Our Australian fund has maintained its strong performance since my Q1 report. The returns below are annualised, except year to date (YTD). Frankly I’m a little surprised the Australian market hasn’t done better. Are you guys letting me win on purpose? While Australian investors have on average had poor returns the unhedged returns to international investors have been significantly better, at least on paper.

It’s difficult to see what can propel Australian corporate earnings higher and as I showed here last month, ratio expansion is also unlikely to deliver meaningful returns.

I continue to stand by my decision to sell the banks, which I mentioned here in February. I was looking at their fundamentals and economic future, though the technicals confirmed the banks were looking stretched. As usual I missed the top, but in investing getting close gets you a cigar. A kink in China’s growth story, a peaked residential property market, a continued high AUD hurting the slow gear in our two speed economy, there were and there remains many reasons why it was time to take banking profits.

Our Elders Hybrid debt continues to be my most worrisome investment. I probably shouldn’t be stretching for so much upside on these fledgling debt investments. IPGA Ltd continues on its growth path. If you take a look concentrate on the people and their track record rather than the numbers. Biota languishes as investors realise that LANI’s payday may be far away and GSK have little interest in promoting Relenza. Despite that, I continue to like the risk reward profile and there are numerous possible catalysts. The markets’ love for Amcom was fleeting, though I think this half will make more investors see the value in Amcom’s business. I’m hoping Clearview finally deliver on their promise this half, management is on a short leash. M2 Telecommunications remains a long term hold, though as I mentioned a couple times recently it has and may again drop down into buy territory.

Meanwhile our US fund has slipped below its benchmark, but with 38% cash it has the resources to profit from future opportunities. Thus far sell in May and go away is playing out. I look forward to refocusing on our US funds and a major sell off would be impetus to do so.

Disclosure: Long positions is all companies mentioned. This post is for entertainment purposes and should never be considered advice.

The first quarter of 2011 brought good returns for both our concentrated Australian fund and our less concentrated less focused upon American fund.

This month I decided to implement a NAV spreadsheet for our Australian fund. Until now I’ve been more focused on the field of play rather than the scorecard (shameless Munger plagiarism) and have been content with knowing year end returns.

While we are index agnostic and target an absolute long run return it is none the less pleasing to show the market a clean set of heals so early in the year.

Our concentrated Australian fund was up 5.6% in Q1 compared to the ASX200 accumulation’s index return of 3.2%. Our US fund was up 12.4% for the quarter compared to 5.9% for the S&P 500 Total Return Index. The US fund underperformed last year due to a lack of attention, thus spoiling my 9 out of 10 years out-performance. The fund may underperform again this year, as it is really not getting the attention it requires and so I consider the current out-performance more fortunate than deserved.

We hold substantial cash balances in the US fund, less so in Australia. That’s right, as I mentioned here, we went on a bit of a spending spree in Australia since I last posted.

With Amcom finally getting some lovin’, and Biota getting $231M from BARDA our Australian Fund is currently up 11.5%. I had said ‘Amcom is undervalued, but with no love in the market it will have to hit the ball out of the park to get any attention.‘ It seems like all Amcom needed was the love of a a stock market report, in this case Calibre. M2 Telecommunication has come down to the pitchers mound and there may be some life in Penrice Soda yet. Penrice directors have been buying, the company finally posted a cash flow positive half and management appear to be steadying the ship.

Disclosure: Very long Biota and M2, long Amcom, keep me interested position in Penrice.

The Fusion Superannuation Fund is up 14% year to date, thanks in the main to strong performance by M2 Telecommunications and Biota. I have been increasing the funds cash position and now hold 12.4% in cash. Cash is an attractive option in Australia where safe 6% returns are easily available. The sales have predominately been in banks, ANZ was first out the door followed by Westpac.

As per my asset allocation strategy for this year I will continue to reduce our equity exposure; increasingly so  into a strengthening (fingers crossed) market.

Holdings

Biota has been on a tear and is up over 40% YTD. It appears many investors are solely focused on the upside potential and are giving little regard to the downside. The upside story is an impressive one; Relenza sales continue, fantastic initial LANI sales in Japan give Biota a second income stream, possible government funding for rest of world LANI trials, LANI prophylaxis trial in Japan and a IIb HRV trial is underway. If either the funding comes through or Biota announce good results from the trial then the share price should quickly re-rate to over $2, possibly way over. However, government funding is never easy to come by, especially when deficits are climbing, similarly rhinovirus has proved to be a tough nut to crack. I view fair value at around $2.

ASW is overvalued, but as it is likely to grow into the price it is difficult to sell, though I have been trimming my holding.

MTU is fairly priced, but I’m not selling as I think I may be in love with Vaughan Bowen the CEO . Sensational management teams are rare and I think the Bowen’s (Vaughan’s dad is on the board) and team are executing brilliantly. Below is a quick chart of their growth. With the recent acquisition of Clear Communications that growth will continue into 2012 and beyond. Intersuisse continue to see upside and rate M2 as a buy.

Clearview will report this week and I hope to see their promise begin to shine through. The recent increase in price is due to Paradice Investment Management accumulating shares. They now hold 6.3% of CVW. Guinness Peat Group hold 49%.

Amcom is undervalued, but with no love in the market it will have to hit the ball out of the park to get any attention. The specter of NBN is capping AMM’s share price, consequently it may take a while for the share price to reflect the value. Acorn Capital was a recent seller, but that could simply be because Amcom is now more of a sapling than an acorn. I continue to like Amcom for their low valuation, fibre strategy and their strategy stake in iiNet. Amcom report on the 23rd Feb.

Hunter Hall and Telstra continue to spin off cash at acceptable rates and I am happy to hold both. Most of our Telstra is held within our separate investment trust.

