refrained from issuing additional shares, which in turn dilutes the existing shareholders’ value, to acquire other businesses quite compelling.
Nevertheless, my understanding of various analysts' reports on the company revealed a prevalent concern regarding the deceleration in revenue and earnings growth – which can be perceived as factors that drive stock prices. The situation was exacerbated by civil unrest in Sudan, one of Codan's primary markets, which had a detrimental impact on the company's operations in Africa. Consequently, the stock experienced a significant decline from its peak in July 2021. These circumstances prompted a retreat of many investors. However, it is precisely this combination of a volatile market environment and unfavourable events that has created an opportunity to buy the company at an attractive valuation.
The General Picture of Markets
Generally, my view is that the overall market is currently priced above its intrinsic value – or fair value, particularly in relation to blue-chip securities. If my viewpoint is accurate, there is a possibility of a significant decline in stock prices, affecting both undervalued and other stocks.
While macroeconomic and market forecasting are not my primary focus, it is important to be attentive to the market cycles. In the event that the general market returns to an undervalued condition, I may choose to add more capital to the existing positions in Oceanside’s portfolio and/or allocate our capital exclusively to high-quality names that are on my watchlist.
Conversely, if the market experiences a considerable upswing, my strategy will simply be sitting still (which can be hard at times – more on this point maybe in the annual letter at the end of the year) and keeping an eye out for any mispriced opportunities.
Finally, I look forward to the rest of 2023. This is not because I have any faith in a speedy recovery in major economies or in an upward movement in asset prices and investors’ psychology. In fact, I have no idea whether any of these developments will materialise.
Rather, my enthusiasm primarily stems from the fact that Oceanside holds a portfolio of investments in quality businesses, which I have bought at reasonable prices. I intend to hold on these holdings for a long time to reap the benefits of such investments. Secondly, it is simply because I enjoy running Oceanside and the game of finding the next great business to invest in.
Robson Walton, the chairman of Walmart and son of its founder Sam Walton, once said, ‘My dad did not set out to make Walmart the world’s largest retailer. His goal was simply to make Walmart better every day, and he thought constantly about how to do just that.’
Please be assured I am doing the same with Oceanside.
Hai Nguyen
4 July 2023