J#42: My inaugural Quarterly Letter To Investors. We are well on the way to building a quality portfolio that yields double digits.

The Fund gained 1.358% in its first quarter and is building a diversified portfolio that should deliver you at least 9.9% in dividends (before fees) for the first year. We’re currently 73% invested. As we get fully invested the yield should climb well into double digits.

It’s been a busy quarter.  Our brokerage accounts with EFG Hermes and Interactive Brokers are fully operational and we are well placed to invest worldwide.  

In my inaugural Quarterly Manager’s Commentary, I’d like to cover three main topics:

  • SECTION 1:  The Fund’s subscriptions and cash balances. The expected dividends from the Fund’s portfolio of investments.  The level of diversification and sustainability of these dividends, and the forecast dividend payment dates.
  • SECTION 2:  The Fund’s performance and cost structure. 
  • SECTION 3:  The quality of the portfolio we are building.

Let’s get straight into it.

SECTION 1:  The Fund’s subscriptions, expected dividends, forecast timing of dividend payments & the level of diversification and sustainability of the Fund’s dividend portfolio. 1.1 Subscriptions & Forecast Dividend Income Stream
We are expecting a blended dividend yield (net of withholding taxes) of 9.9%. This return excludes any movement in capital gains, foreign exchange, and is before fees for the Fund.
Total subscriptions for the first and current quarter are USD2.4 million comprising:
  • April to June 2021 quarter:  USD 1.3 million
  • July to Sept 2021 quarter:  USD 1.1 million
As at 31 July, the Fund had USD650 thousand in cash (i.e. we have invested 73% of subscription monies, with 27% in cash to be deployed this quarter). In August so far, we have purchased a large block of NMB Bank shares in Tanzania for USD250 thousand, and this will change the blended yield once again with approximately USD400 thousand in cash left to invest. Our goal is to be fully invested (i.e., a cash balance as close to zero as possible) so as to maximise dividend returns.  As the blended yield of 9.9% is based only on cash invested thus far, this yield will change constantly.  Once fully invested, the yield should be well into the double-digit yields, which is the goal of the Fund. The graph below provides you with a month-by-month percentage of the current blended 9.9% yield we are expecting to receive for each month.  For example, in September 2021 we are expecting 11.97% of the 9.9% in annual dividend yield to be paid.  This profile is based on the historical timing of the dividend payments made by the companies we have invested in.  Companies can, and sometimes do, change their payment dates and hence the profile is only our best forecast.
Dividend and Bonds Forecast

1.2 Diversification of Expected Dividends

To date, we have 11 equity investments and 1 bond position.  The contribution of each of these investments to our forecast dividend (based on the companies’ historical dividends) and coupon receipts is provided in the pie-chart below.  No company contributes more than 20% of the total dividend and coupons we expect to receive in the next 12 months.  

There is therefore adequate diversification in our expected dividend and coupon payments.
Diversification of dividends

1.3  Dividend Sustainability Measurements

An important question we always ask about our investments is – is the dividend stream sustainable?  After all, as our name implies, we are an income fund, which means our focus is on dividends.  

There are many metrics applied in our analysis of each company to determine dividend sustainability.  For example: 

  • Is there a consistent 3-year history of dividends?
  • Is there a large capital expenditure planned?  
  • What are the company’s debt to equity levels?  
  • Did the company make a loss?  Are earnings falling and what are the trends in gross profit margins?  
  • Is there a pending or likely change in the company’s dividend pay-out policy?

There are two metrics however I would like to discuss in this letter.  They are: the Dividend Pay-Out Ratio, and Dividends to Operating Free Cash Flow Ratio.  

The Dividend Pay-Out Ratio is the amount of dividends paid out relative to the company’s earnings (i.e. accounting profits that have been adjusted for ‘timing differences’ caused by depreciation, amortisation and deferred taxes).   

The Dividends to Operating Free Cash Flow Ratio is the amount of dividends paid out relative to actual cash received from the company’s operations.  

The smaller the ratio, the more sustainable it is for the company to pay its dividends as there is a surplus cash/profit buffer after its dividends are paid.  A ratio greater than 1 implies that the company funded its dividends from its prior years’ retained earnings, or from acquiring debt.  As a general rule, we do not invest in companies with a ratio exceeding 1. 

The table below provides our investments’ Pay-Out and Dividends to Operating Free Cash Flow ratios.  This data and the data in subsequent tables are obtained from 3rd party providers (Bloomberg, GuruFocus, Finbox, Yahoo).  

Conclusion: All 11 companies the Fund has invested in have ratios below 1 giving adequate buffer in their dividend payments relative to earnings and cash from operations.
Dividend Payout Ratio

SECTION 2:  The Fund’s performance and cost structure.