Which brings me to Po Valley. Hunter Hall have been aggressively accumulating PVE and now hold 14.8%. While I still see considerable execution risk and are not comfortable with management the potential upside is very attractive.

International Holdings

I sold Oplink Communications after their sensational earnings announcement a week or two back. Oplink are currently executing extremely well and have the technology our streaming world needs. [correction: Only half position sold]

I was also fortunate to sell 1/3 of our Smith Micro Software (SMSI) at close to it’s recent highs, though unfortunate that I was greedy and wanted slightly more for the remaining 2/3′s. On the back of a very bad quarterly forecast SMSI is down nearly 50%.

Cisco and Gilead appear very attractive. So much so that I am planning on using either a long combo or long synthetic future option strategy. Insurance companies continue to be ignored by the market, with companies like Montpelier Re (MRH) trading near a historically low price to book of 0.83. Insurers will have their day in the sun and once institutions have loaded up I expect we’ll hear a lot more about what great value they are.

Disclosure: Long all stocks mentioned, except Oplink which was recently sold and Cisco and Gilead which I am considering long strategies for. [correction: still long Oplink (OPLK)]

While the Investometer chart shows large changes in both accounts this month the reality is I increased cash by 9% this month. As I commented the other day I’ve been selling down fairly to overvalued US stocks, notably FDX and II-VI, and buying undervalued Australian shares.

The growing account with regular cash flow is the SMSF I manage. Due to regular personal and employer contributions, the coming capital return from Biota and other dividends I’m happy maintaining a lower cash balance in the SMSF. If the market goes down I’ll have new cash to put to work each month. The SMSF currently restricts equity investments to Australia.

The larger account is an investment trust, which for all practical purposes has no external cash flow. The trust has mainly invested in the US, but the allocation to Australia is increasing. I’m happy with the current cash position in the trust.

As I said last month those in accumulation phase should be rooting for a sell-off. The longer and lower prices go in the near term the better the future returns on new cash.

Fusion Investing Portfolio

The FI Fund closed November 5.5% higher and is now outperforming the ASX200 by 16.7%.

Invested levels didn’t change this month, but four calls sold raised cash near the short term peak. The FI Fund briefly returned to positive territory during October. It was good to pop into the green and let’s hope we see more of that soon.

While the Investometer series chart shows no change this month the second chart reflects the calls sold.

Calls sold on AEO, MIDD, NUAN and FDX this month generated cash for the ‘larger, no external cash flow account’.

It just struck me that I might be a 101 kind of guy. I commented the other day how I use TA 101, well I mainly stick to Options 101 too. I predominately sell calls on fully valued companies increasing the number sold when the overall market hits my fundamental historical and TA targets then buy puts, enter bull spreads and buy LEAP calls when fear strikes. [Woops! That TA 101 comment is still in a draft post, so I will post about TA 101]

The growing account with regular cash flow is our SMSF account. Due to regular personal and employer contributions we’re happy maintaining a slightly lower cash balance in our SMSF. If the market goes down we’ll have new cash to add each month. If you manage your own Super, what approach do you take to cash? What does your investment strategy say? Mine has cash ranging from 0-100% with an expected average of 10%. While waiting for market opportunities cash will be invested in high yielding online accounts. Fixed term accounts may also be used.

As an aside those in accumulation phase should be rooting for a sell-off. The longer and lower prices go in the near term the better the future returns on new cash. A well known Warren is credited with that wisdom, but it probably predates him.

Fusion Investing Portfolio

The FI Fund briefly returned to positive territory during October. It was good to pop into the green and lets hope we see more of that soon.

Our SMSF has had a tremendous quarter, easily the best ever. I’ve set the following graph to a base of $100,000 as the figures don’t matter it is the performance that I’m pleased about.

While I don’t normally share my actual positions and won’t make a habit of it I’m hoping it doesn’t hurt this once, though I see little value in doing so. Perhaps my sector weighting and concentrated style may be of some interest. ‘All Others’ is mainly MQG and a couple other tiny positions, which I must get around to selling. Don’t take anything here as a recommendation.

The Fusion Portfolio had a great month and has increased it’s outperformance to 17.5%.

Despite the excellent outperformance the portfolio remains underwater after 18 months, though it could burst into positive territory any week now. That’s disappointing, but most fund managers have done worse and they get paid to spend all day managing their funds.

I’m still ambivalent as to the future of the Fusion Investing Portfolio. The main reason for starting the portfolio was to highlight the dual ludicrous claims that markets can’t be timed and that maintaining a 100% equity allocation is a sensible strategy. I feel I’ve proved those points and aren’t sure why I should keep the portfolio going.

Swapping back to real life my updated investometer is below. I now realise that the investometer only tells part of the story. I raised cash in the larger account via sales of JetBlue Airways and Facet Biotech, but due to equity appreciation the cash raising is muted on the chart. Similarly, rising equity values exaggerated the effect on the cash balance in the growing account, after I made one investment. Still it’s not a bad snapshot tool and I’m happy with the investment level in each account.

If US equities continue to rise I will sell further positions in the large account. Two retailers and three tech companies are top of my sell list right now.

The Fusion Investing Portfolio posted a small gain in August, though was resoundingly thrashed by the S&P/ASX 200 Index. The portfolio relative outperformance decreased from 16.7%, to 13.1%. Since inception the portfolio is down an absolute 9.9%.

The only transaction in August was the sale of STW.AX, the S&P/ASX 200 tracking fund at $40.95. STW.AX has risen since then and closed last night at $42.20. The sale dramatically increased the portfolio cash position, which now sits at 39.6%.

Last Update: Fusion Portfolio’s return to 31 July