J#44: Reflection time; How our Fund saves investors money; and Turning lemons into lemonade—all packed into one journal

If You Have a Lemon, Make a Lemonade

I’ve been reflecting on the events of the past year and David Gilmour’s Pink Floyd song “Wish You Were Here” came to mind, and in particular, the following stanza:

“We’re just two lost souls
Swimming in a fish bowl,
Year after year,
Running over the same old ground.
What have we found?“

The song has a deep and meaningful story behind it that any Pink Floyd fan would know. This song was written by the band for their old mate who left after suffering a mental breakdown. It’s a familiar story we sadly often see with highly talented and successful artists. Too much fame, success, money and their lives evolving too fast, and they can’t handle it.

For this reason, I believe it is important to take a step back and switch gears from time to time from work, career, and making money and just to simply reflect.  The purpose of this journal is to do just that. 

The other thing I like about Pink Floyd is that they are advocates of being yourself and doing your own thing.  “We Don’t Need No Education” and “Mother” are two of their iconic songs with these themes. 

I am a big fan of this philosophy and approach to life.  Life is hard enough, why would you complicate it by trying to impress others or compare yourself to them?  We all have to swim our own race and when I applied that to myself, I have found things simply fall into place. Furthermore, taking the road less travelled by others has often made all the difference in my life. I have written about the importance of being yourself and doing your own thing in these journals:

If you’d like to hear David Gilmour sing “Wish You Were Here”, you can find it here.

Back to the purpose of this journal — to reflect on where we are, how we got there and what we are (and have been) doing differently:

  1. We have built a Corporate Structure & Business Operations that absorbs the high costs of running a fund and we have passed these savings to our Double Digit Dividends Fund investors.

The diagram below is the current corporate structure and operations of the Fund.

It is a busy diagram, that reflects the amount of work done.  To many readers it may come as a surprise that the Double Digit Dividends (and the African Lions Fund) are more than just those two entities, there are several other entities that provides revenue generation for the Fund.

Running a fund is an expensive business. The majority of the costs involved are not only in creating legal structures but ensuring regulatory compliance, financial services licensing, and all other requirements are met. To give you an idea, just the directors’ liability insurance expenses, salaries of a responsible manager and a bookkeeper, as well as fees to the Australian Securities and Investments Commission (‘the Regulator) come to nearly AUD 100,000 per year.

Unlike other funds, Double Digit Dividends Fund does not pass on any of these expenses to investors. Our investors are therefore able to enjoy greater returns through a considerably reduced cost ratio.

The Fund’s cost ratio last quarter, computed by the Administrator, Circle Partners, was 1.65%.   This is the ratio of expenses paid by the Fund’s investors last quarter relative to the asset under management (AUM).  It excludes the annual AUD100,000 expenses I mentioned above.  How are we able to absorb these costs?   It is through what we call “Corporate Authorised Representatives” (CAR).

The corporate structure shows that our Investment Manager is the Australian public, unlisted company, ST Funds Management, with an Australian Financial Services licence. Our licence is used by our trusted mate, James Hyndes, who manages two funds that invest in Australian motel properties and businesses called Redhill Regional Accommodation Fund (1 & 2), and three other fund managers referred to us by Andrew Meakin, a veteran in the Funds Management industry.  [No Andrew, this does not mean you are an old man.  ‘Veteran’, yes.  ‘Old’, no!]

These funds utilise our Australian financial services license and in return they pay us a fee.  These fees are used to offset the fund’s running costs.

I must personally thank Andrew Meakin, Shaun Stone, and my business partner, Tim, for being the ‘brain child’ of this structure, moving it forward and taking care of the day-to-day operations.  This has allowed me to deal with important family matters (some of you already know that I am going through a bitter custody battle to be able to spend more time with my children—from few hours a week to a few days!) and at the same time to focus on building and running the Double Digit Dividends Fund from the ground up with a viable cost structure from the get-go!

ST Funds Management team
From left to right: Mr. Shaun Stone, ST Funds' Company Secretary and Independent Non-Executive Director; Mr. Andrew Meakin, the Responsible Manager and “key person” on ST Funds’ AFS License; Mr. Tim Staermose, my business partner and Chief Investment Officer of African Lions Fund; Mr. James Hyndes, the Principal of Redhill Regional Accommodation Funds 1 & 2; and yours truly.
  1. To date, over 40 journals have been written and published.

There are over 250 readers who have signed up to receive these periodic journals in their email inboxes and I am sure there are many other ‘silent’ readers who simply read the journals as and when they are posted on the website, Facebook, LinkedIn and the Fund’s Twitter account.  I always break into a smile when I hear from a reader that they like reading the content.   I have made a few new friends, globally, just by writing! 

