ASX Code: PGF
Purchase Date: 21.03.2017
This week’s stock of the week is PM Capital Global Opportunities Fund (PGF). PGF is a listed investment company (LIC) that aims to create long term wealth for investors by investing in 25-45 global companies. They look for companies that are trading at a value different to their intrinsic value (i.e. looking for bargains or value investing – as we discussed in our first podcast). To get a good understanding of LICs listen to Episode 3 of the Equity Mates Podcast. In a nutshell, however, it is helpful to think about LICs like any other company, except that their main business operation is investing. They make money from buying and selling shares, and receive dividend and interest from their investments, and then investors in the LICs make money from dividends paid by the LIC or by the growth in the share price of the LIC.
From the outset, it is important to talk about how we chose this stock of the week. In our interview with Andrew Brown he mentioned this was an investment that was on his radar. This peaked our interest, and after doing some research ourselves we decided to choose this as our stock of the week. It is important to remember that investing is a collaborative process and whilst we may get extra personal satisfaction in picking stock ourselves, it is a bad long-term attitude to have towards investing. Instead we try and take in as much information as we can, from as many different sources as we can. There is simply too much information out there for us to consume it all ourselves.
We say this with one important caveat, all of the information we read or hear we then do our best to consider critically and independently. So while we listened to what Andrew told us, we did our own research and ultimately came to our own conclusion. We would be fools to blindly follow Andrew’s advice, just as anyone reading this would be fools to blindly follow Equity Mates’ advice. Throughout your investing journey you’ll find that everyone from Warren Buffett to the bloke sitting next to you at the pub will have stock advice and a hot tip. While it never hurts to listen, we try to constantly remind ourselves to prosecute the information critically and do our own research. There is an attraction to putting our mind in cruise control and just blindly following the advice of others, but that isn’t a good investing habit to get into. For at the end of the day investing is a results-based business – all that will matter to us 10 or 20 years down the line is the final outcome. There aren’t any prizes for how we found our successful investments, nor is there any compensation for following bad advice.
So with that in mind there are a couple of reasons why PGF was an appealing investment for us. Firstly, PGF is trading below Net Tangible Asset value. At the time of writing PGF is trading at $0.98 and has a Net Tangible Asset value (NTA) per share of $1.09 after tax. Net tangible assets is an accounting term that is calculated by taking all of a company’s assets (i.e. everything it owns) subtracting all intangible assets (for example, intellectual property and goodwill) and all of the company’s liabilities (for example, bank debt). What is left is the net amount of physical assets (i.e. property, cash, shares, inventory etc.) the company holds.
A simple way of thinking about NTA is through an analogy. Imagine QANTAS owned $100 million in planes and it’s intellectual property (e.g. its trademark and copyright) was valued at $50 million. It has $150 million in total assets. Intellectual property is intangible though – so QANTAS only has $100 million in tangible assets. Now if it has $40 million in debt, QANTAS’ net tangible asset value is $60 million. If it has 6 million shares issued, Net Tangible Assets per share is $10.
Net tangible assets is an important metric used by value investors because if a company has $2 of NTA per share and it’s shares are trading at $1, then the value of the company’s physical assets alone are worth more than what the investor is paying. So in the event the company shuts up shop tomorrow, the investor will still make money when the company sells its assets.
Going back to the QANTAS analogy from above – So QANTAS has $10 of Net Tangible Assets per share. Imagine it is trading on the share market at $9. If you owned 1 QANTAS share and it stopped operating and sold all of its planes – it would receive $100 million. It would then pay off it’s debts (minus $40 million) and the company would be left with $60 million to distribute to its shareholders. So each of the 6 million shares would receive $10 and you would be a lucky investor that walks away with $10 in your pocket even though you only paid $9 for that 1 share.
So applying this measure to PGF as a listed investment company, it means that for each share we buy in PGF at $0.98, the company holds $1.09 in assets (in this case the assets are the shares it owns). So when we spend $0.98 buying a share in PGF we are actually purchasing (as a part owner in the company) $1.09 in shares.
Now the obvious drawback to this is that we do not know which shares PGF owns (we just know how much they are worth), and we do not have any control over when PGF sells these shares. For this reason most listed investment companies or exchange traded funds trade at a discount to their net tangible asset value. However, at Equity Mates we thought this would be a great opportunity to introduce everyone to the concept of net tangible assets and to get you thinking about some of the different metrics investors look at when valuing companies.
So if there are a lot of listed investment companies out there that trade below NTA, why have we chosen PGF? Simply, because of the fund managers. PM Capital, and it’s Chief Investment Officer Paul Moore, are excellent investors. As Andrew Brown said in his interview with Equity Mates, the beauty of investing is you have the opportunity to invest in people that are far smarter than you, and Paul Moore is a classic example of this. Paul Moore has been the Chief Investment Officer for PM Capital since it’s inception in 1998 and whilst he has seen a lot of volatility (fluctuations in market value) he has ultimately seen a lot of success. Here at Equity Mates we like Paul Moore’s investment focus (long-term, value investing) and so are willing to put part of our capital into PGF.
So through this stock of the week, we hope you can gain a better understanding of another investment option available. Rather than buying shares in a company (as we did last episode with Gateway Lifestyle Group), investors can buy shares in LICs or ETFs and essentially invest in the fund manager’s performance, and profit as the fund profits and grows.