Series A shareholders of the Fund saw NAV values increase 1.35% for the June quarter.  They also received 0.0327% in dividends (net of withholding taxes and the Fund’s running costs).  The total return for the quarter was therefore 1.358%

A sample investor statement can be viewed below.

Double Digit Dividends Fund Investor Statement

In this case, a US 100,000 dollar investment returned $1,358.05 of which $326.96 of dividends were withdrawn from the Fund.  Dividends withdrawn from the Fund are recorded in an accounting “Payable to the Investor” ledger to accumulate with future quarterly dividends, until such time you elect to transfer the balance to your nominated bank account or reinvest the accumulated dividends.  This is consistent with the Fund’s mandate to pay all dividends, net of Fund’s costs, to investors on a quarterly basis. For small quarterly dividend amounts, especially in the start-up phase, it is not yet cost-effective to distribute the dividends, but there is nothing to stop you requesting them to be paid to you, even at this time.

The Fund’s expense ratio came to 1.65% of the asset under management (AUM) for the quarter. As our AUM is growing and a large proportion of our costs are fixed (Administration and legal costs for example), our expense ratio should fall further in the coming quarters.

The Fund’s expenses consist of:

  • Brokerage Expenses (60% of total)
  • The Administrator (Circle Partners), Company Secretarial and Compliance reporting charges (20% of total)
  • Bank charges
  • 1% Management Fee
  • 10% high-water mark performance fees.
  • Dividend Withholding Taxes

Bank charges, management fee, performance fees, and withholding taxes round out the remaining 20% of the total cost.

SECTION 3:  The quality of the portfolio we are building.

The metrics and measurements below give you an indication of the quality of the portfolio we are building.

3.1  Number of Investments Made & Portfolio Concentration

As of the 30th of June, the Fund acquired positions in 8 different companies and closed out 1 position in Gazprom. I’ve written a journal about this, which you can read here. The portfolio has grown considerably since then and a more up to date position as of 31 July 2021 is provided below, now with 12 positions.

Double Digit Dividends Fund Percentage of investments

There are now 12 open positions in the Fund. None of them accounts for more than 20% of the portfolio (excluding cash on hand).  This is consistent with the Fund’s mandate to ensure adequate risk diversification.  

3.2  The Portfolio’s Sector Concentration

The Fund is also well diversified in terms of sector allocations. No sector represents more than 25% of assets under management.

3.3  Trading Liquidity

Liquidity, or the daily market turnover of shares, is also healthy across the board for the companies we have invested in.  This is an important metric.  The Fund aims to have more than 50% of its investments in companies that have an average daily turnover in excess of USD500,000 per day.  This should permit us to raise cash to meet any investor redemptions or to switch investments when opportunities arise.  

Currently, 7 of the 12 names which, collectively, account for over 63% of the fund’s investments, have a daily turnover in excess of USD500,000.  

We should also note that for our investments with an average daily turnover of less than USD500,000 per day, the term ‘illiquid’ is sometimes misleading.  We invest in names that are difficult to buy (as sellers are few) but as they are ‘quality’ names and at very low valuation multiples, and high dividend yields, buyers are usually available. It is therefore superficial to simply label our investments as being ‘illiquid.’  A good example of how liquidity bands can be misleading, can be found in my Journal #37.

Liquidity of DDD Fund investments

3.4  The Portfolio’s Foreign Exchange & Country Risks

Foreign Exchange (FX) and country risks go hand-in-hand.  Often, the segmented disclosure requirements (or should I say, the lack of disclosure) by companies makes quantifying our portfolio’s exposure to country and exchange rate risks difficult.

Take for example Jupiter Mines which I have written extensively about.  Its manganese mine is in South Africa. Its cost base and exchange rate exposure is therefore in South African Rands.  A depreciation of the Rand is therefore beneficial to us.  The markets Jupiter sells to include Japanese, Indian and European steel mills but China is its main customer.  Country risk is therefore concentrated in China, but as manganese sales contracts are likely to be denominated in US dollars, the Chinese renminbi fx rate is not a factor.  Finally, to add another layer of complexity, Jupiter Mines is listed on the Australian Securities  Exchange, so the USD/AUD and SAR/AUD fx pairings also provide a source of fx risk to our portfolio.

In terms of country risk, the Fund does not have a concentration of more than 25% in any one country.

The table below provides a summary of the countries to which our investments sell their products (i.e. their revenue base).  Again, these may not be the base currency risk our portfolio is exposed to, as their sales contracts may be based in US dollars.  The term “World Wide” is used to identify a company whose sales profile is to a diverse number of countries and regions.   

A similar table is reproduced for the cost base (i.e. where the product is manufactured or service provided) for the 12 investments we have made.

