Investing Recommendation: From Jan 2015 to Feb 2019, CVF's NTA outperformed VAS by 3.29% annualised. Meanwhile its TSR has been much lower, especially since Oct 2018. Unless underperformance takes hold, the higher end of its recent discount ranges are worthwhile investing opportunities while performance fees remain ineligible due to not clearing the indexed high watermark.
Trading Recommendation: Trade when discount is at least 3% greater than recent (1 to 6 months) average. Minimum Pre-tax discount advised is 15%.
28 Feb 2019 Discount/Premium: Pre-tax -15.7% Post-tax -14.29%
Actual NTA Performance:
In its Feb 2019 monthly report CVF reports the following performance:
Using Excel's CAGR formula I've computed the CVF Inception to Date (ITD) non-reinvested performance using the IPO NTA after offer costs ($0.976), 28 Feb 2019 Pre-tax NTA ($1.21), Dividends (18 cents), Franking (5.14 cents) and Options at expiry (1.5 cents). Undistributed franking credits are ignored here.
- CVFs published ITD of 14.1% net is a significant overstatement of performance. It's cumulative figure of 73.4% net is also way off and even easier to check. 1.734 * $0.976 = $1.69 yet you can see that the End NTA inclusive of dividends, franking and options value is $1.456. Even if we add undistributed franking credits (see Insights section below) of ~ 7 cents this is $1.526.
Note: With divs not reinvested and using the same values as in Excel, Sharesight produces a 10.17% NTA CAGR. The small difference being due to the specific timings of dividends and options value in Sharesight. This is a nice cross-check on the ballpark consistency of CAGR calculations between simple Start to End Date ones in Excel and Sharesight's more precise timings.
Actual NTA CAGR using Sharesight (divs reinvested, undistributed franking included)
First in Sharesight we turn on Dividend Reinvestment and set it to "Round down and track balance." Then we enter a Sell trade at the end date (28 Feb 2019) at End NTA value (not share price) and enter a "dividend" at option expiry (30 June 2016) for 1.5 cents to reflect option value. While not strictly portfolio return, option value is included to offset option dilution effects on NTA (it can be generous when option value at expiry is high given the Start NTA used is not the IPO price but the NTA after offer costs of $0.976.)
End NTA is the only debateable element:
- Pre-tax NTA is $1.21. Post-tax NTA is $1.19. Given CVF is an active trader splitting it at $1.20 is fair.
- Undistributed franking credits per share are ~ $0.07 (see Feb 2019 report)
- So for End NTA I calculate using both $1.20 and $1.27
CVF's Comprehensive NTA CAGR from inception to Feb 2019 is:
11.82% annualised including undistributed franking
10.39% annualised excluding undistributed franking
Actual TSR Comparison with relevant benchmark ETF:
Using Sharesight and a performance report period of 7 Jan 2015 to 28 Feb 2019 you can accurately determine like-for-like Total Shareholder Return annualised performance between investing in the CVF IPO and investing in the closest index fund to the benchmark. Dividends (or option payments) are reinvested for both CVF and Australian-listed index funds like VAS. Sharesight does not offer this for index funds (e.g. ACWI) listed outside Australia.
- CVF has an annualised TSR of 5.86% using its IPO price of $1.
- ACWI has an annualised TSR of 10.62%
(CVF invests in overseas stocks so this is relevant too)
Performance and Risk Impact on NTA Discount/Premium:
CVF's 11.82% NTA CAGR is significantly higher than VAS's 8.53% and also exceeds ACWI's 10.62%. Meanwhile its TSR is lagging significantly at 5.86%. The TSR isn't going to improve much due to a better understanding of CVF's true performance. But if CVF gets back on track with a permanent lead portfolio manager, being mostly invested rather than in cash, and acceptable NTA growth then the current extra discount due to a cloud over future returns will dissipate.
Risk-adjusted returns will vary depending on the balance of risk priorities (e.g. minimising drawdowns or capital loss or volatility or correlation) and how this specific investment is intended to fit within a portfolio strategy (CVF would typically be chosen to complement something like VAS not replace it.) CVF's NTA variance so far justifies some risk-adjusted discount compared to VAS but its up to individual investors to determine the extent.
Selected Brief Insights:
I expect that, if it continues to at least match VAS, the higher end of its discount ranges will be good trading opportunities. However, its lead portfolio manager (Gary Hui) left under a cloud and its data scientist left at the same time. It has been mostly in cash since Nov 2018. So there is an extra discount currently being applied that predicts future returns will have little connection to past outperformance. This extra discount needs to be assessed too.
In its Feb 2019 monthly report CVF reports: "Not reflected in the NTA, is $0.06 per share worth of unused franking credits. The NTA is also net of $0.03 per share tax payable on realised gains which will generate franking credits when paid."
- This means there are around 7 cents per share of franking credits yet to be distributed. If CVF reported NTA like PAF and PGF its Pre-tax NTA would be $1.27 and discount ~20%.
- In its 31 Dec 2018 Interim Report CVF states: "A fully franked interim dividend of 2 cents per share has been declared and will be paid on the 2nd of May 2019. A review is currently underway as to the feasibility of paying a fully franked special dividend before 30 June 2019." Given its franking credits balance is so high it would certainly be in retiree investor's interests, but higher dividends reduce fund AUM and future fees.
Management and Performance Fees:
Management Fee
0.0915% per month (inc GST) which equals 1.1% per year
Performance Fee
20% of the outperformance over a hurdle - which is 8% per annum when the S&P/ASX 200 Accumulation index is positive and 0% when the benchmark is negative or zero. A rolling high watermark applies.
Extracts from most recent Annual Report, Interim Report and Prospectus:
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A Performance Fee is payable for a Performance Period ended 30 June, at the rate of 20% of the out performance of the Fund over an 8% per annum cumulative hurdle when the Fund’s benchmark (the S&P/ASX 200 Accumulation index) is positive and over 0% when the benchmark is negative, since the date that a performance fee was last paid.
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The Hurdle is the greater of: – the value of the Portfolio at the end of the last Performance Calculation Period for which a Performance Fee was paid indexed by the Period Hurdle Rate for each Performance Calculation Period since that period.
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Once a Performance Fee has been paid, no further Performance Fee can be accrued or paid unless the Portfolio’s value increases above its previous high, indexed by the Hurdle.
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Fee Comments:
Total Expense Ratio w/o Performance fees = 1.53% of end NTA
Total Expense Ratio inc Performance fees = 7.56% of end NTA
Whether the performance fee applies and over how much of the positive return is the key fee factor here. You can get some idea of the likelihood of the June 30th performance fee applying by seeing whether the Interim Report has accrued a payable amount in expectation a performance fee would apply.
Personally, while the fund's NTA is comfortably below the rolling high watermark figure I am happy to consider buying at higher than average discounts above 15%.
