The portfolio delivered a net return of 7.9%[1] for first half of 2020 while FTSE Global All Cap index’s return is -6.7% during the same period. Our portfolio’s cumulative return since 2016 is 86.6% while the above-mentioned index’s cumulative return is 45.3%. Cash is 48% of the portfolio.

In the past six months, COVID-19 introduced unprecedented level of uncertainties and challenges for businesses. Most of the businesses in our portfolio performed exceptionally well given the tough circumstances. Below are some operational highlights:

Games Workshop reported revenue growth and profit growth of 4.6% and 8.3% for the 12 months ending 31 May 2020 despite having no revenue for 6 weeks. Fans are escaping to Warhammer to seek temporary respite from the stressful lockdown environment. On 25th July 2020, Games Workshop successfully launched the latest edition of Warhammer 40K with improved game play, new story lines and miniatures; and fans responded enthusiastically. The Warhammer IP continues to grow from strength to strength with a record pipeline of video games and an upcoming mass-market TV show. Warhammer is truly a global franchise which is still in the early innings of its growth trajectory. I am thrilled to be part of this journey. Games Workshop is our largest investment and constitutes ~15% of our portfolio.

As a travel company, Dart Group is disproportionately impacted as customers cancelled their holidays due to CVOID. They took this opportunity to build enormous customer goodwill by refunding its customers quickly. The management team also quickly sold assets and raised new capital to ensure they can survive under any conditions.

Avanza has benefitted from the global tailwind of increased participation from retail investors with the growth of new customers accelerating. 139,100 new customers joined Avanza during the 6 months ending June 2020 – an incredible 100% growth versus same period in 2019. Consistent many other retail brokerage platforms globally, the average trading volume per customer increased by 50%. With a largely fixed cost base, Avanza’s net profit grew 211%. Avanza’s short-term operational performance is driven by a myriad of market factors such as market volatility and prevailing interest rate level. However, in the longer term, the most important driver for Avanza’s intrinsic value is the growth of its customer base. Avanza’s current market value is probably ahead of its intrinsic value. I have resisted the temptation to sell Avanza shares as there is still an exceptionally long growth runway for Avanza. Avanza’s customer base is 10% of Sweden population but its share of savings capital is only 5%. Our long-term return should be slightly above Avanza’s long-term customer growth rate of 15% due to operational leverage.

Eslite Spectrum is a physical retailer from Taiwan. While its Taiwan operation is relatively well insulated from the impact of COVID-19, its mainland China operation took a big hit. Due to the pandemic, it closed the Shenzhen store. I believe the pandemic is simply a catalyst to reveal the inherent weakness of Eslite’s retail model of using Eslite bookstore as a traffic generator and monetised through carefully selected third-party vendors. My mistake is to over-estimate the brand reputation of the Eslite bookstore as a traffic generator and its merchandising capability. Hence, I will be exiting this investment.

When I consider my performance in this period, I give myself a B minus – reasonable but not stellar performance. It was not stellar because I was too conservative in deploying capital due to my hesitation to take advantage of investments opportunities that were offering attractive absolute long-term return. Overall, it is a reasonable performance as I have the conviction to hold onto existing investment and added two news investments – Nintendo and Ryman Healthcare.

I am increasingly convinced that partnering with great businesses is the most reliable strategy to grow wealth over a long period of time. Accordingly, the highest priority is to increase the weighting of great businesses within our portfolio. While I will always be open to the generally undervalued and special situation investments, the relative opportunity cost of owning them will increase as I find more great businesses to own.

I am glad to report that Compounders currently make up 36% of our portfolio up from 3% in 2017. As a reminder, I define Compounders as great businesses with durable business moats and an exceptionally long growth runway. I intend to hold our Compounders for as long as possible unless 1) there is a mistake in my judgement, 2) the valuation is so ridiculous that prospective long-term return is below risk-free rate, 3) there is better investment opportunities. In the last six months, we became business partners to two great businesses – Nintendo and Ryman Healthcare – which I will explain in detail later. I believe that our Compounders as a group can sustain ~10% return for a long period of time.

The high cash level is due to the successful closure of Yixin investment in June 2020. While no one can grow rich sitting on cash, I am willing to be patient and wait for great opportunities to present itself. After all, one must not lose money to make money.

[1] Assuming a fee structure of 1) no management fee, and 2) a 20% performance fee above 5% threshold i.e. 8.6% – (8.6%-5%)*(20%) = 7.9%