Naos have put out their first NTA notice for the CTN portfolio. It indicates that, through October, the CTN portfolio, before tax, is up from $1.033 to just $1.04. The $1.04 figure may be rounded to the nearest cent, but taking it at face value, that is a gain of just 0.7% for the month.
That is a very disappointing result, considering that the Small Ords Index (XSO) is up 5.92% through Oct.
As a check, using two separate methods, I have estimated how the CTN portfolio, as declared at the end of Sep, would have performed if it had been held through Oct.
First, the Sep NTA notice declared ten stock holdings comprising 24.5% of the portfolio, together with 11.9% held in cash. Assuming those stocks were representative of all the stocks held, and zero contribution from the cash, the estimate is that the portfolio, if held through Oct, would have been up 5.1%.
Second, the Sep NTA also declared all the sector allocations of the portfolio.
By attributing the declared sector allocations to the various sector indices and again counting zero contribution from the cash, the estimated gain for the CTN portfolio, if held through Oct would have been 6.6%.
(In making this sector estimate, I have scaled up the gain based on the sector allocations by the ratio of the XSO Oct gain divided by the XAO Oct gain. I did that to allow for the fact that the sector indices mostly reflect the performance of large stocks rather than the small stocks in the XSO and CTN. Even without that adjustment, the estimated gain for the CTN portfolio, based on the sector indices alone, is still 4.5%)
So all of that begs the question as to why the CTN portfolio is only up 0.7% through Oct? Now I suppose it is possible that there were simply enough undisclosed clunkers in the portfolio that. not only didn't participate in the Oct rally. but dragged the overall average down to near zero. However given the diversity of the portfolio that is an unlikely explanation.
Rather, I have to suspect that our foregone gain of circa 5% has mostly been burned in transaction and slippage costs incurred so far, as Naos liquidates the existing portfolio and presumably buys new stocks to suit its investment style. The Naos NTA declares that the cash component at the end of Oct is 34.5%, up from the 11.9% declared at the end of Sep. That rise in the cash, together with the likelihood that there already has been some rotation into new stocks, points to there having been considerable churn of the portfolio already.
Being a microcap LIC, by its nature, CTN invests in illiquid stocks.
Consequently, re-positioning tens of millions of dollars in such a short period is bound to incur considerable slippage.
I have to suspect that Naos still has further to go in re-positioning the portfolio, so sadly, I have to suspect that there will be still more burn-in-the-churn of our funds. (Naos say that as of 7 Nov, CTN is 42.25% in cash)
Some of our forgone gain will be due to simply missing out by being in cash as the market has risen through October. It is bad timing to have this portfolio churn in a month with the best gain in a long time.
If it was raining female film stars, CTN shareholders would get Lassie.
Two big questions are what does the current Investment Management Agreement (IMA) allow the investment manager to invest in and is Naos operating within it? .It may be that for the time being, Naos are just cashing in the existing portfolio on the assumption that the AGM motions will go through and they can then change the IMA to match their investment style.
A third question is whether simply liquidating the current portfolio now, in anticipation of a change in the IMA, is a breach of the current IMA? In other words, is the act of liquidating now, with the intent of applying the funds later to different strategy, a breach of the current IMA?
And why liquidate so aggressively in a rising market? Is that responsible investment management? Or is Naos intent on making the liquidation of the CTN portfolio a fait accompli by the time of the AGM?
What to do?
If a CTN shareholder sells out now they may well be selling their shares at a considerable discount to the underlying portfolio. The Oct NTA declares the after tax NTA for CTN as $0.97. The XSO is up another 3.1% since then.
So, as of last Friday, at $0.93, CTN is still likely selling at more than a 5% discount to its intrinsic value.
Indeed, I picked up a few extra CTN on Cup Day at $0.90, as I thought that was cheap because of the rise in the XSO through Oct. But I am not so sure now, given how aggressively Naos is liquidating the portfolio.
Naos might not be the devil incarnate, but CTN should be run for the benefit of CTN shareholders, and not for the benefit of CGA nor Naos nor any other investment manager.
However, if the AGM motions get up, it is likely that Naos will be in effective control of CTN for the next 15 years.
Accordingly I have voted my shares AGAINST all the AGM motions.
I have done that in the expectation that if the AGM motions fail, that will precipitate an EGM.
In which case, the opportunity will likely arise to vote for new directors who have NO allegiance or interest in related parties, and hopefully, have significant holdings in CTN.
My sentiment is to vote AGAINST all the AGM motions.
If you have already voted, you can still change your vote online prior to the deadline. Or contact Computershare.
Cheers
These are my opinions only. Nothing that I have written here should be construed as disparagement of any of the parties or entities involved. For all I know, all of the parties and entities may be completely convinced of the correctness of their actions and be acting from the highest possible motives with all due skill and care in accord with their various responsibilities and obligations. Any figures and facts are mentioned in good faith but I accept no responsibility for their accuracy
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