The Takota Income Value Strategy Fourth Quarter 2018 Update

Date Added: January 24, 2019 | Comments Off on The Takota Income Value Strategy Fourth Quarter 2018 Update | Filed under: Blog

A quiet portfolio year in a tormented world

Dear Partners,

In a quiet year for the Takota Income Value Account strategy portfolios declined by approximately -4% before rebounding by approximately +2.6% as I write this year end letter in mid- January, 2019. The modestly lower year end mark to market valuation is a reflection of weaker global markets in the last quarter of the year. The underlying value in the portfolio has not been affected, and we retain a healthy reserve of cash and cash equivalents to take advantage of opportunities presented by any further market weakness.

There were several transactions closed during the course of the year. Early in the year we submitted our Sherritt Debentures to a Company bid and closed that position for a +135% return. As the year progressed, we also sold our National Retail Properties REIT investment for an +18% return. Other positions we closed include Auto Canada common (-2.3%), Medicure common (+11.7%), and Element Fleet Management common (+9.6%).

A protective put expired on CI Investments equity position(s) and a Corus put position was sold for a +279% gain. Your manager would have been smarter to exercise each of these puts rather than sell them (Corus) or let them expire (CI) given the poor state of the market at year end and irrespective of the fact that the fair value of each of these equity positions is substantially higher than their recent trading prices.

At year end, we sold our Hydro One equity position (+4%) given the difficulties they are having closing a U.S. acquisition, the possibility that their future will be confined to Ontario, and due to the provincial government’s interference with the management of the Company.

Several new positions were established and at year end the Accounts were 65% invested in 13 different securities with 35% held in high yield savings accounts. In general, we will continue our policy of non-disclosure when it comes to new positions in the process of being acquired although I do highlight one such highly liquid position below.

New Purchase: Seaspan Corp common

Seaspan provides many of the world’s major shipping lines with alternatives to vessel ownership by offering long-term leases on large, modern containerships combined with ship management services. Seaspan has 112 vessels of varying capacity in their fleet. They employ 4500 people from offices in Hong Kong, Canada, India, and China. Seaspan’s strategy is to enter into fixed rate long term charters with staggered maturity dates which supports their dividend policy and is aimed at generating strong, stable, and visible cash flows through the shipping cycle. Seaspan trades on the NYSE.

The Chairman of the Company is David Sokol who previously worked with Warren Buffett. The Company has two major shareholders, the Washington family, and Canada’s Fairfax Financial. Fairfax has provided the Company with a $1.0 billion dollar investment (debt and equity). The Company’s intent is to roll up the containership business. They currently have 8% of a fragmented global market. The Company’s variable dividend is currently set to provide a 5.6% yield at recent market prices.

Maintaining the same approach to investing

We take a “bottom up” approach to income investing and as such, our portfolios are the sum total of those opportunities we find “interesting”.

By interesting, I mean securities that have an attractive yield and are undervalued. To paraphrase one of our favourite studies, “What Has Worked in Investing” by Tweedy Browne, the five main determinants of superior rates of return are:

1. A low price relative to asset value,

2. A low price relative to earnings (cash flow),

3. A significant pattern of purchases by one or more insiders,

4. A significant decline in a stock’s price, and

5. Stocks with smaller market capitalizations

These criteria apply as much to investing for income as they do to investing for capital growth and across our portfolio, we have all of these criteria in spades.

Scott Leckie, CFA

January 16, 2019


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