Investments' Revenue Markets vs Production Cost Base
To reiterate the Fund’s mandate:

“We will manage a portfolio of up to 15 investments. The underlying country of revenue generation of the investments can be anywhere in the world, but we tend to have an emphasis on frontier and emerging markets which possess a tailwind of strong population growth and acceptable corporate governance.”


I am comfortable with the Tanzanian Shilling, Egyptian Pound, Ghanaian Cedi and Russian Ruble foreign exchange pairings relative to the US dollar.  We have analysed and documented our process in the Double Digit Dividends journals that I have written.  

Finally, the Fund’s administrator, Circle Partners, produces a summary table of foreign exchange movements of prices they use to compute the Fund’s Net Asset Value (‘NAV’) for quarter ended 30th June.  The table is reproduced below.

Foreign Exchange movement report from Circle Partners

There are no material shifts (more than 5%) in the foreign exchange rates during the quarter.  The Russian Ruble rates are not included, since the Russian stocks we own were purchased through the London Stock Exchange. Though clearly, while listed in pounds sterling , the share prices of these companies will be affected by movements in the Ruble, which is their underlying currency.   The Australian and Chinese companies the Fund purchased happened in the current quarter and hence were not required to be valued and reported in the 30th June Net Asset Value computations performed by Circle Partners, from which the above table comes.  

3.5  The Portfolio’s Debt Leverage & Return on Equity

The Fund aims to build a portfolio of names with LOW leverage (debt levels) and a high Return on Equity.  These are some of the hallmarks of a good and safe investment that we search for.

Debt Leverage:

The table below provides the leverage (debt) levels of our investments.  Financial Institutions such as banks, of which the Fund owns three, are excluded as it makes no sense to report leverage metrics given that they are in the business of taking in customer deposits.  

There are two metrics we look at. Debt as a ratio to Equity, and, the number of years it would take for the company to pay off its entire debt from its operating free cash flows (‘FCF’) .

Of all our positions, the debt levels of Company 5 are of a concern.  We have nevertheless decided to invest in it as it has a good 3-year dividend payment history with a double digit yield. It is a well-known and global name (operations and markets worldwide), and looking at its debt to operating free cash flow, its debt is a manageable 3.2 years to repay.

3.6  Valuations – Are (were) our investments bought cheaply?

Let’s revisit the Fund’s mandate: 

“Our aim is to build a portfolio of recommendations that can deliver sustainable dividend income above 10% per annum, excluding long-term capital appreciation.

Underpinning these dividend yields are high-quality assets with long-term capital appreciation potential via earnings growth and cheap valuations on purchase.

Whilst the portfolio’s main focus is to provide a steady income above 10% per annum, we envisage long-term valuation multiple expansions over a 10-year period could also result in capital valuations increasing by as much as 4 times.” 

Naturally, given that the dividend yields of our investments are in the double digits, either the market thinks the dividend is not sustainable and therefore it has attributed a low valuation to the stock, or the market has overlooked its price and value.  We, after our due diligence, believe that with our investments, the market has over-looked its price and value.  When, Mr. Market comes to his senses, we believe we will see a substantial upside to the prices of our investments, especially in the near-zero interest rate world we live in.  

Two indications of how cheaply we have bought our investments are their low Price to Earnings (P/E) and Price to Book (P/B) ratios in the table below.

DDD Fund Investment Valuations

All our investments have a P/E of less than 10.1.  All of our investments have a P/B, with the exception of one investment at 3.3 times, of less than 2.6 times.  The company’s earnings and book values from the last reported financial year results are used to derive these multiples.   

How cheap is that?  The portfolio’s weighted average (weighted to position sizes) P/E ratio of 6.9 and a weighted average of 1.7 P/B is very cheap when compared to the S&P 500.  The S&P 500 is a weighted index of 500 largest capitalisation companies listed on the US stock exchange – the S&P 500 has a P/E of 28.22 times and a Price to Book of 4.76 times.  That looks to be in nose-bleed territory compared to the Double Digit Dividends Fund’s portfolio.

S&P500 Stats
S&P 500 statistics as of 31 July 2021. Source: Bloomberg.

I would like to apologize for the delay in getting my inaugural Quarterly Commentary to you. There were some systems which needed to be put in place first, and it took longer than I had hoped. Now these are in place, future reports should be able to get to you faster.

I would also like to thank you again for investing in the Fund.  One of the greatest compliments you can provide a Fund Manager is to allocate your hard-earned capital to be invested under their stewardship.  

I hope the above metrics provides some insights into the depth of work we undertake on your behalf.

Yours sincerely,

Peter CL Tan
Double Digit Dividends Fund, Ltd.

6 August, 2021