The published journals provide a record of the fund’s investment process and our approach to investing.  Equally important, it has built a repository for my children of some of my life’s views.  This, I believe, is more valuable than the financial profit & loss statement that they can read elsewhere!

In terms of content, I think there is enough ‘meat on the bone’ to consolidate these journals into a book.  I will probably publish it as a free e-book.  If you think this is a good idea, or have any experience in the book publishing field, please do reach out to me.  This is new territory to me (and hence even more reason to do it!).  Any help from you would therefore be greatly appreciated.

  1. In just over three months since the Fund’s inception, we have built a safe and diversified portfolio of 11 companies operating in over 8 different jurisdictions. The Fund should deliver you at least 9.9% in dividends (before fees) for the first year. 

Whilst the portfolio’s main focus (and our performance reporting) is to provide a steady income above 10% per annum, we envisage long-term valuation multiple expansions over a 10-year period that 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 overlooked its price and value.  When Mr. Market comes to his senses, we believe we will see substantial upside in the prices of our investments, especially in the near-zero interest rate world we live in. 

An indication of how cheap we have bought our investments can be measured by the Price to Earnings  (P/E) and Price to Book (P/B) ratios of our underlying investments, as reproduced in the table below.

All our investments trade on a P/E multiple of less than 10.1.  All of our investments have a P/B ratio, with the exception of one investment at 3.3 times, of less than 2.6 times.  These multiples are based on earnings and book values of the company’s last financial year results.

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 capitalization companies listed on the US stock exchange – the S&P 500 has a P/E multiple of 28.22 times and a P/B ratio of 4.76 times.  That looks to be in nose-bleed territory compared to the Double Digit Dividends Fund’s portfolio.

S&P 500 P/E ratio
Source: Bloomberg

A copy of the Fund’s inaugural Quarterly Letter to Investors can be read here. 

Looking back, we certainly have accomplished a great deal.



A Message for My Children

We have certainly been on a journey. Twenty-four months ago, our communication came to a halt and we did not meet at all. We were totally estranged. Now, we catch up on a weekly basis, sometimes over a meal.  This has in large part been made possible through the intervention of various parties.  I am super happy that we are making progress.  Failure to do so, can be very damaging as these are the formative years you have with your parents.  My friend Simon has not seen his daughter for over 4 years and he has shared his concerns with me through the following 14-minute video.   The video explains what psychological damage his daughter (and he) will need to address in future years. 

Over the course of those twenty-four challenging months, I turned my attention to setting up my own business. I started writing journals as a way to communicate with you and to other like-minded investors. Your father, together with his clients, now own shares in companies from different countries. It is my hope that the time will come when we can discuss these companies and investments together, and even do some company visits together.

We have certainly turned lemons into lemonade!

The phrase, “If You Have a Lemon, Make a Lemonade” is mainly attributed to the all-time, world-renowned author, Dale Carnegie.

Carnegie was a prominent writer who wrote books aiming to help people build friendships, relationships, and in general, be a better version of yourself. One of his books is entitled, “How to Stop Worrying and Start Living.”

But you’d probably recognise him by his most famous book “How to Win Friends and Influence People” which was published in 1936. That’s 85 years ago, yet today his books are still high up on the list of self-improvement references. That’s because he’s written about some of the important ‘soft’ skill sets to have in life.   With the internet and mobile devices, ‘hard’ skill sets (such as being able to be an engineer, architect or an accountant) are now readily available to all.  For you to differentiate yourself from others, and to swim your own race, it will be these ‘soft’ skills that will count more and more in life.

Peter "Chor Leng" Tan's Dale Carnegie Certification

Your Dad was invited to assist the trainers at the Dale Carnegie program in Western Australia. This came about after I attended the program that I paid for with my own hard-earned money.

Today, there are all sorts of life coaches and self-help seminars but too many of them are designed to make money out of people desperate to become better. But from experience, I can recommend and am encouraging you to attend a Dale Carnegie program.  That said, it has to be from your own will and you should be willing to pay for it out of your own money, just as I did.  One of my observations whilst attending these programs was that there was a difference between those who paid for themselves and those who were sponsored or paid for by their employer or their parents.   The former really wanted to make lemonade out of lemons!

Have you heard of these sayings?  “There is no such thing as teaching, but only learning”, and, “you can lead a horse to water but you cannot make it drink it.”  In the final analysis, when it comes to learning and in many other things in life, you have got to want it!